Who gets paid when a company goes bust: creditors' rights explained
When dealing with creditors in insolvency situations, it is vital to remember the order of priority. Who ranks above whom? Where does the bank and HMRC rank? If the bank has security, do employees rank ahead of them? These are all common questions we get asked.
The simplest way to answer these questions is to imagine creditor ranking as a ladder. Further down the page, we have a written explanation but if you prefer a pictorial format, we have produced an infographic that shows the situation.
Embed this infographic on to your site - copy and paste the code below:
For further information, please refer to the flowcharts below:
Creditors ranking in terminal insolvency - PDF
Creditors ranking in terminal insolvency - JPEG
At the top are secured creditors. Secured creditors have a legal right or charge over
Fixed and floating charges:
Fixed charge creditors:
The easiest way to understand a fixed charge creditor's rights is to think of their position as holding title to or ownership of the property in question. Whilst this isn't strictly legally correct, it is a simple way to understand their position. This means that the person (company) who has given the fixed charge to a bank or other lender (there must be a consideration for fixed and floating charges) has relinquished permission to trade or sell the property in question, without the explicit permission of the charge holders.
Floating charge creditors:
An altogether more complicated situation exists under the floating charge. Essentially the way to remember how floating charge works is as follows: all items that the company uses, or sells or trades in the normal course of business where it isn't possible to refer to a fixed charge holder for permission are covered by floating charges. This can be complicated to apply, for example a fixed charge may exist on a piece of machinery which is sold in liquidation the proceeds of which would go to the fixed charge holder. If the machinery was sold for say 10,000 more than the fixed charge, then this amount is covered under the floating charge collection. Under any floating charge created before 15th September
This is a very complex area and advice should be taken a soon as possible if you do not understand the position. We have produced a new page on fixed and floating charges that will help to explain them.
Please feel free to call us on 08009700539 or use our contact form on our website.
Unsecured creditors now include HMRC for deductions for employees through a PAYE Scheme and for VAT, trade creditors, suppliers,
Connected unsecured creditors:
Usually this is where a director or employee has provided money to the company on an unsecured basis, non-payment of salaries and wages or expenses can fall into this area. The technical term is "associate creditors" this means that the creditor is in some way associated with the company. Associate or connected creditors can include family members of staff or director's spouses etc. Connected creditors will not generally receive a dividend in a CVA but would be eligible for a dividend in liquidation.
This is a complex area and advice should be taken a soon as possible if you do not understand the position. Please feel free to call us on 08009700539 or use our contact form on our website.
Unfortunately, at the bottom of the pile comes members. otherwise known as shareholders. Shareholders are people (or companies) who have provided the money to the business on a risk basis and are therefore not entitled to remuneration, dividend or repayment of their exposure until all of the above creditors are satisfied. Hence the name risk capital! Shareholders are at the biggest risk of losing their money.
are, of course, many different classes of shareholders and there are many complex issues appertaining equity - it is not the purpose of this guide to go into these areas but should the reader require advice they are encouraged to discuss this matter with their professional advisors or call 08009700539 or use our contact form on the website. It is quite common for shareholders to covert some of the equity into secured debt to ensure that they are paid in the event of collapse.
Above all the reader should remember this key point.
If the company is insolvent (see our guide by clicking the word insolvency) then the directors have a duty of care to act to maximise the body of creditor's interests. This means acting in the best interests of all creditors, by assessing the situation, collating as much information as possible, looking at their objectives, studying the options available and making a decision to ACT. The message is clear: if the business is insolvent (see Is our company insolvent?) think very carefully about payment to creditors, if after reading this page you are unsure what the order of priority should be, please call our technical support team on 08009700539.
Author: Keith Steven
I have bought a company and it's gone wrong
Business and personal objectives in insolvency
I need bankruptcy advice
Business rescue and recovery
Creditors' rights explained
The company has cash-flow problems
Company in financial trouble?
Company rescue in Scotland
How do I collect in more debtors?
Director's dos and don'ts
Personal guarantees in insolvency
Top 10 tips for directors
Failed MBO, merger or acquisition? What happens next?
Guide to cost-cutting
Insolvency toolkit for directors
Is my company viable for restructure?
My business is failing - what should I do?
Guide to overdrawn directors' accounts
Can Directors be held liable for a company's debts?
What is a personal liability notice?
Save my business from going under