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A Liquidator has to share the assets of a Liquidation in accordance with legislation. This is known as the statutory order of payment in an insolvency.
How Are The Assets Of A Liquidation Shared?
The assets of a Liquidation are shared amongst the creditors by a Liquidator on a pari passu basis. However, before they are shared out amongst the creditors they have to be first used to pay the costs and expenses of the Liquidation.
The costs and expenses of a Liquidation are subject to their own order of payment in the legislation. In simple terms the costs of litigation and other asset realisations are paid first, then the petitioning creditor’s costs for the petition (if it is a Compulsory Liquidation), then any legal costs and then the fees of the Liquidator.
What Is A Pari Passu Basis of Distribution?
The pari passu basis of distribution of the assets by a Liquidator is where the assets are shared on an equal basis amongst the creditors.
Do All Creditors Get The Same Share Of The Assets?
No, creditors do not all get the same share of the assets. The assets of a company in Liquidation are divided amongst creditors equally but in accordance with each category of creditors’ rights.
What Are the Categories Of Creditors In A Company Liquidation?
The categories of creditors in a company Liquidator are:
- Secured Creditors
- Preferential Creditors
- Unsecured Creditors
- Prescribed Part
What Are Secured Creditors?
Secured Creditors are creditors such as for example banks or asset-based lenders who have specifically obtained security over some or all of the company’s assets by way of a legal charge or a debenture giving them priority over other creditors. This means that when those secured creditors agreed to provide funds to the company they did so having entered into an agreement that they required such priority and upon realisation of those assets in the event of insolvency.
Secured Creditors with a ‘fixed’ charge over an asset reign supreme and rank right at the front of the queue. Upon insolvency, an asset subject to a fixed is really owned now by the fixed chargeholder.
A fixed charge is attached to an asset and can be easily identified. A floating charge is a charge that floats above assets that constantly in effect change.
Subject to the Prescribed Part and Preferential Creditors (see below) the Secured Creditors with a ‘floating’ charge will be paid ahead of other creditors ie. the Unsecured Creditors.
Who Are Preferential Creditors?
The Preferential Creditors are those creditors who are entitled to preference when the assets are shared in the event of a distribution by the Liquidator.
Preferential Creditors are employees and H M Revenue and Customs (“HMRC”). Preferential Creditor claims rank ahead of the unsecured creditors but not necessarily for the full sum owed to a Preferential Creditor.
Employee creditor claims that are preferential are:
- outstanding salary (including commission) for the previous four months, up to a maximum of £800 in total
- Accrued holiday pay of up to six weeks
- Some occupational pension payments
Only certain specified HMRC debts are included. These are:
- Value Added Tax (VAT)
- debts that relate to the following taxes:
- Pay As You Earn (PAYE) Income Tax
- employee National Insurance contributions (NICs)
- students loan repayments
- Construction Industry Scheme deductions
Where the business is required to deduct these taxes from payments they make to another other person and pay those deductions to HMRC and the payment to HMRC is credited against the liabilities of the other person.
Who Are The Unsecured Creditors?
The Unsecured Creditors are in effect everyone else and they are all treated the same. They do not have any priority rights available to them other than those arising from the Prescribed Part.
What Is The Prescribed Part?
The Prescribed Part is a ring fenced fund that must be made available to unsecured creditors in a Liquidation or Administration which instead of being paid to a bank under its (floating) charge is instead ring-fenced to be paid to unsecured creditors.
The overall sum available for distribution (after paying off secured creditors and preferential creditors) must be divided into two parts being:
- That prescribed part which must be made available to unsecured creditors.
- The balancing sum which is then available for the floating charge holder
The “prescribed part” is :
- 50% of the first £10,000 of the sum and
- 20% of the balance.
What About The Shareholders Share Of The Assets?
If there are sufficient realisations available after the Unsecured Creditors have been paid in full with interest, and there is a surplus, then this will be distributed amongst the shareholders in accordance with their rights. This is a relatively rare event in an insolvent Liquidation but does happen.
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