No company would want to consider its perspective on chances of liquidation, not being successful is something that is not appreciated by our psyche. That is why when insolvency comes knocking it becomes rather difficult for businesses to outsource insolvency work. When a company enters into an administration the owner obviously would begin to wonder as to which creditor is to be paid first. Are payments first to be made to your employees or to the HMRC or to a bank? The best approach to this would be to consider the hierarchy which goes roughly as follows:
In the United State when a company does get liquidated there is a particular order in which creditors are paid. The secured creditors, as well as bondholders (who are also secured), are given the first priority. After these debts are cleared attention is paid to the unsecured creditors such as suppliers, banks, and the employees of the company. Stockholders, unfortunately, are last in this line. In the UK the system is slightly more intricate but perhaps could be deemed more favourable depending upon your perspective. Doshi Outsourcing provides assistance with the same can is your ideal partner for insolvency outsourcing. To make matters clearer we’ve complied a factsheet on the ranking of creditors as far as payment goes when a company goes insolvent. An elaboration on the types of creditors is as follows:
What are Secured Creditors? The secured type of creditor is the safest as they are considered to be at the very top of the priority list. Entities like banks who are in procession of a floating or fixed charge over the business’ assets fall under this category. What are fixed charges? This deals with a particular asset which has been financed by a lender. This would include: (1) intangible assets (2) business premises (3) financed vehicles and machinery. Companies House registers the fixed charge and this has to be the first payment made after the insolvency practitioner’s fees have been cleared even in a member's voluntary liquidation. What are the floating charges? This actually deals with the assets of the other company which would include (1) fixtures and fittings (2) cash at the bank (3) book debts (4) plant and machinery that is unencumbered where no invoice with factoring agreement is present. Holders with floating charges are not secure creditors and so their payment follows after the preferential (employees etc) have been paid so they are much lower in the hierarchy. Thus, it is considered that their right over the company is legal and this right or right on the company’s property can extend from buildings to machinery, equipment, and even vehicles. That is why banks and such other sorts of lenders fall into this category. However, their payments are only sanctioned after the insolvency practitioner has first received payment of the fee. The Floating Charge type of Creditors This is slightly more complex than the others but there are plus points too as there is more flexibility present for both the company as well as the creditor. The creditor is left free to look at and administer the assets during the normal running of the business. The charge only comes in when there is the situation of insolvency coming in which is the actual crystalising event. Important to note here is that post the 15th of September 2003, around 50 per cent monies realised to the value of £10,000 need to be kept for the unsecured creditors of the company. Also, about 20% of monies between £10,000 and around £600,000 need to be paid to the unsecured creditors. The rest of the monies would go to whoever is holding the floating charge. Who are the Preferential Creditors? There were changes made to the insolvency protocol in around 2002. Due to the Enterprise Act, the HMRC no longer holds a position as a preferential creditor. It is now instead of an unsecured form of the creditor. This means that the collection of money will be less certain but at least the trade creditors will have a chance at receiving payment. Employees come under the category of preferential creditors and so whatever wages are unpaid or holiday pay is left pending can be cleared. The Unsecured Creditors As mentioned above, the HMRC is one such creditor. Thus, payments towards VAT, trade creditors, business rates, and even suppliers fall here. Important to note is that arrears claim and unpaid holiday pay too fall in this priority which is a bit dodgy as one expects these payments to be made with the wages. However, this in itself serves to illustrate why you need to have an expert guide you through the insolvency process. Those Unsecured Creditors who are connected primarily to the business Money borrowed from family members or from the director or an employee of the company that was on an unsecured basis. Also, the salaries of owners or company directors fall here. Finally, the Shareholders Unfortunately, these come last for their investments into the company were in understanding of the risks. Due to this, they do not have the right to make demands until those of the above all parties are met. How to ensure you pay the right creditor It can be difficult to stay compliant due to the intricacies of the administration process. For instance, though an employee is a preferential creditor, we saw above that holiday pay payments fall into the unsecured creditors' priority. Therefore who to pay and what to pay are tricky at their best. Thus, insolvency and its protocols are highly complex and it is best to have an expert see you through processes like a members voluntary liquidation where the shareholders themselves place a Liquidator to close a company that is solvent. Doshi Outsourcing can help you through the complexities of the members' voluntary liquidation process. Furthermore, having an expert at your side will also make you know what is in your rights as well as which creditors need to be paid first. Comments are closed.
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