Have you recently liquidated a company? Then you might be interested in finding out more about the process and who is involved. In this blog, we’re looking into secured vs. unsecured creditors in liquidation and understanding the payment hierarchy.
What is liquidation?
Liquidation involves the formal closure of a company. There are many reasons why directors may choose to liquidate a company, including retirement, moving onto a new venture or financial problems.
The reason for the company’s liquidation has an impact on how it can be closed. For example, a company with outstanding debts that it cannot pay will likely use a creditors’ voluntary liquidation or wait to be forced into compulsory liquidation, although this is not recommended.
A company with no outstanding debts, or debts that can be paid off, can use a members’ voluntary liquidation. These companies are solvent.
An insolvent company cannot afford to pay its debts when they fall due or its liabilities are worth more than its assets.
What happens during liquidation?
The exact liquidation process depends on the chosen method and your individual circumstances. The most common type of liquidation is a creditor’s voluntary liquidation. For this process, we will assume this method and that no wrongdoing has occurred.
A company entering a creditor’s voluntary liquidation has outstanding debts that it cannot afford to pay off. These debts will be owed to company creditors.
When a company enters this type of liquidation, it must also appoint an insolvency practitioner. The insolvency practitioner will take care of the entire process, including assessing your company accounts and reviewing your actions as a director to ensure there is no wrongdoing.
The insolvency practitioner will communicate with all creditors, giving directors some breathing space in what can be a stressful situation.
It’s imperative that directors are honest with their insolvency practitioners, as this will enable them to complete their job as smoothly as possible.
They will be responsible for trying to find money within your company to pay back your outstanding creditors. This may include selling company assets, including stock and machinery. They will also use any cash left in the bank. Any money realised will be distributed in accordance with the payment hierarchy. Once the liquidation is complete, the business details are removed from the Companies House register, and the business ceases to exist.
You mustn’t sell your assets before entering into a formal insolvency process. If you do, you must retain all documentation and ensure they are sold at a fair market price. You should also avoid sending money to yourself or creditors during insolvency. If you pay off the creditor who is shouting the loudest, it could be seen as a preference payment.
Before you appoint an insolvency practitioner
Before you appoint an insolvency practitioner, you need to follow these simple tips.
- Make sure you speak to a few insolvency practitioners
- Make sure you get all costs in writing
- Make sure they have checked all elements of your business, eg wrongful trading and outstanding director’s loan accounts
- Make sure you feel comfortable asking any questions you have
What is a secured creditor?
A secured creditor has a legal claim against a debt or a specific asset. They have priority over unsecured creditors as a result. Their security comes from being able to seize or sell secured assets to make back the money they are owed.
Secured creditors have either fixed or floating charges over assets. These company assets could be vehicles, machinery, equipment or similar items. Examples of secured creditors may include banks that lend mortgages for business premises or similar. They may be known as a secured lender.
What is an unsecured creditor?
An unsecured creditor has no legal claim over a company’s assets or debts. These creditors are paid after secured creditors. These creditors often include suppliers, contractors and customers.
Other examples can include landlords and HMRC for certain tax debts.
What happens if there is no money and no assets?
Many directors place their companies into liquidation when they have no money and no company assets. It’s understandable that you’d want to know what happens in this case.
Companies that have no money or assets and whose directors have not committed any wrongdoing are likely to have debts written off. This means that creditors may be paid a very small amount of what they are owed.
What about personal guarantees?
Personal guarantees are when a director promises to pay a debt if the company cannot. These are serious and can cause significant stress during liquidation. There is no real way out of these, and you must tell your insolvency practitioner as soon as possible.
If you cannot afford to pay the personal guarantee, you may end up needing to file for personal bankruptcy. Always seek professional financial advice before signing a personal guarantee.
What is the payment hierarchy in liquidation?
The payment hierarchy in liquidation is outlined in the Insolvency Act 1986. It states that all creditors in a single class must be paid before an insolvency practitioner can proceed to the next class.
- Secured creditors with a fixed charge
- Liquidation fees & expenses
- Preferential creditors – eg employees owed holiday pay
- Secondary preferential creditors – eg some HMRC debts
- Secured creditors with a floating charge
- Unsecured creditors owed unsecured debts
- Connected unsecured creditors
- Company shareholders
In many liquidations, it is unlikely that the company’s shareholders will receive any money.
At 1st Business Rescue, we’ve worked with many clients in these situations, and we always offer trusted advice.
We understand that liquidation is a stressful time and are here to support you at every stage. Every director that we speak to comes off the phone feeling more at ease than they did at the beginning. We hope this blog has been helpful regarding the difference between secured and unsecured creditors. Find out more about fixed charge holders and floating charge holders.
Do you need professional support with liquidation? Then you should contact us.
Justin Barker
I’m Justin Barker, the Managing Director at 1st Business Rescue. I have over 25 years of experience providing insolvency advice to business owners.
I understand how challenging it can be when dealing with financial difficulties within your business. It’s easy to ignore the problem and hope that it disappears, but this is often the worst thing you can do. Our dedicated team is here to provide honest, valuable advice to help UK directors deal with their personal situations in the most appropriate way.
No case or circumstance is the same, but I can guarantee that I am there to give you the best advice.
We are one of the only 5-star corporate insolvency companies on Trustpilot, with hundreds of 5-star reviews. Contact our friendly team for insolvency advice.