Creditor repayment hierarchy: Who gets paid first in liquidation?

The Insolvency (Scotland) (Receivership and Winding Up) Rules 2018 include an official ‘hierarchy’ that determines the order creditors are paid during an insolvent liquidation.

Importantly, each category of creditor must be paid in full before the liquidator can allocate funds to the next group. That explains why creditors towards the bottom of the hierarchy, such as the unsecured creditors, are often left out of pocket.

The liquidator pays the creditors in the following order:

• Secured creditors with a fixed charge
• Liquidator fees and expenses
• Preferential creditors
• Secured creditors with a floating charge
• Unsecured creditors
• Connected unsecured creditors
• Shareholders

Secured creditors with a fixed charge

This group typically includes banks and other finance providers that lent money to the company and took security on a business asset in return. The creditor can sell that asset to recoup their money if the company defaults or is liquidated.

Liquidator fees and expenses

The Insolvency Practitioner who acts as the liquidator is paid a fee. There will also be administrative costs and expenses associated with their various tasks.

Preferential creditors

This group includes employees who are made redundant as part of the liquidation process and are entitled to claim for unpaid wages, holiday pay and pension contributions. Employees are also entitled to claim a redundancy payment and notice pay, but they are regarded as unsecured rather than preferential claims. HMRC is also a preferential creditor for unpaid VAT, PAYE and National Insurance contributions.

Secured creditors with a floating charge

Rather than a fixed charge, some creditors have a floating charge over a company’s assets. Floating charges are attached to assets that are traded in the normal course of business, such as stock, raw materials and work in progress. When the company becomes insolvent, the floating charge becomes fixed and the charge holders are entitled to a distribution from the value of those assets.

Unsecured creditors

Unsecured creditors include trade suppliers, customers, landlords, contractors, employees (for redundancy and notice pay) and HMRC (for Corporation Tax). Company directors with director loan accounts that are in credit also fit into this category. It’s common for unsecured creditors to receive a dividend of just a few pence in the pound due to their position in the repayment hierarchy.

Connected unsecured creditors

Unsecured creditors that are connected to the business, such as family members or company employees, are even less likely to receive the money they are owed.

Shareholders

At the bottom of the pile are the company’s shareholders. It’s unlikely that the shareholders will receive any distribution at all. If there is money to pay the shareholders, it will be deemed a solvent rather than an insolvent liquidation.

As the director of an insolvent business, it is your legal duty to act to maximise your creditors’ returns. If you fail to prioritise your creditors’ interests, you could face accusations of wrongful or unlawful trading and potentially become personally liable for company debts or be disqualified from acting as a company director for up to 15 years.

At Scotland Liquidators, we can clarify your company’s financial position, help you understand which creditors take priority and guide you through the insolvency process while protecting your creditors’ interests. Please get in touch for a free consultation or to arrange a meeting at one of our offices throughout Scotland.