Conduct of the Liquidation | Creditors

Creditors

There is a strict order of priority of payment of creditors in liquidation. It is set down by law and cannot be varied.

First come the secured creditors out of the proceeds of sale of their security. What this means is that any who holds a fixed or specific charge over a particular asset or group of assets is entitled to satisfy his debt out of the proceeds of sale of that particular asset or group of assets. Hence the bank owed £100,000, which is secured by mortgage over a property which sells for £200,000, is entitled to be paid £100,000 out of the £200,00. Conversely the bank owed £200,000 secured in a property with £100,000 is entitled to receive £100,000 as the proceeds of its security but is said to be "unsecured" for the balance of £100,000.

The holders of floating charge are secured but came after the preferential creditors. The difference between a fixed and floating charge is a complex and highly topical subject at this time. In simple terms floating charges apply to things like plant and machinery, cars and stock.

Second out of the proceeds of sale of all assets not covered by a fixed charge come the preferential creditors. These comprise:

• PAYE and NIC for 12 months prior to liquidation
  
• VAT for 6 months prior to liquidation
  
• Employees wages up to 4 months prior to liquidation
  
• Employees holiday pay
  
• Amounts due to occupational pension

If there is a floating charge then the floating charge holders rank next in order of priority.

Finally come the unsecured creditors, that is to say all the creditors who are not covered by the preferential provisions and who do not held any security. The unsecured now rank for payment out of the balance plus any surplus from fixed charges (because the preferential charge holders are not able to participate in the surplus from fixed charge).

And really finally come a few arcane creditors who are rarely seen and so we won't bother with them.