An insolvent liquidation procedure involves the sale of assets, and distribution of the proceeds amongst company creditors. An IP is appointed to administer the process, and must ensure that all creditors are paid according to the hierarchy laid down in the Insolvency Act 1986. Our Insolvency Experts in Bolton can ensure your creditors are paid on time. Jason Elliott at Insolvency Experts in Bolton explains the ‘hierarchy’ and why unsecured creditors often fare badly in in liquidation procedures. Each class of creditor must be paid in full before funds are allocated to the next. Creditors are ranked as follows: •Liquidator fees and expenses •Secured creditors with a fixed charge •Preferential creditors •Secured creditors with a floating charge •Unsecured creditors •Connected unsecured creditors •Shareholders
Liquidator fees and expenses
The liquidator’s remuneration and fees for administering the process are first to be paid. Administrative costs and expenses can be incurred for holding meetings, realising assets, distributing funds, providing accounts and reports, and investigating the conduct of directors.
Secured creditors with a fixed charge
This creditor group includes banks and other financial institutions that have provided borrowing to the company, taking security on one or more business assets. For example, if the company has borrowed money to purchase land or property, the bank will take fixed charge security allowing them to sell the asset on default or liquidation, and thereby recoup their money.
Preferential creditors and ‘prescribed part creditors’
Preferential creditors are members of staff entitled to certain statutory payments. These include arrears of wages, holiday pay, redundancy, and unpaid pension contributions. The ‘prescribed part’ refers to an amount set aside from the sale of assets with a floating charge taken out after 15th September 2003. This sum is used to provide unsecured creditors with a greater chance of recovering part of their debt. 50% of the first £10k realised from the sale of floating charge assets is set aside in this way, and then 20% of any realisations between £10k and £600k. Anything left goes towards repaying floating charge-holders.
Secured creditors with a floating charge
Assets subject to a floating charge can include stock, raw materials, work-in-progress, fixtures and fittings – essentially, any other assets not subject to a fixed charge. Assets of this type can be traded in the normal course of business. Terms and conditions relating to fixed and floating charges are laid out in a debenture – a document signed by the directors and registered by the creditor at Companies House.
Unsecured creditors generally consist of the company’s customers, suppliers, contractors, certain employee claims, and HMRC. If all unsecured creditors have received an equal dividend and there are additional funds available, interest is also paid on their debt.
Connected unsecured creditors
Unsecured creditors who have an association with the company are eligible to be paid a dividend upon liquidation. This creditor group could include a director’s family member, or an employee who has loaned money to the business. Employee expenses also fall into this category.
Shareholders are the final group to be paid. Because they have taken a business risk in providing money to the company, they are not entitled to a distribution until all other creditor groups have been paid. In an Insolvent Liquidation it is unlikely that there will be sufficient funds to pay this class of creditor. All classes of creditor must be paid in full before the liquidator can distribute funds to the next group and it is important to maximise the interests of creditors once you enter insolvency, otherwise as a director you could be subject to accusations of wrongful or unlawful trading. Fixed and floating charges are a complex area to understand, particularly if more than one charge has been taken on an asset. The Insolvency Experts can help clarify your company’s financial position, and investigate who takes priority in cases where you have multiple creditors. Also, we will ensure that your legal obligations as a director are met and reduce your risk of exposure. For honest, confidential advice contact our Insolvency Experts in Bolton on 0300 303 8284 or via our contact us page.