In general, creditors in insolvency are ranked in the following order
1. 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.
2. 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.
3. 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.
4. 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.
5. 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.
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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