Insolvency Payout Priority
When a company has a major financial issue, they can become insolvent. Insolvency comes into effect when the company doesn’t have enough cash to pay its debts on demand.When this happens, a creditor can issue a winding up petition against the company or the company itself can start the insolvency process eventually resulting in the company being wound up and closing its doors for good.
What Comes After A Company Is ‘Wound Up’?
All creditors should be informed about the insolvency and will be given a proof of debt form. If creditors do not receive this proof of debt form, it is important they make contact with the nominee Insolvency Practitioner and ensure that they are listed as creditors. An insolvency practitioner can be formally appointed at a creditors meeting providing they have the necessary support from creditors. Approval of at least 75% of the value of creditors is needed by the insolvency practitioner. Once appointed, an insolvency practitioner will go on and assess whether there are any assets ready for liquidation and take action accordingly.
Liquidation Debt Recovery Priority
If monies are realised from the assets of the company, these will be released in accordance with a certain priority. The priority of payment is listed below:
- First in line for the payment are the liquidator and the costs of his services.
- Then there are the creditors who had been granted security – like banks, lenders and finance providers. These are called the Secured Creditors.
- Only after the secured creditors have been paid, the company employees claims can get in line for the payout, and those are still subject to the limits that the government has set in place.
- After the company employees have been paid, next in line for the payout are unsecured creditors like suppliers, landlords, contractors, clients that are due for a refund, and taxmen.
- The last in payout order of priority are the shareholders.
What Happens With Insolvency Payout?
These are the priorities but usually in a case of an insolvency payout, there is just enough money for the secured creditors. More often than not the rest don’t get paid. If there is any money left for the unsecured creditors, it’s all placed into a creditors’ pot. For example, each creditor might receive 10 pennies for every £1 of debt. The creditors will be deemed as unsecured unless they gain security by having a charge against the assets. Even if you have a County Court Judgment, you will be deemed an unsecured creditor.
Belts and Braces
When giving credit to a company consider whether you obtain a Personal Guarantee from a debtor. This way if a company does become insolvent you can have another chance of getting paid in full, this time from the Director personally. If you are concerned about the solvency of a company you are currently trading with, please feel free to contact us.