When a company goes into Administration, who gets paid first?
When a company goes into Administration who gets paid first? This is one of the first questions asked by creditors of companies that have entered into financial problems. An Administrator is an officer of the Court, and accordingly, they are responsible for the actions of the company for the duration of the Administration period and must act in the best interests of creditors at all times.
The Administrator is tasked with overseeing either a restructuring of the company, a sale of the company as a going concern or the liquidation of the company. This is always with the view of ensuring the creditors achieve the best outcome for the debt that they are owed by the company in Administration. An Administrator will analyse the company and its assets, looking at potential outcomes and putting forward a proposal to creditors that includes a realistic timeframe for a resolution to the current situation, and how it is to be resolved (with the creditors in mind).
The Insolvency Act 1986 sets out the order of payments where a company enters Administration. What this means is that the list of creditors linked to a company is assessed, ranked and ordered. As a company enters a formal insolvency process, each level of creditors is paid what they are owed, to the extent to which funds permit, with any leftover funds then moved on and allocated to the next level of creditors. This process continues until there are no longer any funds left in the pot. The funds are established through the sale of assets, as well as possible restructuring of a company to realise as many assets as possible.
Creditors are ranked in the following terms:
- The fees and costs of the Administrator/liquidator
- All secured creditors that hold a fixed charge (usually in the form of property, stock debts or other assets)
- Preferential creditors
- Secured creditors holding a floating charge
- All unsecured creditors
- Shareholders of the company
How is each Creditor rank paid?
To understand the hierarchy of creditors and to more fully answer the question of ‘when a business goes into Administration who gets paid first?’ let’s take a deeper look at each level and the payments expected.
Administrator and Liquidator Fees: The appointed Insolvency Practitioner will first take fees for the process of Administration that they have undertaken, including all related costs and expenses for holding meetings, realising assets and the distribution of funds to creditors. The fee also includes the investigation into company directors to discover if there was any wrongdoing in the build up to the Administration process.
Secured Creditors (Fixed Charge): Those creditors who hold title over a business asset will be next to be paid from the pot. It should be noted that any fees taken are subject to approval from the company’s creditors. Assets include property, machinery, vehicles and equipment. The lender with a fixed charge is entitled to first rights to the sale proceeds of the asset over which they hold security.
Preferential Creditors: This section of creditors includes employees seeking wage arrears and holiday pay owed. This ensures there is a greater chance for unsecured creditors to recover a portion of their debt. 50% of the first £10,000 is put aside on sales of floating charge assets, with 20% of anything between £10,000 and £600,000. Ordinarily, employees will claim via the Redundancy Payments Service, who will in turn submit a claim to the approved Administrator.
Secured Creditors (Floating Charge): Floating charges include stock and any other asset not subject to a fixed charge. They can be traded in the same way as during normal business trading. Creditors in this section are entitled to receive money from the net property of the company, subject to the dilution of the prescribed part.
Unsecured Creditors: Suppliers, contractors, customers, HMRC and some staff members all fall into this category.
Shareholders: The final group of creditors to be paid as they have chosen to take a business risk by putting money into the company.
How do I find the right guidance on Creditor payments in Administration?
Every class of creditor must be paid in full before the funds can be distributed to the next group. It is a crucial and sometimes complex period for a company that has gone into Administration. So, when it comes to the question of when a company goes into Administration who gets paid first, you can see that there is a strict hierarchy of creditors that will be paid on order based on that classification, making it important to seek expert guidance on this process.
It is vital that you are in control wherever possible, and by hiring our services as a professional Insolvency Practitioner you guarantee that we can work diligently and offer expert advice and guidance at every stage of the Administration process. Get in touch with us today by phone on 0300 303 8284 or email us via our contact form to find out how we may be able to help you.