Insolvency: Who Gets Paid First?
Posted: 19/01/2021 15:34
In Insolvency proceedings there is a set hierarchy to be followed when paying out dividends to the various classes of creditors, which is as follows:
1. Creditors secured by way of a fixed charge
Payment will be made to a fixed charge creditor out of the realisations made from the charged asset, less any costs of sale.
Any shortfall owed to the creditor would then rank further down the hierarchy and any surplus realisations would filter down to the next class of creditor and be included with the realisations made from uncharged assets.
2. Insolvency practitioners’ fees and expenses
Insolvency Practitioners’ fees and expenses incurred in administering the insolvency procedure are then settled out of the realisations of any uncharged assets.
Insolvency Practitioners fees must first be either agreed by the creditors or approved by the court before they are drawn.
Further guidance on Insolvency Practitioners fees and expenses can be found in our Creditors Guide To Fees.
3. Preferential creditors
Preferential creditors in Insolvency proceedings are comprised of employee claims for; arrears of wages (capped at £800), unpaid accrued holiday, and outstanding pension contributions. Claims for arrears of wages over the £800 cap, payment in lieu of notice, and redundancy will rank as unsecured.
In most instances an employee’s claim will be paid by the Redundancy Payments Service (“RPS”) shortly after the insolvency event, and they will then stand in the employee’s shoes and receive the preferential payment.
Any shortfall owed to employees however, due to the caps applied by the RPS would still rank as preferential for dividend purposes.
4. Secondary preferential creditors.
As of 01 December 2020, H M Revenue and Customs once again rank as a preferential creditor in respect of VAT, PAYE, Employee NIC’s, and CIS deductions.
These claims are to be settled only once all the preferential creditors listed at point 3 above have been paid in full.
5. Creditors secured by way of a floating charge
Creditors secured by a floating over the assets of the Company are to be repaid following the secondary preferential creditors.
On 15 September 2003 the Prescribed Part was introduced to ensure that a portion of the asset realisations made available to creditors secured by a floating charge is kept aside for the unsecured creditors.
The Prescribed Part is calculated as follows:
- 50% of the first £10,000 of the sum and
- 20% of the balance
Further explanation of the Prescribed Part, together with a case study can be found by clicking on the link.
6. Unsecured Creditors
The majority of creditors involved in Insolvency proceedings will find that they rank as an unsecured creditor.
Once the secured creditors, Insolvency Practitioners, and preferential creditors have been repaid, any surplus that remains will be distributed amongst the unsecured creditors in proportion to their claim in the liquidation.
7. Shareholders and Individuals
Finally, in the event that there are funds remaining once all creditors have been repaid, a distribution will be made to any shareholders in corporate insolvencyproceedings or the individual in personal insolvency proceedings.
Whilst the above hierarchy does apply to all Insolvency proceedings, the way that creditors are treated in voluntary arrangements can vary and will be set out in the proposal for the arrangement.
You can view more information on the different Insolvency Processes using the links below:
Should you wish to speak to one of our licensed Insolvency Practitioners regarding either personal or corporate insolvency matters please do not hesitate to contact us on 01326 340579 to book a free telephone meeting.