When a company goes into liquidation, there is a defined order of who gets what and when. Below we explain the rules governing the priority of payment to those owed money.
Where a creditor stands in the order of payments to be made and what they are likely to receive depends on three things:
- The types of creditors involved in the process and what they are owed
- The size and value of the assets available, and how easily they can be turned into cash
- What fees will be incurred by a liquidator in carrying out their duties.
Types of creditor
There are three main types of creditor:
These are creditors with security over the company assets for amounts owed to them. Security itself generally falls into two areas; fixed charge security and floating charge security.
- Fixed charge security can be defined as a mortgage over a specific fixed asset. This is registered and remains in force until a fixed charge debt is paid. The key requirement is that a borrower would need the lender’s permission to sell a fixed charge asset. This includes large assets such as land, property and specific items of equipment
- Floating charge security can be defined as a mortgage over assets that change in quantity and/or value over time. A good example of this is stock or cash in the bank. This security only becomes part of the company’s physical assets once a company enters into liquidation, administration or administrative receivership.
These involve repayment of outstanding contributions to pension schemes, employee wages owing in the four months prior to liquidation (capped at £800 per employee), and any outstanding holiday pay.
These are the claims of all other creditors, which will have no security associated and have no preferential status. These include debts due to HM Revenue & Customs.
There is a set order in which surplus assets are distributed, as illustrated in the following graphic:
In general terms, those with fixed charge security over assets get paid first from the net proceeds of fixed charge recoveries. From any surplus preferential creditors are then paid from floating charge or non-charged assets.
Next to receive payment are those with floating charge security who will be paid from net floating charge recoveries (save for a portion which may have to be set aside for unsecured creditors if the security was registered after 15 September 2003). Any leftover money will then be paid over to unsecured creditors, leaving shareholders last in the queue.
For more information and advice about the liquidation process and how it may affect you, take a look at our resources section or get in touch.