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Who Gets Paid First in Liquidation?
During the insolvency process for a company that can no longer financially remain viable, it is important for the liquidators and insolvency practitioners to carefully evaluate the company’s affairs. Who gets paid first in liquidation? It is an important question that has to be answered, but at first the assets of a company must be thoroughly analysed in order to sell them at a fair price which therefore can be justified to creditors.
The problem is, that a company is insolvent for a reason, and with liquidation fast approaching there aren’t enough funds to make payment to creditors in full. There is a specified order of payments, so let’s take a look at what you can expect if a company goes into liquidation and which creditors can expect to be paid first.
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3 Key Questions on Who is Paid First in Liquidation
Who are the very first to be paid during a company liquidation?
The Insolvency Act 1986 set out a clear order of payments that has to be legally followed when a company becomes insolvent and goes into liquidation. Each class of creditors receives payment following the sale of company assets, in accordance with their order of priority. Should a class of creditors be paid in full, any surplus funds will be made available to the next class of creditors.
So, when it comes to the very top in the order of payments, who gets paid first in liquidation?
Liquidator Costs and Expenses – Once the assets of a company have been valued and sold, the first cost to be paid are the costs of the liquidation. The fee for the insolvency practitioner acting in the role of liquidator is paid in full, alongside all administrative costs and expenses that have built up during the entire process.
These costs and expenses can include any meetings and travel costs relating to those meetings, the realising of assets, the distribution of funds, producing and providing reports and accounts for relevant individuals, and the investigation that will have taken place regarding the conduct of company directors. It should be noted that these costs and expenses are subject to approval from creditors.
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What are the different classes of creditor to be paid?
Secured Creditors (Fixed Charge) – Holders of a fixed charge are usually banks or other lenders, who hold a title over specific assets. This is most commonly in the form of a mortgage on a business premises through a bank, but also may be charges over any equipment and machinery. When the lender is provided a fixed charge the company no longer has the right to sell or trade the item without the lender’s consent. Once a company moves into insolvency the assets in question will most likely be sold by the liquidator in order to pay back the debt to the secured creditor.
Preferential Creditors – Next on the list in the order of payments of ‘who is paid first in liquidation?’, are preferential creditors. These can include employees seeking wage arrears and holiday pay. These funds are claimed from the Redundancy Payments Service, who will subsequently submit claims into the liquidator. Any payments made to employees in respect to arrears of wages are subject to a cap of £800 per employee.
Prescribed Part Creditors – This relates to an amount that is set-aside from the company’s net properties (where a floating charge was created after 15th September 2003). This ensures that unsecured creditors have a better chance of recovering some of the debt that they are due. The amount of the prescribed part fund is 50% of the first £10,000 from the company’s net property, with 20% of anything further between the value of £10,000 and £600,000.
Secured Creditors (Floating Charge) – Any assets that are not subject to a fixed charge, such as fixtures and fittings at a premises, stock, any raw materials used in the production process of a company and any work-in progress. Floating charge assets can be sold and traded during normal business proceedings. The amount leftover once prescribed part creditors have been dealt with (see above) is used to repay any floating charge creditors.
Unsecured Creditors – Next on the list are the unsecured creditors. This includes:
- Staff Claims
- Trade Creditors
- HM Revenue and Customs (HMRC was, prior to 2002, listed as a preferential creditor until the Enterprise Act came into effect)
Where a company has secured a floating charge over the assets of the company on or after 15 September 2003, and the company’s net property is greater than £10,000, then unsecured creditors will benefit from the associated prescribed part fund.
Are there any other people who still need to be paid?
After all of these creditors have been paid, the remaining assets – should any remain – can be used to pay shareholders.
In terms of finding out more about who gets paid first in liquidation, we hope this guide has helped shed some light on the order of payments in a liquidation process. The Insolvency Experts offer a wealth of experience within the industry. We have worked with countless companies over the years, working with myriad industries.
If you would like to speak with us about your specific situation, we are happy to help. You can contact us via email or telephone to speak to one our specialists and we’ll arrange a consultation at a time that suits you.