When companies go bust, who gets what?

Insolvency in a process that the vast majority of business people will have little direct experience of – which is not bad of course. When a company does go into an insolvency process, the process by which the insolvency practitioner (“IP”) decides who gets what is laid out in legislation, and that order is one of the areas that I spend a lot of my time explaining to those affected by the insolvency.

First we have secured creditors. If a creditor holds a security over an asset – the most easily understood example being a bank with a standard security over a building – then when that asset is sold, the bank’s debt must be paid from the proceeds before anyone else.

Secondly, we have the costs of the insolvency process. That includes the IP’s fee, but also covers the costs that the IP must incur, such as legal expenses or advertising costs. Also included are the costs of the creditor who took the legal action to have the company placed in the hands of the IP, assuming it was done through a court process.

Next come the preferential creditors. These days, these are usually only the employees of the company, and their claims for wages (up to £800 per person) and holiday pay. This does not include HM Revenue and Customs – their claims are unsecured. They used to have a preferential ranking, but this has not been the case for many years now.

After the preferential creditors, we have floating charge holders. This is usually someone that has provided finance to the company, most often the company’s bankers. Depending on when the charge was put in place, some of the money that would otherwise be paid to the floating charge holder may be held back and paid to the next category of creditors.

In most insolvencies, the last category is the unsecured creditors. This is pretty much everyone not mentioned above who is due money by the company, but also includes any shortfalls suffered by secured creditors, and also any other claims from employees not covered as preferential.

Given the above, it is not that surprising that often there is little or no money available to make payments to unsecured creditors, given the sizeable claims that must be paid through before something can be paid out to them. However, every case must be considered on its own merits of course.

To complicate matters further, employees can make claims to the Government’s Redundancy Payments Service, who then take the employee’s place in the above ranking. Of course, if the government pay something to the employees, that doesn’t get paid from the IP, then it is the public purse that takes the hit.

SPEAK TO US ABOUT INSOLVENCY