When all other avenues have been explored and exhausted and the debt is overwhelming, a company may have little choice but to go into liquidation. This formal winding-up process is technically known as a Creditors' Voluntary Liquidation (CVL) and sees a very fixed hierarchical structure established by the Insolvency Practitioner put in charge. This hierarchy, or ‘order of priority’ isn’t decided upon by the IP, it’s dictated by the 1986 Insolvency Act.
Some company owners and directors assume there is a level of flexibility around who is paid what and in what order and can often be quite surprised to find out that this is really not the case at all.
When a company is formally wound up, all the business’ funds, assets and income is collected together and a plan is put in place to pay off creditors. Working out who gets paid in what order and how much they receive is one of the main tasks of the IP. But there is still a very strict formula and set of guidelines which must be adhered to.
Here is the ‘order of priority of payments’ for when a company in debt is liquidated by an Insolvency Practitioner:
- Secured Creditors - Large fixed asset-secured loans with major financial institutions take precedence. Basically, if a bank lent the business funds and the loan was secured against a property or land, they’re the first to be paid back - and in full wherever possible. Consider a car on finance, we all know and understand the finance company needs to be cleared to sell the vehicle.
- Pre Appointment Cost - The cost of getting the company into liquidation, such as the fee for drafting the Statement of Affairs, Valuation or Protection of assets, the report for creditors and dispatching of information and notices to stakeholder.
- The Liquidators - disbursements and cost, such as statutory advertising, insurances, agents fees uplift and storage of company records.
- The Liquidators - Then, the IP takes their fee. They cannot work for nothing and so, by law, priority lies with them. Without them no one gets anything, so they take their fee early. This leaves greater clarity too as to the true sum of the pot. Any additional costs incurred in the process need to be accounted for at this early stage too.
- ‘Preferential’ Creditors - After the banks, the next in line for a payout are what’s known in the industry as ‘preferential creditors’. And that basically means any employees or former employees that are owed wages, bonuses or unpaid holiday. Former employees owed redundancy payouts or wages in lieu of notice are not entitled to this preferential status.
- Secured creditors with a ‘floating charge’ - A floating charge is the opposite of a fixed charge and is the amount owed liable to change during the course of the loan. But when a firm goes into liquidation, that floating charge ‘crystallises’ and becomes fixed. Secured creditors with such charges are next in line.
- Unsecured creditors - Next up are people owed funds such as the company’s suppliers, or even customers if contracts are broken causing losses. There can be huge sums owed to those waiting patiently on this rung of the repayment ladder. Contractors, landlords, the HMRC... There may even be claims for interest on these debts to be assigned if the pot allows for it.
- Associated unsecured creditors - This next group is a more vague subset of creditor. ‘Connected’ or ‘associated’ unsecured creditors are people who have lent the money business such as friends of the owner. Or a spouse. It could be an MD’s parent or even an employee.
- Shareholders - The last people on the list to receive money when a company goes into liquidation are the shareholders. On the face of it, it may appear bizarre that people who faithfully invested their own money in the firm are the last to see any back. But investing is inherently risky and the chance of the business failing will have been weighed up by the shareholders before they signed over their funds initially. Shareholders only see money from the liquidation process if the Insolvency Practitioner is fully satisfied that all other creditors above them in the pecking order have had their debts fully settled.
That’s the hierarchy and there are laws protecting it. If your business is failing and you’re concerned that your creditors may not be sufficiently remunerated, you need to instruct a trusted and respected IP like us here at McAlister & Co.
We will speedily and accurately assess your situation and give the necessary advice (and take the necessary action). Then we will strive to raise as much money as humanly possible for all assets. We will then set about paying back your creditors and settling matters as fairly as we can.