Insolvency: Who gets paid first?
When a company becomes insolvent, and is placed into an insolvency process, steps are taken to sell assets to repay the debts. However, these debts are settled in a particular order which is specifically set out by UK law. It aims to ensure fairness to creditors while also protecting the rights of employees and the public interest.
Whether you’re a creditor waiting to be paid or a director or employee of the insolvent company, understanding how the process works can help you gain a clearer picture of what will happen and when you are in the insolvency payment order.
Let’s take a closer look at what happens during insolvency and the order in which people and companies can recover the money that is owed to them.
What happens during insolvency?
When a business can no longer feasibly meet its financial obligations, it is considered insolvent. This means that the business either lacks the cash flow to repay its debts or that its debts significantly outweigh its assets. An insolvent business may take one of the following procedures:
- Liquidation: The business closes, and its assets are sold by the Liquidator to pay off its debts.
- Administration: An administrator is appointed to take control of the business, with the aim of either rescuing or selling it, with greater returns to creditors.
- Company Voluntary Arrangement (CVA): An agreement between a company and its creditors to settle the debts over a specified period allowing the Company to continue to trade with a CVA Supervisor overseeing its trade.
In all of the above cases, assets are managed and distributed by an Insolvency Practitioner, who then follows a strict legal order of who gets paid and when.
Order of insolvency payments
Following the sale of assets and the raising of funds to settle debts, it is not a case of who shouts the loudest or who you like the most. The Insolvency Practitioner overseeing your insolvent business must follow a rigid set of legal rules as to the order in which creditors are paid:
- Insolvency Practitioner’s fees and costs: these costs are deducted from the funds recovered before money is distributed to creditors.
- Secured creditors with fixed charges: these include a loan secured against company property. They are entitled to be paid directly from the sale of those particular assets.
- Preferential creditors: these include employees’ claims for unpaid wages (up to a capped amount), accrued holiday pay, unpaid pension contributions.
- Secondary Preferential creditors: Being HMRC for VAT, PAYE and NI contributions (Not Corp Tax).
- Secured creditors with floating charges: a floating charge covers general business assets such as stock, raw materials, or fixtures and fittings. These charges ‘float’ over changing assets and only crystallise on insolvency.
- Unsecured creditors: these include suppliers, contractors, landlords, HMRC for Corp Tax and customers who do not hold security or preferential status. Unfortunately, given their position in the priority order of payment, unsecured creditors often don’t receive any proportion of what they are owed or if they do, this is only small.
- Shareholders: last but not least, if there’s anything left over once all of the creditors’ debts have been settled, the remaining funds go to the shareholders. While this is what happens in practice, in reality, this is rarely the case in an insolvency situation.
Can creditors change the order?
No, this isn’t possible. The insolvency payment hierarchy is established by law and therefore must be adhered to. There is no leeway or bending the rules; insolvent businesses and Insolvency Practitioners must follow the order.
That said, there are a few situations where creditors may improve their situation. These include:
- Retaining security, such as having a fixed or floating charge.
- Retention of title: If the contract states that the creditor retains ownership of goods until they’re paid for, they may reclaim them before they’re sold.
- Acting early before the company enters formal insolvency.
Get impartial insolvency advice
If you are facing insolvency and would like impartial advice, please contact the friendly team of experts at Bridge Newland. We can discuss your situation and explore how we can assist you.
Categorised in: Latest Insolvency News
