Following on from the previous post of bringing a Winding up Petition where a company is unable to pay its debts and on the assumption that the Winding up Petition is successful, a Liquidator will be appointed to bring the companies affairs into order and close down the company.
There then exists a hierarchy of creditors and these receive payment from the surplus funds of the company after the Insolvency Practitioners fees have been settled.
In simple terms you are either a secured creditor or an unsecured creditor with secured creditors being paid first.
A secured creditor is usually a bank or other asset-based lender that holds a fixed or floating charge over a business asset or assets. When a business becomes insolvent, sale of the specific asset over which security is held provides repayment for this category of creditor.
Secured creditors fall into two subcategories:
- those with a fixed charge on an asset / assets of the business
- those with a floating charge
A fixed charge may be held over a specific asset which was financed by the lender, for example business premises, vehicles, or machinery and equipment which may have been purchased in this way. The company has a statutory duty to register these charge / charges with Companies House, where they become a public record.
A further common example of a Fixed Charge are Factoring companies, used to provide an injection of cash. These companies “buy” the company’s sales ledger, which is the asset over which the charge is held.
A floating charge is a security over a fund of changing assets of a company, such as shares. It floats over the asset until the point at which it is converted into a fixed charge, known as crystallization.
Crystallization usually triggers by an implied term in the Documents over which the security is held and stops the company’s “right” to deal with the asset / assets, such as insolvency proceedings. In the event of insolvency, the creditor holding the floating charge will be placed after those with a Fixed Charge. This holds true as long as the charge was registered after 15th September 2003.
Registering a floating charge provides the lender with some security for the loan, but not on a specific asset as with a fixed charge.
Unsecured creditors include suppliers, customers, HMRC and contractors and are one of the last groups to be paid, being placed above the shareholders of the company. It is often the case that this group receives little money, if any, from the distribution of assets once all other creditor groups have been paid.
Generally unsecured creditors rank after secured and preferential creditors, where preferential creditors are generally employees of the company, entitled to arrears of wages and other employment costs to certain limits.
This is why unsecured creditors feel they have little involvement or influence during insolvency proceedings compared with secured and preferential creditors.
They are consulted during the initial stages when the creditors’ meeting is called to provide them with formal notification of the company’s financial position, and to vote on the appointment of the Insolvency Practitioner.
After that it’s just a case of waiting until payment (if any) is made to them.