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What Is The Order Of Creditors When A Company Goes Into Liquidation

Published on : 21st May, 2021 | Updated on : 28th August, 2024
Robert Moore

Written ByRobert Moore

Marketing Manager


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Rob has over a decade of experience in web and general marketing. He has extensive knowledge of the Insolvency sector and has helped many worried directors with their questions.

Rob is now working with the Board at KSA Group Ltd to develop strategic marketing programmes to support the business plan and drive more company rescues.

Robert Moore
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Table of Contents

  • Secured creditors:
  • Preferential Creditors such as Employees and HMRC
  • Fixed and floating charges:
  • Fixed charge creditors:
  • Floating charge creditors:
  • Unsecured creditors:
  • Connected unsecured creditors:
  • Shareholders:

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. Here we explain both pictorially and in written format.

Secured creditors:

Secured creditors are paid first over any other creditor. Secured creditors have a legal right or charge over property. Property can mean anything from bricks and mortar to plant and equipment, motor vehicles, fixtures and fittings, particular pieces of machinery or things such as patents or intellectual property.  This charge is called a debenture and is taken out at the time of the loan.

Preferential Creditors such as Employees and HMRC

HMRC is what is called secondary preferential creditors.  VAT and PAYE are classed as such but other taxes on the company like corporation tax are not.

Employees retain the status of preferential creditors for their arrears of pay and for holiday pay claims in insolvency situations.

Fixed and floating charges:

Usually the fixed and floating charge is given under a debenture and this must be considered carefully.

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. Usually a fixed charge exists over, for example, a piece of machinery. Because this machinery is used to develop the economic activity of the business in question, it is unusual or abnormal for the business to want to sell or trade this piece of equipment. If the machinery in question was redundant or no longer sufficiently efficient, then the company may seek to sell this equipment (but would have to seek permission from the fixed charge holder first). Usually, this is not withheld as the proceeds for the sale would probably be used to pay down borrowings.

Floating charge creditors:

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 2003, any floating charge collections are payable to preferential creditors first. Under any new floating charges created from September 15th 2003, all collections are first subject to a prescribed PART which must be set aside for the unsecured creditors. This is calculated as follows 50% of first realisation up to £10k and 20% of £10k to £600k is paid to unsecured creditors with the balance going to the floating charge.

This is a very 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.

Unsecured creditors:

Unsecured creditors now include HMRC for some monies like corporation tax but not for deductions for employees through a PAYE Scheme and for VAT as that is now preferential.  Trade creditors, suppliers, unsecured portion of fixed charge debts, national non-domestic rates and some employees’ claims for example.

Connected unsecured creditors:

Usually this is where a director or employee has provided money to the company on an unsecured basis, non-payment of 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. Usually, however, the dividend for unsecured / connected creditors is nil 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.

Shareholders:

Unfortunately, at the bottom of the pile comes members, otherwise known as shareholders. Shareholders are people (or companies) who have provided 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.

There 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 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 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 0800 9700539.

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Guide To Liquidation Fees

in Company Liquidation

The costs of liquidation start at around £4000 + VAT. This would be for liquidating a company with a single creditor, such as having an unpaid Bounce Back Loan (BBL) or HMRC. For more than one creditor issue, we would expect the fee to be approximately £4,400 - £6,000 plus VAT.

Read
Guide To Liquidation Fees

Can I Liquidate My Company Myself?

The answer is no, you cannot liquidate your own company, because you need to be a licensed insolvency practitioner to liquidate a company! So, how do you quickly get your company liquidated? If the company IS insolvent then the company directors need to decide if the business is viable. If it is not, it should be quickly liquidated.Here are the 5 steps you need to go through:Step 1 Find a Liquidator. We can help as we have a number of insolvency practitioners across the UK. Uniquely to KSA, you can speak to one of our IPs TODAY. Call on 08009700539.Step 2 - Pass details of any company assets over to the proposed liquidator, and our valuers may get these valued. This will independently set the value of the assets for going to auction, or you may wish to buy them. Step 3 Let us know who the company owes money to (creditors). KSA will write to them all to let them know whats happening and tell them that a creditors meeting will be held. The meeting can now be held online or phone as physical meetings are no longer mandatory. This will quickly remove creditor pressure from you and they will start talking to KSA instead!Step 4 Give us all company information and books and records. KSA will give you a list of all the information we need in order to liquidate your company. This information will allow us to prepare the necessary reports for the creditors. Step 5 A company director needs to "chair the meeting of creditors". In actual fact the liquidator will run the meeting but you or one of your directors must attend it by law.Call KSA now and we will get you talking to an insolvency practitioner today! If the company is solvent but you just want to get the money out then you can do an Members Voluntary Liquidation (MVL). 

