Priority of payments in liquidations

When a company is placed into liquidation there is a priority of who is paid out first out of the proceeds of any asset sales held by the liquidator.

Special rules apply and the liquidator must comply with the Insolvency Act 1986. The list below also applies to members voluntary liquidations and administrations. d administrations.

1. Fixed charge creditors from fixed charge assets

A fixed charge is a loan directly secured on an asset such as a mortgage on a property or Hire Purchase on a car or machinery.

2. Expenses of the liquidation (or administration)

These are direct costs incurred by the Insolvency Practitioner for expenses relating to statutory advertising, professional agents fees and legal fees.

3. Liquidators fee

Either the liquidator or administrators’ fees get aid next. If they were not at the top of the list of who gets paid then they would not take on the work. Once they are appointed, they do not have the choice of only doing half a job just because there are insufficient assets from which to pay their fees.

4. Preferential creditors

Preferential creditors are given their status by law. HMRC – PAYE and VAT due for insolvencies from the 1 December 2020 are included as well as the first £800 of employee wage arrears, up to six weeks of unpaid holiday and pension contribution arrears.

5. The prescribed part

Where there is a debenture, which is a charge usually registered by the bank at Companies House, then a proportion of the assets that fall into this stage must be paid to unsecured creditors. This rule was designed to make sure creditors received at least some payments towards the money they were owed. The first 50% of £10,000 and then 20% of the remaining assets up to £800,000 gets set aside for unsecured creditors.

6. Floating charge creditors

These are secured creditors who do not have a fixed charge so do not rank as highly. This is typically the balance of a debenture due to a bank.

7. Unsecured creditors

Normally by this time – in some cases there is normally nothing left BUT, in those cases, where there are remaining funds available to distribute to unsecured creditors which include:

• suppliers for goods, services and utilities
• Corporation Tax and business rates
• rent arrears and lease dilapidations
• unsecured loans from banks and lenders
• unsecured overdrafts
• employees for redundancy and pay in lieu of notice and arrears of pay above £800
• friend and family loans to the business
• directors loan accounts that are in credit
• the shortfall on any fixed or floating charge

8. Interest to unsecured and preferential creditors

If there are sufficient funds from which unsecured creditors get paid in full then they will also be entitled to statutory interest at 8% on their debts.

9. Shareholders

Any final surplus left here then goes to shareholders.

Directors are also often asked to sign personal guarantees. This is usually the case on smaller and newer companies for bank finance and property leases. The creditor (person owed money) should claim against the company first, but nothing stops them pursuing the personal guarantee as well. If the creditor is repaid under the guarantee, then the guarantor (the person who gave the guarantee) may ‘step into their shoes’ to claim this back from the company in the same class of category. The creditor does not get paid back twice.