Any creditor involved with a company that has failed, wants to know their position. This article will shed some light on the order creditors are paid in a Liquidation process. So, that if you are a creditor of a company in Liquidation then you can have an understanding of your chances.
When a company goes into Liquidation, the question on every creditors mind is when will I get the money owed to me and where do I stand.
Essentially this depends on 3 things:
- Types of creditors and what they are owed.
- Available assets.
- Liquidators fees for contacting their statutory duties.
It’s important to note that before the Liquidation process even commences there is a strong likelihood that creditors won’t get back what they are owed as the company was already insolvent and had insufficient assets to discharge its debts.
Just so you know, there are rules governing the priority of payments to creditors of a company in Liquidation. The order of priority in a Liquidation is set out below:
- Costs of the Liquidation
- Secured Creditors
- Preferential Creditors (Employees)
- Unsecured Creditors
Costs of the Liquidation
The first payment will go to the Liquidator in respect to fees and expenses incurred to conduct the Liquidation. There’s a simple reason a Liquidator gets paid first, to ensure there’s a professional available to do the job.
A creditor who has a security (i.e. registered security Interest or mortgage) over some or all of a company’s property. Secured creditors enjoy a superior status in the funds being distributed.
Preferential Creditors (Employees)
The rules governing priority payments sets an order among preferential creditors. Each class of preferential creditor will be paid to the amount of their entitlement before preferential creditors in the next class are paid.
If there are insufficient funds to pay the preferential creditors in one class, the funds to be distributed will be paid on a pro-rata basis.
Unfortunately, an unsecured creditor does not hold any security over company assets. So once all preferential creditors have been paid in accordance with their preferential entitlement, the balance of any funds in the Liquidation will be available for distribution to the unsecured creditors on a pro-rata basis.
Shareholders Last in line come the shareholders of the company. So, despite the shareholders putting money into the company to help get it started and support it along the way, it’s unlikely they will receive anything.
If you’re a creditor of a company in Liquidation or if you find a debtor of yours potentially going into Liquidation you’ll now hopefully be able to find where you are in the pecking order. If you have any questions about the priority of creditor payments, contact What is Liquidation today for any assistance.