Who gets paid first in insolvency?

When a company becomes insolvent, it will have creditors to which it owes money, and who gets paid first in insolvency is decided by the payment hierarchy as per the Insolvency Act 1986. During the insolvency process, your insolvency practitioner will distribute any funds to your creditors as per the payment hierarchy.

Who are your creditors?

Your company’s creditors are the parties to which your company owes money. If your company becomes insolvent, certain repayments will take priority over others and help determine the order in which your creditors will receive any monies.

Secured creditors with fixed charges

Top of the payment hierarchy, your secured creditors with fixed charges, are who get paid first in insolvency.

Secured creditors with fixed charges include financial institutions and banks, which you may have secured or guaranteed a business asset against in exchange for a loan. The bank could claim that asset, which could be sold to recoup the cost of your debt.

There are several assets the company could have guaranteed a fixed charge against:

• Vehicles
• Machines and equipment
• Sales ledgers
• Premises

These charges and the associated assets are registered at Companies House, and they cannot be disposed of without consulting the creditor.

Preferential creditors

Preferential creditors are second in the repayment hierarchy; made up of company employees and HMRC. In insolvency, employees are entitled to payments of wages in arrears, holiday pay and pension contributions up to a certain amount.

From December 1st, 2020, HM Revenue & Customs (HMRC) are preferential creditors for repayments of VAT, PAYE, student loan repayments, employee National Insurance Contributions and Construction Industry Scheme deductions. This change designates a greater portion of your funds to the tax office before suppliers, contractors, and customers.

Secured creditors with floating charge

Secured creditors with floating charges, like their counterparts with fixed charges further up the hierarchy, hold charges over the company.

Their charges are more likely to be on assets such as:

• Works in progress
• Stock or raw materials
• Cash
• Unfactored debts

Where fixed charges have physical assets to reclaim, floating charges are more susceptible to change. The fluidity of these assets is what sets secured creditors with floating charges apart from those with fixed charges.

Floating charges crystalise if the company enters liquidation and become fixed.

Unsecured creditors

Unsecured creditors are creditors with no claims over company assets but may be owed payments for other, more fluid amounts. Consequently, any amount received is likely to be smaller than those to secured and preferential creditors.

Creditors befitting this category include suppliers, contractors, customers, and until December 1st, 2020, HMRC was an unsecured creditor. However, employer National Insurance Contributions and Corporation Tax remain unsecured.

Shareholders

Company shareholders sit at the bottom of the hierarchy and are the last to be repaid. As they don’t hold any charges over the company, they are classed differently than the other creditors. Shareholders only receive payments after the other previously listed creditors, and only if any amount is remaining.

In summary

If your company becomes insolvent, the repayment hierarchy, as set out in the Insolvency Act 1986, dictates which of your creditors are paid first. Secured creditors with fixed charges will be first to receive any remuneration, followed by preferential creditors, which now includes HMRC. Third in line are secured creditors with floating charges that are more fluid. Unsecured creditors, such as contractors, suppliers and customers are next, and shareholders will only receive repayment if any funds remain after everyone else is repaid.

How we can help

When your company is showing the signs of insolvency, and your creditors are asking for their money, it’s essential you act fast to avoid trading whilst insolvent. We can assess your situation and help decide the solution best for your company while taking all its circumstances into account. Our team has years of experience in the industry and can offer you free, impartial advice with no obligation.

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