What Is The Order Of Creditors In Company Liquidation?

When a company faces insolvency and goes into liquidation, it’s important to understand that not all creditors are created equal. In fact, creditors are prioritised in a specific order laid out by the Insolvency Act 1986 and this order affects how the company’s remaining assets are distributed. Though the type of liquidation – voluntary or involuntary – does affect some parts of the hierarchy, the order of creditors is a crucial aspect of both processes as it determines who gets paid first and who may not receive any payment at all.
Providing there are funds and assets remaining after all costs incurred by the liquidation process are covered, the order of creditors in company liquidation is typically as follows:
Secured Creditors
Secured creditors are at the very top of the order of creditors in company liquidation. These are individuals or entities such as banks and lenders that hold a security interest or fixed charge against specific assets of the liquidating company. Because secured creditors have a legal claim to those assets, they are entitled to be paid before any other creditors in the event of liquidation.
Usually, the funds required are raised through the sale of the secured assets whereby the balance owed is reclaimed through the value of said assets.
Preferential Creditors
Following secured creditors, preferential creditors come next in the order of creditors in company liquidation. A preferential creditor is an individual, business or authority that has a claim treated preferentially by law. In most cases, this part of the hierarchy will include:
Employees
Employees are the most common type of preferential creditors and are typically given the highest priority amongst this group. Telling employees that a company is insolvent is a difficult process but it is important that any affected business does so quickly as outstanding wages, salaries, redundancy payments and unpaid pension contributions are all considered preferential claims during the liquidation process.
HMRC
Once the preferential claims of employees have been made, tax authorities like HMRC are next in the order of creditors. HMRC have the right to claim unpaid taxes, such as VAT, PAYE and employee NICS.
Suppliers Of Essential Goods & Services
Lastly, creditors who supply essential goods and services to the company during the liquidation process may also be classified as preferential creditors. This will depend on the type of company and the services provided, but a common example is utility companies that supply necessary resources for business operations while liquidation is ongoing.
Unsecured Creditors
Once secured and preferential creditors have been paid, any assets that remain are used to settle the claims of unsecured creditors. Unsecured creditors can include trade suppliers and lenders without security interests, but the term covers an individual or entity that does not have secured or preferential status.
Because unsecured creditors sit near the very bottom of the order of creditors in company liquidation, there is a high chance that they will only receive a fraction of what they are owed when the remaining assets are distributed. The payment they do receive will depend on the proportion of each unsecured creditor’s claim in relation to the total claims of all unsecured creditors.
Shareholders
In the case of insolvent liquidation, it is unlikely that shareholders will be paid. However, in cases of solvent liquidation like members voluntary liquidation (MVL), there may be sufficient funds remaining to repay shareholders. This group sit at the very bottom of the creditor hierarchy as they are not considered creditors in a traditional sense and have taken a recognised risk when getting involved in the ownership of a company.
Seek Help From Professionals
It is important to remember that the hierarchy of creditors in company liquidation is set out by the Insolvency Act 1986 and therefore there is a legal obligation to pay creditors in full in the correct order before the next group receives funds or assets. Understanding how these rules apply to your business and its creditors can be tricky and individual circumstances can affect the order in certain cases, particularly regarding preferential and unsecured creditors.
If your business is entering liquidation or is not sure where it stands with regard to its creditors, seek professional help at the first available opportunity. The expert insolvency practitioners here at MyLiquidation can answer any questions you may have about the order of creditors in company liquidation and give you personalised advice about your current situation. Don’t hesitate to get in touch with the experienced team today.