Order of Payments in Liquidation: Who gets paid first?
When entering an insolvent liquidation for the first time, it can be hard to understand how everything works. If your business is insolvent, that means your company owes a range of creditors money that you can’t pay back. We’re answering the question, what is the order of payments in liquidation and who gets paid first?
What is an insolvent liquidation?
First off, if you’re not sure whether your company is insolvent, you might want to seek some advice. Generally speaking, if your business liabilities are worth more than your assets or you cannot afford to pay your bills on time, then you probably are running an insolvent company.
What you do next is very important. The right thing to do is seek company insolvency advice as soon as you can. The wrong thing to do is bury your head in the sand and try to keep the business going, making payments to creditors who shout the loudest.
In all liquidations, a director’s investigation takes place. At this point, the director’s conduct will be assessed to find any elements of wrongdoing. Carrying on with an insolvent company could be labelled as wrongdoing.
In the same way, choosing to make payments to some creditors and not others could be classed as preferential payments. Both of these acts of wrongful trading could land you in hot water, facing fines and other penalties.
Entering an insolvent liquidation
An insolvent liquidation procedure involves going down one of two paths.
When a company goes into liquidation, directors should have a clear view of unsecured loans, secured debt and company accounts. This can help to avoid nasty surprises further down the line of the company’s liquidation.
After all insolvency procedures, the company’s details are removed from the Companies House register. This means the business will cease to exist.
Creditors voluntary liquidation
As the name suggests, the key aspect of a creditor’s voluntary liquidation is that the director enters it voluntarily. This is a positive approach as it shows that the director has not buried their head in the sand and is therefore acting within their director’s responsibilities.
Compulsory liquidation
On the contrary, a compulsory liquidation is generally forced by unpaid creditors. Usually, in this instance, a winding-up petition is issued by a creditor and the directors are given a date in court.
This liquidation process is not ideal and could mean that the company director faces more issues if accused of any wrongful trading. Part of the Insolvency Act 2016 states that a director must not take actions to make the creditor’s position worse, continuing to trade with no hope of recovery could be an example of this.
Regardless of which insolvency process you choose, a licensed insolvency practitioner must be appointed. Licensed insolvency practitioners are responsible for completing a directors investigation, selling the company’s assets, repaying creditors and formally closing the company.
So, what is the order of payments in liquidation?
Below you’ll find the payment priority of creditors in a liquidation process. A creditor is anyone who is owed money from your limited company, this could be banks, employees as well as HMRC.
It is worth noting that the next set of company creditors cannot be paid until the creditor group ahead has been paid in full. Unfortunately, in most cases, it is unlikely that every creditor will receive the money they are owed. Your company’s financial position must be assessed in detail during an insolvent liquidation process.
Company employees may be able to claim redundancy as well as other unpaid money, such as wages or holiday pay. So, what is the order of payments in liquidation?
Liquidation fees
Over the years, we’ve received many calls from directors telling us that they’ve been offered liquidation for very cheap or free. This is simply not possible and will 100% end up costing you a lot of money in the near future. If you’ve taken up this offer and need some free confidential advice, contact us.
Your liquidation and legal fees have the highest hierarchy when it comes to getting paid in a liquidation. Without paying your licensed insolvency practitioner’s fees, no one else gets paid, and you continue worrying about your company’s debts.
For a small liquidation with minimal creditors, you’re looking at around £4000 plus VAT. We know that’s a lot of money, but it’s important to remember there are options if you’re worried you can’t afford liquidation.
Secured creditors (fixed charge holders)
There are two types of secured creditors, fixed and floating charges. The first to receive payment is those holding a fixed charge. Secured creditors with a fixed charge include large organisations such as the banks. For many business owners, taking out a loan from the bank is not uncommon practice.
Loans from a fixed-charge secured creditor can be used to buy assets such as property or land that will benefit the business. If that is the case, the bank has a fixed charge security which allows them to sell this asset and take back their money. These debts will be registered with Companies House.
Preferential creditors
Once secured creditors have been paid, the next group in the order of payment are preferential/preferred creditors. These include employees. Wages are included within this payment, as well as earned holiday pay and pension contributions.
Employees may also be eligible for redundancy pay depending on whether they meet specified criteria such as length of service. If eligible, the employee claims redundancy pay through the Government website.
HMRC can also be classified as a preferential creditor when it comes to selected payments such as VAT, PAYE and more. In a liquidation, you are still required to pay corporation tax. If you fail to pay HMRC debts prior to entering the liquidation, you may face a winding-up petition.
A winding-up petition often leads to a compulsory liquidation. During these liquidation proceedings, directors often find themselves under more scrutiny for wrongful or unlawful trading.
Secured creditors (floating charge holders)
Secured creditors with floating charges are sometimes called asset-based lenders. Floating charge creditors have power over other types of company assets. Floating charge assets can include stock that can be sold or even disposed of while a business is running.
If you begin to experience financial problems and therefore, your company enters liquidation, the floating charge will ‘crystallise’. This means that you can no longer dispose of these business assets.
Due to many creditors often not being paid in a company liquidation, at this point, an amount of money is put aside and labelled as a ‘prescribed part’. This money is often used to give unsecured creditors some of the money owed by the company.
Unsecured creditor
Unsecured creditors are next in line to be paid in a liquidation. These include HMRC, company suppliers, customers and contractors.
In most liquidations, despite this group being owed a large amount of money, unsecured creditors receive very little or even nothing. If these unsecured creditors are paid in a liquidation, they may also receive interest on the debts they were owed. This will provide unsecured creditors with a better outcome.
Personal connections
When a business is struggling financially, often family members or friends want to step in and help. In a liquidation process, they too become unsecured creditors but with a personal connection.
Some company directors choose to make payments back to their family and friends on the loaned money as they feel guilty. In an insolvent liquidation procedure, giving this group preferential status is classed as wrongdoing, and it will be found out by your insolvency practitioner.
Preferential treatment will no doubt leave you in trouble and could even open the door to further investigation into how you have acted as a company director.
Company shareholders
The last to receive any form of payment are company shareholders. A company shareholder is anyone who owns a share of the insolvent business. Unfortunately, it is rare that a shareholder will receive any payment in a company liquidation.
Liquidation and company closure is not a nice thing to deal with, but the process doesn’t need to be complicated. Try not to worry about liquidation pricing, there are multiple options that you may be eligible to use, such as director redundancy pay.
Our team of experts are always on hand to provide professional advice and support to directors who need it. We can help you to understand the order of payments in liquidation.
I'm Chris Worden, Managing Director at 1st Business Rescue. With over 7 years of experience, I help UK directors navigate the complex world of UK corporate insolvency. We offer free and independent advice to UK directors and advise them about what options may be available to them if their limited company starts to struggle.
I am passionate about helping other directors overcome their business challenges and get back on their feet, as I was once in the same position as them. I had a business that became insolvent, and the advice out there was confusing and overwhelming. I am here to provide honest and valuable advice to UK directors.
I am proud to say that we are one of the only 5-star corporate insolvency companies on Trustpilot with hundreds of 5-star reviews, and we publish videos weekly on our YouTube channel. Our channel is designed to educate UK directors about insolvency and debt advice. Check it out here:
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