Distribution of assets
Ranking of creditors
The fact that a winding-up order was granted indicates that there will most likely not be enough money to pay off the debt owed to the creditors in full. Creditors in a liquidation get paid in a set order and this is referred to as their priority ranking.
The order of priority for payment during the distribution phase of the liquidation is:
- Fixed charge creditors
- Costs of the liquidation
- Preferential creditors
- Floating charge creditors
- Creditors with unsecured provable debts
- Statutory interest
- Creditors with non-provable debts
A creditor is secured if they hold the right to sell a specific property in which the debtor company has an interest in order to force the settlement of a particular debt which the debtor company has failed to pay. A secured creditor retains this right even if the debtor company is placed in liquidation.
If the secured creditor decides to sell the property over which they hold the security and the proceeds of the sale are:
- more than the outstanding debt owed to them; they must pay the excess over to the liquidator for distribution among the other creditors;
- less than the outstanding debt owed to them; they can lodge a claim (this is referred to as 'proving' the debt) against the company in liquidation as an ordinary unsecured creditor for the unpaid balance of the debt.
If the secured creditor decides not to sell the asset over which they hold security, they can give up their security so that the asset can be sold for the benefit of all the unsecured creditors. They can then prove their full debt against the company in liquidation as an unsecured creditor.
Costs of liquidation
The costs of liquidation include the expenses incurred to convert the company assets into money and the professional charges of the liquidator to administer the liquidation and distribution process.
These costs will be paid in full before any of the insolvency debts listed below is paid.
The creditors who will get paid from what money is left over after the liquidator's fees have been paid will want to make sure that those fees are not higher than they should be. The creditors may except if the OR is the liquidator, appoint a liquidation committee of up to 5 but not less than 3 members to monitor the administration of the liquidation and to approve the liquidator's fees. If no committee is appointed, then the fees may be fixed by a decision of the creditors taken by following a decision procedure.
The liquidator's fees must be fixed in accordance with prescribed Insolvency Rules that provide for 3 methods of fixing the fees. These methods can be used in combination or different ones can be used for the different tasks dealt with by the liquidator.
The 3 methods that can be used to calculate the fees are:
- fixing the fees as a percentage of the value of the assets sold or distributed or both;
- determining the fees in accordance with the time spent by the TIB and their staff to attend to matters in administering the bankruptcy; and
- agreeing to a set amount.
These costs will be paid in full before any of the insolvency debts listed below is paid.
The preferential creditor, although without security for the debt owed them, gets paid before any unsecured creditors.
Preferential creditors are actually divided into 2 sub categories:
- ordinary preferential creditors; and
- secondary preferential creditors.
Each category of preferential creditor ranks equally amongst themselves with the ordinary preferential debts being paid in priority to the secondary preferential creditors.
Ordinary preferential debts are mostly relevant where the insolvent company was an employer and includes certain employee claims and contributions to occupational and state pension schemes. Employees' preferential salary claims will however be limited to that for the 4 months preceding the date of liquidation and can't exceed £800. For the balance of any outstanding pay the employees will be unsecured creditors.
Secondary preferential debts are that part of deposits made by creditors to a bank or building society that is not protected by the Financial Services Compensation Scheme on the insolvency of that institution.
A further category of preferential creditor occurs if a creditor has in the 3 months preceding the date of the winding-up order exercised commercial rent arrears recovery (CRAR) upon the goods of the company. In this event:
- the creditor can sell goods over which it has exercised CRAR;
- the creditor must use the sale proceeds to pay preferential debts before paying themselves; and
- if the sale proceeds are insufficient to pay preferential debts and the creditor's debt in full, the remaining balance owed to creditor ranks as a preferential debt.
Creditors with floating charges
A floating charge is used where the assets, which provide the security for repayment of a debt, are constantly changing due to it being traded as part of the company's business. So, for example, a floating charge can be held over the stock-in-trade of a company as a 'class' of assets while the particular assets falling into that class are not specified. However, should a default in payment occur, the floating charge will change into a fixed charge over the specific assets which fall into that class of assets on the date of default. This is referred to as the 'crystallising' of the floating charge.
A floating charge will also crystallise on the date of liquidation if it hadn't crystallised before that date.
The floating charge holder is entitled to the proceeds from the sale of the assets falling under the floating charge, but only once the preferential creditors and the costs of the liquidation have been paid in full and a prescribed amount has been retained for distribution to any unsecured creditors.
The prescribed part is calculated as follows: 50% of the first £10,000 of the company's net property, plus 20% of the balance up to a maximum of £600,000. If the value of the net property of the company is less than £10,000 the liquidator is not obliged to retain a prescribed part for the benefit of the unsecured creditors.
Creditors with unsecured provable debts
A creditor is unsecured if they do not have the right to sell an asset (the security) of the debtor if the debtor fails to pay the debt in full and on time. These unsecured creditors could, for example, include:
- Her Majesties Revenue and Customs (HMRC)
- Credit card companies
- Suppliers of goods and services on credit
- Service providers for unpaid service fees such as outstanding accounts for property maintenance, gas, electricity, mobile and broadband rentals
All the unsecured creditors rank equally among themselves and a percentage of each debt will be paid from available funds in proportion to how much is owed. Only if there are funds left over after all prior categories of debt have been paid in full will the unsecured creditors share the balance in proportion to their outstanding debt. An unsecured creditor will only be paid in full if all the unsecured creditors can be paid in full.
An unsecured creditor must accept whatever the liquidator pays on the outstanding debt as full and final settlement, even if only a percentage of the debt can be paid or nothing at all.
Statutory interest is interest that accrues on provable debts after the commencement of the liquidation until the debt is paid. Statutory interest that arises during an administration that immediately precedes the liquidation will not be a provable debt (see next paragraph). The statutory interest rate is currently the greater of the contractual interest rate (if any) or 8% per annum. Statutory interest will only be paid if there is any money left over after all the provable debts have been paid in full. Statutory interest that accrues during an administration, but is not paid, could be lost if the company transitions directly into a liquidation. However, the Court of Appeal has said that such interest can be paid as an expense in the liquidation.
Certain debts are regarded as non-provable in a liquidation. Non-provable debts would include claims that have become statute barred and claims that did not arise from an obligation incurred prior to the date of the liquidation order (or the administration order if the liquidation was preceded by an administration). Non-provable debts are those that can also not be regarded as expenses of the liquidation because it did not originate from any action taken by the liquidator.
If there was enough money left after payment of all statutory interest claims any non-provable debts would be paid. For example, a non-provable debt might arise where a claim in a foreign currency was proved at the start of the liquidation, but at the time it was paid, there was a negative fluctuation in the exchange rate resulting in a monetary loss.
If there is any money remaining after paying all the previous categories of creditors in full, the members of the company will be paid what is left over.