When a company enters insolvency it is vital to understand the different classes of creditors and the order of priority applicable. There are three main types of creditors:
Those who hold security over the company assets. They are generally banks or asset-based lenders with a legal charge registered at Companies House, which can fall into two areas: Fixed charge and floating charge.
A fixed charge security is a lien or mortgage over a specific asset (or category of assets) owned by a company, which is not free to sell the asset without the lender’s permission. Examples include buildings, land, plant and machinery, goodwill and intellectual property.
A floating charge security is a lien or mortgage over assets used by the company in its day to day trading such as stock, work in progress or cash in the bank.
Employees for arrears of pay (limited to £800), holiday pay (maximum of 6 weeks within a 12 month period) and unpaid contributions to an occupational pension scheme (4 months for employee contributions, 12 months form employer contributions). From 15 September 2003, HM Revenue & Customs ranks as an unsecured creditor without preferential status.
All other claims that are neither secured nor preferential, including trade creditors, HMRC and employee claims other than pay arrears and holiday pay.
The following list details the priority of payment when there are funds to be distributed by the Insolvency Practitioner:
- Individuals or organisations holding a fixed charge get paid first from the net proceeds of the sale of the asset over which they hold the charge (after the liquidator has received their fee)
- If there are funds left after the payment of costs and expenses, the next group to receive funds are preferential creditors
- Prescribed part: Proportion of the remaining funds (subject to a maximum of £600,000) made available to unsecured creditors when there is a floating charge created on or after 15 September 2003
- Creditors with a floating charge security will be paid out of the net floating charge recoveries
- Unsecured creditors
- Shareholders: They will only get paid if the unsecured creditors are paid in full