Who gets paid first when a company goes into liquidation?

During the liquidation process, a company’s assets are sold to repay creditors, with the goal of winding up the company.

However, it’s not as simple as repaying different parties randomly; there’s an order of payment in liquidation that must be respected during the process.

Whether you’re a creditor or shareholder, this article identifies your position in the liquidation payment order.

In the UK, the liquidation of assets and repayment takes place in the following order:

Secured creditors with a fixed charge

Secured creditors with a fixed charge hold liquidation priority because a fixed charge is a loan secured on a specific asset, such as land or machinery.

It’s best to understand a fixed charge similar to a mortgage or car loan.

If you sell the asset before you’ve completed repaying the financial institution that lent you the money to buy it, you have to settle the balance with them before receiving the rest of the sale proceeds.

Based on this analogy, it makes sense that fixed charge creditors are typically banks or similar financial institutions.

If the company has several fixed charge creditors, the liquidation payment order is determined by date.

Liquidation expenses and liquidator’s fees

Second in the hierarchy for repayment are the expenses incurred during the liquidation process, such as legal fees, valuation fees, and fees owed to the liquidator.

This ensures that they’ll receive payment for their work.

Preferential creditors

Although they don’t hold security over a specific asset and are therefore unsecured creditors, preferential creditors are a specific class of creditors that are given priority over other unsecured creditors.

Preferential creditors include utility companies and employees who are owed wages and holiday pay (up to a certain amount).

HMRC is also considered a preferential creditor for tax obligations such as VAT, PAYE and employees’ National Insurance contributions.

Otherwise, HMRC is considered an unsecured creditor.

Secured creditors with a floating charge and preferred part

Secured creditors in liquidation are not viewed equally.

Although secured creditors with a fixed charge are at the top of the order of payment in liquidation, the same cannot be said for secured creditors with a floating charge.

A floating charge is a group of assets that change in value and quantity – the opposite of a fixed charge which holds a constant value and quantity.

However, secured creditors with a floating charge can recover payment thanks to the prescribed part – a portion of the assets set aside to repay this class of creditors and other unsecured creditors.

Unsecured creditors

The final category of creditors to receive repayment in the liquidation process are unsecured creditors.

Parties such as vendors, landlords, directors, and customers fall into this category, if they had either granted the company a line of credit or supplied goods and services without securing an interest in the company’s assets.

HMRC tax obligations that are not deemed as preferential also fall into this category.

Repayment is made by selling unsecured assets – if any remain available to satisfy the debt.

These funds are also subject to 8% interest.

Shareholders

The last party in the liquidation payment order are the company’s shareholders.

At this stage of the liquidation process, it’s very unlikely that they would see repayment if the debts owed to the parties which hold liquidation priority were substantial.

Whether you’re a shareholder or creditor, understanding your position in the liquidation payment order is crucial to managing expectations of the liquidation process.

The experts at Irwin Insolvency have more than two decades’ experience guiding parties through liquidation.

For more information, contact us by telephone at  0800 254 5122  or by email at mail@irwinuk.net.