What are the rankings of creditors in insolvency?

Secured creditors with a fixed charge:

First in the chain are secured creditors who have a legal right or charge over the property. A fixed charge can be made over various assets such as motor vehicles, machinery, fixtures and fittings and equipment.  

Preferential Creditors:

Preferential creditors are mainly employees, for example, in respect of their unpaid wages or unpaid pension contributions. Preferential creditors are entitled to a dividend from the realisations after distributions are made to secured creditors.

Floating charge creditors:

For a floating charge created before 15th September 2003, any realisations pursuant to the floating charge are to be paid to the preferential creditors first. *Floating charges created after 15 September 2003 are subject to a prescribed part set aside for unsecured creditors with the balance being distributed for the floating charge creditors.

Unsecured creditors:

Unsecured creditors are creditors who have no security for their debts and can include the likes of, trade creditors, suppliers, HMRC for VAT and many more.

Connected unsecured creditors:

The technical term for connected unsecured creditors is “associate creditors” which is where s director or employee has provided loans to a company on an unsecured basis. This tends to include loans by family members or spouses. Sometimes connected unsecured creditors may receive a dividend in a liquidation if there are enough realisations available, but this is very rare.

Shareholders:

Finally, shareholders, who contribute financially to the company, may be considered. However, as their financial contribution is considered a risk of the business often shareholders will not benefit from any realisations made. Although, it is still possible and common for shareholders to convert some of their equity into a secured debt to ensure that they receive some compensation from the company in the event that the company fails.


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