Annex: Order of payment of creditors
The order in which creditors are paid can be complex.
Some types of secured creditor will only be paid after certain
unsecured debts have been paid. The order of payment is set out
in the Insolvency Act 1986:
1) Payments to those creditors with a fixed charge
over a specific asset/assets from the proceeds of the sale of
that asset. If a loan to a company is
secured on particular asset (such as land, machinery or buildings)
this is a fixed charge. The charge has to be registered with Companies
House. If the debtor company defaults on the loan, the creditor
can seize the asset the debt is secured on and sell the asset
to repay the loan. The fixed charge holder will get all the proceeds
of the sale of the asset they hold a charge over (less the costs
of realisation e.g. actually selling the asset).
2) Fees and expenses for the administrators/liquidators.
Once any fixed charge creditors have been paid, the expenses and
fees of the administrators and liquidators involved will be paid.
3) Preferential debts.
Preferential creditors are defined by the Insolvency Act 1986.
The Enterprise Act 2002 removed preferential status for the Crown
as a creditor (for example money owed to Inland Revenue or Customs
and Excise). As a result, the main type of preferential debt is
wage arrears. This means that former employees receive the wages
they are owed and unpaid holiday pay before floating charge creditors
or unsecured creditors up to a cap of £800. Unpaid holiday
pay is not capped. Any wages owing to employees that over the
cap are treated as unsecured debts. In practice, wage arrears,
holiday pay and redundancy payments are all made from the National
Insurance Fund so that employees do not have to wait for their
payment. A difference cap of 464 per week for 8 weeks applies
to payments made from the National Insurance Fund. The Government
then reclaims all the money it has paid out on behalf of the employer,
although only the £800 capped wages and unpaid holiday pay
are treated as preferential debt. The rest of the debt is unsecured
and the claim is added to any other claim by unsecured creditors.
4) Prescribed part-payments to unsecured creditors
from the sale of assets which have a floating charge on them,
up to a maximum of £600,000. Floating
charges are discussed below. A floating charge would normally
cover all of a company's assets and the creditor would therefore
be entitled to all the remaining funds from liquidating a company
once creditors in the earlier categories have been paid. To preserve
some funds for unsecured creditors a 'prescribed part' is set
aside by the administrator or liquidator for the benefit of unsecured
creditors. The size of this prescribed part will vary depending
on the value of the assets but the maximum amount is £600,000.
5) Payments to creditors who have a floating charge
over assets. A floating charge is a type
of security but unlike a fixed charge it is not attached to particular
assets. A floating charge is a security on all a company's present
and future assets. This allows a company to borrow even if they
don't have specific fixed assets to offer as security for a loan.
A floating charge also means that a company is able to use, buy
and sell assets in the ordinary course of business without needing
consent from the creditor.
6) Payments to unsecured creditors.
In addition to the 'prescribed part' (as above), unsecured creditors
will receive further payment if there are funds left after fixed-charge
creditors, the administrators, preferential creditors and floating
charge creditors have been paid.
7) Payments for interest on debts proven during
winding up.
8) Payments to company members under a share redemption
contract.
9) Payment of debts to company members who hold
preferential rights.
10) Payment of debts to ordinary shareholders.
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