Read
Can I Liquidate My Company Myself?

How Much Does It Cost To Liquidate A Company?

If your company is insolvent, then you are likely to be concerned about the costs of liquidation.The cost of liquidation depends on the complexity of the case.  This is based on factors such as;Whether the company is trading or not. Number of employees Number of creditors, and how much it owes them Value of its assets, including money it is owed by debtors Director and shareholder profile The quality of the financial information available.How Much Does A Liquidation Cost? Generally, the costs of liquidation start at around £4000 + VAT. This would be for liquidating a company with a single creditor, such as having an unpaid Bounce Back Loan (BBL) or HMRC. For more than one creditor issue, we would expect the fee to be approximately £4,000 - £6,000 plus VAT. For more complex issues including companies who have landlords, employees, BBLs and supplier debts we will provide a written quote after our meeting with the directors to discuss the company’s options. Do get in touch to discuss your company’s liquidation, don’t delay and hope the problem will go away!Be wary of websites (not actual insolvency practitioners) saying they can do it for £1500 or so - this is for sure, too good to be true. The cost of the liquidation may be lower but the risk to you personally is very high, especially if you owe the company any money. Additionally, you will probably end up dealing with all the creditors and will find it difficult to move on.  Liquidation is heavily regulated and there are no shortcuts.   You may also be asked to sign personal guarantees.Here, we’ll explain how much voluntary liquidation costs, so you know exactly what to expect if you’re in a situation where you need to consider it. When Should I Consider Voluntary Liquidation? Voluntary liquidation is when a company’s directors choose to close the company down and disband. The process is quite straightforward:First, the company appoints a licensed insolvency practitioner as the liquidator, Then, control of the company is handed to the liquidator and the business ceases to trade, The liquidator sells all of the company assets, The liquidator removes the company from the Companies House register.There are two core types of voluntary liquidation, so it’s important to understand which one your company is facing.Members’ voluntary liquidation – This occurs when the company has enough assets to cover its debts. The directors must make a declaration of solvency before proceeding. Creditors’ voluntary liquidation – This is a popular method for closing down insolvent businesses. 75% of creditors must agree with the liquidation proposal put forward at a creditors’ meeting.It is important that directors assist their liquidator in all areas. They must hand over company assets, records and paperwork, and agree to interviews if requested.In a creditors’ voluntary liquidation (CVL) it’s important to remember that the liquidator acts in the interest of the creditors, not the directors. If the liquidator finds that a director’s conduct was ‘unfit’, the director could face fines, or even disqualification for 2-15 years. What’s Included in the cost of voluntary liquidation? This covers the cost of hiring an insolvency practitioner to act as liquidator and organise the creditors’ meeting. It also includes the preparation of the statement of affairs and section 98 reports.Further liquidation costs will accrue as the process moves forward. This is because the liquidator will perform a wide range of duties during this time, which include:Advising directors of their duties Settling legal disputes or outstanding contracts Making people redundant and processing their claims Collecting debts, including those owed by company directors Meeting deadlines for paperwork and keeping the relative authorities informed i.e. Companies House, HMRC, Insolvency Service and Department for Business, Energy, Innovation and Skills Investigating transactions prior to the liquidation to check for discrepancies and obvious preferences/undervalued transactions Alerting creditors to progress every 12 months and involving them in decisions where necessary Valuing and realising assets Distributing monies to creditors and accounting for themThe cost of voluntary liquidation – excluding the initial fee – is charged according to time spent, usually over a period of five years. How do companies pay for voluntary liquidation? Proceeds from the sale of the company’s assets usually pay the costs for three different areas:The cost of voluntary liquidation Money owed to creditors Shareholder debtsHowever, the second and third tier only receive funds after payment of the cost associated with the previous tier. Therefore, as the process continues, it could become increasingly unlikely that shareholders will receive the full amount owed to them.Sometimes, the cost of voluntary liquidation cannot be met through the sale of assets. In such cases, liquidators will require payment in advance.When this occurs, or directors require a more efficient process, directors often pay for liquidation out of their own funds.The cost of voluntary liquidation can be daunting, but this process is the correct way to close an insolvent company and stop the position getting worse. It can help protect directors from wrongful trading accusations, stop the risk of personal liability, ensure all staff are paid compensation quickly and perhaps most importantly spare the director time to get on with their life.

Read
How Much Does It Cost To Liquidate A Company?

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