The BCR Insolvency Blog

Everything You Need To Know About Liquidation Preferences

Posted by Chris Knott on 20-Jun-2019 12:56:32

Everything You Need To Know About Liquidation Preferences

Your company is entering liquidation. All eyes are focused upon the situation, and everybody has questions.

One of the most important ones is who is going to get paid? What is the pecking order when it comes to dissolving assets?

Download 'What To Do When Your Business Is Facing Liquidation'

Here is our quick guide.

1) Secured Creditors

These are at the top of the food chain. Secured creditors include lenders for commercial mortgages, plant and equipment, or creditors for other aspects of the organisation, such as intellectual property. They will have a charge on the specific asset(s) in question. Should the asset realise greater than the secured charge, the surplus will be available in the liquidation.

If the asset sells for less than the outstanding charge, the shortfall will become an unsecured creditor within the liquidation.

2) Preferential Creditors (employees)

Employees are entitled to preferential status for Arrears of Pay (subject to a maximum of £800) and all outstanding Holiday Pay.

3) Floating Charges

Whilst fixed charges usually relate to land, property and equipment, anything else is referred to as ‘floating’.

Floating charges are highly complex to untangle, floating charges relate to anything that is not ‘fixed’.

It is very important to access professional advice to separate and calculate floating charges. They are subject to numerous rules and regulations, including a potential prescribed part, which relates to the percentage that must be reserved for unsecured creditors.

4) Unsecured Creditors

This is a broad group. It can include:

  • All HMRC claims e.g. VAT, PAYE and corporation tax
  • Trade creditors
  • Employees’ redundancy and notice pay claims
  • Business rates

Complex and often negotiated on a case-by-case basis, this area of finance is notoriously tricky. Seek help quickly in order to determine which party is eligible for any returns.

5) Shareholders

Given that unsecured creditors are near the bottom of the list, it is no surprise that shareholders have the least promising outcome. Shareholders enter the contract at their own risk, and so are unlikely to gain any recompense in the result of a closure. After all, if there was a surplus available to shareholders, the company would not be insolvent nor in liquidation.

Closing Thoughts

If you think that your company might be reaching the insolvency stage of its life-cycle and would like to speak to an expert advisor, please call our dedicated support network on 0333 014 3454. Or, you can download our free guide for more information.

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