I am often asked what is the order of payout of creditors in a corporate insolvency?
Here it is:
- The ‘Pool’ of assets subject to a fixed charge/fixed charges
(i) The fees, costs and expenses incurred by the insolvency practitioner in preserving and then realising the assets subject to the fixed charge(s)
(ii) The fixed charge holder in the order of Registration or any agreement they reached between them to formally vary their order between themselves
(iii) If there is a surplus after 1(ii), then it goes to the ‘Free Asset Pool’ (that is unless it is caught by any floating charge) - The ‘Pool’ of assets subject to a floating charge(s)
(i) The fees, costs and expenses incurred by the insolvency practitioner (to the extent that there are insufficient free assets to meet them)
(ii) Preferential Creditors
In broad terms the preferential creditors comprise:
– Employees wages up to £800 incurred in the 4 months prior to insolvency
– All accrued holiday pay (no limit),
– Unpaid employee contributions into an occupational pension scheme for the 4 months prior to the insolvency
– Unpaid employer contributions into an occupational pension scheme for the 12 months prior to insolvency
– Any money paid under a ‘Protective Award’ for the employer’s failure to consult.
Note the dates. Note that employee expenses are not preferential, they are unsecured.
(iii) Something called ‘The Prescribed Part’. This is a pot of money that the IP has to ‘put to one side’ to be paid to the unsecured creditors – this money therefore bypasses the floating charge holder(s). Note that the ‘Prescribed Part’ only applies where there is a floating charge in place that postdates 15 September 2003! If the floating charge predates then, there is no Prescribed Part.
(iv) Any surplus then goes to the Free asset Pool. - The Free Asset Pool
(i) The fees, costs and expenses incurred by the IP in the insolvency
(ii) Preferential Creditors (if any remaining)
(iii) Unsecured Creditors (in essence all those owed money who are neither secured nor preferential).
Unsecured creditors therefore include trade suppliers, HMRC for PAYE, NIC, VAT and Corporation Tax, employees for redundancy, pay in lieu of notice, expenses and claims in excess of the preferential limits, directors’ and others’ unsecured loans to the company, landlord’s claims, finance company shortfalls, deposit creditors, customer claims for breach of contract, etc.
(iv) Interest on preferential and unsecured creditor debts (firstly at the statutory rate of interest – 8% – then if that’s settled in full at the individual creditors’ contractual rate)
(v) Shareholders. Sometimes the Memo and Articles will subdivide shareholders into a specific order of payout, eg preference shareholders before ordinary shareholders, with ordinary shareholders getting anything that is still left.
As you can see, it can be quite complicated, but the following principles can be drawn:
- The costs and expenses of Insolvency Practitioners rank at the top!
- Secured creditors tend to come next, if there are any.
- Employees enjoy little preferential treatment in insolvencies themselves – but the Redundancy Payments Service often step in and pay certain claims and then stand in their shoes as a creditor.
- Shareholders are bottom of the heap, so they typically only receive something in a solvent, members’ voluntary liquidation.