Freephone (including all mobiles) 0800 987 1040

Advice Centre

Who Gets Paid First in a Company Liquidation?

Introduction

There are two ways an insolvent company can be liquidated – either voluntarily by the directors instructing an Insolvency Practitioner to convene meetings of shareholders and deciding on a creditors’ decision; or compulsorily, usually by a creditor petitioning at court for the winding up of the company. In both cases, it may well be that there are sufficient assets realised into the liquidation for payments to be made to some or all creditors. However, there is a statutory hierarchy in place which sets out the order in which the costs of the liquidation and creditors are paid.

There are three types of creditor:

  1. Secured (split into fixed & floating charge holders)
  2. Preferential
  3. Unsecured

First – Costs of the Liquidator and/or the Official Receiver

In a Creditors’ Voluntary Liquidation (CVL), a Liquidator, who is an Insolvency Practitioner, is appointed immediately by shareholders and creditors. In a Compulsory Winding Up (CWU) the Official Receiver is usually initially appointed Liquidator, but an Insolvency Practitioner may subsequently be appointed Liquidator, if there are substantial assets to realise or an investigation is required.

Liquidator’s fees are agreed by creditors via a fee resolution and are paid from asset realisations. The only exception to this is where the assets are subject to a Fixed Charge, where the Liquidator will need to seek the approval of the Secured Creditor to draw fees.

The fee taken by the Liquidator will have a material impact on what is left for creditors, and in the vast majority of cases, there is often very little left for creditors. However, Bridgewood offers a voluntary fee cap to ensure more funds are available for the benefit of creditors.

As a general rule, there will be more money available for creditors in a voluntary liquidation, since compulsory liquidations incur the additional cost of the petitioning creditor, legal fees, and statutory Insolvency Service/Official Receiver fees (which exceed £10,000).

Second – Secured Creditors with a Fixed Charge

Creditors with a fixed charge are normally banks and asset based lenders; they will hold security over a company’s assets. Details of the fixed charge are registered by the lender at Companies House, via a Debenture.

The company will lose the right to sell these items, which might include goodwill, property, plant or machinery and only the title holder or Liquidator, can realise the asset for the benefit of the creditor. Factoring or Invoice Discount providers usually also have a fixed charge over the debtor book.

Third – Preferential Creditors

These are typically employees of the company who are owed arrears of wages or holiday pay. However, pay in lieu of notice and redundancy payments are non-preferential and will rank alongside other unsecured creditors. If there are insufficient assets in the liquidation to pay employee claims, then any shortfall is covered by the Government’s Redundancy Payments Fund, subject to certain upper limits.

From April 2020, HMRC will be treated as a preferential creditor in respect of certain unpaid taxes.

Fourth – Secured Creditors with a Floating Charge

A secured lender can hold a floating charge over an asset that is not secured via a fixed charge. This includes stock, raw materials, work in progress, and book debts. In the normal course of business, these assets can be subject to change in quantity and value. As with the fixed charge, details of any floating charges are registered by the lender at Companies House with a Debenture.

Under insolvency legislation, a fixed percentage from the sale of assets subject to a floating charge is set aside for the benefit of unsecured creditors; this is known as the ‘Prescribed Part’ and consists of 50% of the first £10,000 of assets realised and then 20% between £10,000 and £600,000, after payment of the costs of realisation.

Fifth – Unsecured Creditors

These include all remaining creditors such as suppliers, contractors, the landlord, consumers, HMRC and director’s loan accounts. Any distributions are paid equally to all creditors, on a “pari passu” basis, that is their percentage share of the total unsecured liabilities.

Shareholders

Shareholders will only receive a payment from a liquidation if all the costs of the liquidation and creditors have been paid in full plus statutory interest.

Summary

A Liquidator must maximise asset realisations and estimate their fees and costs to try and ensure a fair return to all classes of creditors, based on the priority of payments set out above.

About the Author

Louise Freestone

Louise Freestone is a Licensed Insolvency Practitioner with 12 years of experience in restructuring, turnaround and insolvency. She leads Bridgewood's corporate insolvency team.

View Louise's Profile and Contact Information

Who We Advise

Shareholders
Directors
Sole Traders
Accountants
Advisors
Creditors

Contact Our Team

Your privacy is important to us. All information submitted is treated in strictest confidence and we do not pass your details to any third parties.

Submitting a call back request confirms that you have read and accept our Privacy Policy.

Bridgewood is a trading style of Bridgewood Financial Management Limited (Company No: 07130329) and Bridgewood Financial Solutions Limited (Company No: 06957765). Registered Office: Poynt South, Upper Parliament Street, Nottingham, NG1 6LF. Registered in England and Wales.

Calls are recorded for training and security purposes.

Bridgewood are rated 4.9 out of 5 based on

Paul Mallatratt (Licence No. 2039) and Louise Freestone (Licence No. 2030) are licensed to act as insolvency practitioners in the UK by the Institute of Chartered Accountants in England and Wales and are subject to their Code of Ethics, available in English at www.icaew.com[...]code-of-ethics-d

In carrying out the regulated profession of Insolvency, the firm is subject to the Insolvency Regulations and Guidance Notes at www.icaew.com/insolvency and the Statements of Practice at www.icaew.com[...]insolvency-regulations-and-standards