A company that owes me money has entered liquidation in Scotland – what can I do?

If a company owes you money, the last thing you want to hear is that it has gone into liquidation. Liquidation is a formal process to close a company down. It usually happens when a company is insolvent, which means it can no longer pay its debts when they become due. However, as a creditor of the company, you do have rights in the liquidation process.

When an insolvent company enters liquidation, the Insolvency Practitioner who acts as the liquidator will value and sell the company’s assets. They then use the money they raise to repay the company’s creditors in a strict order. Depending on where you are in that order determines how much of the money you are owed you are likely to receive.

As an unsecured creditor, you could receive very little of the outstanding debt. Once the liquidator has distributed all the funds from the sale of assets, the company will be closed down and any remaining debts, including the money the company still owes you, will be written off.

That depends on the type of creditor you are. Broadly speaking, there are five groups of creditors, and the liquidator must pay each group in full before they move on to the next. That means those further down the repayment hierarchy may receive some or even none of the money they are owed. 

The repayment hierarchy is as follows:

• Secured creditors with a fixed charge – This group includes banks and other finance providers who have lent the company money and have taken security over one or more assets. They can sell those assets on liquidation to recoup their money. 
• Preferential creditors – These creditors include HMRC in respect of PAYE and VAT payments and employees who are entitled to statutory payments, such as wage arrears and unpaid pension contributions. 
• Secured creditors with a floating charge – Creditors that hold a floating charge over assets are entitled to a payout from the sale of assets that can be traded in the normal course of business. That includes stock, raw materials and work-in-progress. Unsecured creditors are also entitled to receive a proportion of the sale of floating charge assets. 
• Unsecured creditors – Many of a typical company’s creditors fall within this group. It includes trade suppliers, commercial landlords, contractors, customers, credit cards, overdrafts and some payments due to HMRC.
• Connected unsecured creditors – Last to be paid are unsecured creditors with some connection to the business. An example could be a director loan account that’s in credit or loans from friends and family members. 

Once the liquidator has distributed all the funds among the creditors, they will remove the company from the official register and write off any outstanding debts. Unfortunately, it’s often the unsecured creditors who are left out of pocket.