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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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© Parliamentary copyright 2015
Prepared 23 March 2015