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Which creditors are paid first in the liquidation process?

A clear hierarchy for repayment exists when a company closes down with debts and this is laid out in the Insolvency Act of 1986. Creditors are ranked by their class and the appointed liquidator is legally obliged to repay creditors in the prescribed order.

They must also repay each class of creditor in full before moving on to the next in line. It’s worth noting that the liquidator’s fees and expenses are paid first but the three main categories of creditors are secured, preferential, and unsecured.

These can be further subdivided and some creditors, including HMRC, may fall into two different categories depending on the type of debt they’re owed. So let’s look at the different creditor groups in company insolvency.

Categories of creditor and their order of repayment when a company is closed

Secured creditors with a fixed charge

The group that lies at the top of the hierarchy for repayment is secured creditors with a fixed charge on a company asset or assets. This charge allows them to repossess the asset and sell it to recoup their money.

Preferential creditors and secondary preferential creditors

Employees who are owed certain debts, including arrears of wages, holiday pay, notice pay and redundancy payments, are known as preferential creditors. Secondary preferential creditors are repaid after employees and HMRC is an example of this for some tax debts, including outstanding VAT.

Secured creditors with a floating charge

A floating charge can be made against an asset class, such as stock or raw materials – one that can be traded and that isn’t subject to a fixed charge. Part of the proceeds of these assets is set aside for the benefit of unsecured creditors, and this is known as the ‘prescribed part.’

Unsecured creditors

Unsecured creditors fall near the bottom of the statutory hierarchy in a company insolvency and if the company has few assets to liquidate, they may receive little or no return from the procedure. This group typically comprises trade suppliers, customers, clients, contractors, and HMRC for certain debts.

Connected unsecured creditors

This group is made up of unsecured creditors that have an association with the company, such as a director’s family member or friend, or a member of staff who has loaned money to the company.

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Prioritising the interests of creditors as a whole

The importance of prioritising the interests of creditors as a whole when a company is unable to repay all of its debts cannot be understated. If you pay one creditor in favour of others, for example a connected unsecured creditor, it’s known as a preferential payment and can be reversed by a liquidator. This leaves you at risk of misconduct allegations and the possibility of becoming personally liable for some of your company’s debts.

Company Closure can provide more detailed information on paying creditors in the correct order and support you if your company has to close down. Please call one of the team to arrange a free consultation.

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