The difference between compulsory liquidation vs voluntary liquidation is essentially how the company is put into liquidation and who initiates...
When a business is liquidated, it ceases to trade and its assets are sold. The resulting funds are used to pay the creditors of the business as much as is possible. In the case of solvent liquidation, all the debts of the business will be cleared and the funds left over can then be distributed to the shareholders. However, when the business has been forced to close through insolvency, not every creditor will be paid the full amount owed to them and there is a pecking order when it comes to distributing liquidated assets.
Creditor Hierarchy in Liquidations
When an insolvent business is liquidated, not all creditors are equal and there is a defined hierarchy when it comes to repayment from the liquidated assets of an insolvent business.
Fixed Charge Secured Creditors
Most likely to be paid in full after liquidation are secured creditors with a fixed charge. Typically banks, mortgage providers or similar lenders, who have loaned money for high value assets like property, machinery or motor vehicles. These creditors hold the title over those assets and as such, own the business asset either in part or outright (until such time as the loan is repaid). Depending on the specific nature of the agreement with the liquidated company the liquidator may dispose of the asset or the creditor may use their title claim to do this themselves.
In second place in the hierarchy of creditors are those who are classified as ‘preferential creditors’.The most common preferential creditors are employees for unpaid wages and accrued holiday pay. However, there are other preferential creditors such as amounts due to occupational pension schemes; levies on coal and steel, production; and amounts due under the Financial Services Compensation Scheme. PAYE, VAT & NIC were preferential up to 2003. However, in the 2018 Budget the Chancellor announced proposals for these debts to become preferential again from April 2020.
Floating Charge Secured Creditors
The next rank in order of importance in the creditor hierarchy is that of secured creditors with a floating charge. Secured creditors have interest in physical assets held by the liquidated business. Assets which fall under the ‘floating charge’ classification are generally stock in trade, fixtures and fittings, or other physical assets which the business uses as raw materials or property of any sort which doesn’t come under the ‘fixed charge’ heading.
Creditors who do not fall into the classes above are unsecured creditors. Typical examples are trade creditors, loans and HMRC for unpaid taxes although, as stated above, the Chancellor has plans to change this from April 2020.
Last on the list are shareholders. Whilst strictly not creditors as such, shareholders will have invested money to purchase the share capital of the company when they became its owners. Shareholders have the least chance of recovering what is owed to them after a business is liquidated and they will not receive any funds at all unless there are assets left after every other creditor has been paid in full.
Will I get paid what’s owed to me after liquidation?
If you are a creditor of a company that is going through liquidation, an insolvency practitioner acting as the liquidator will seek to make contact and invite you to a meeting where further information will be made available.
How much you get paid or even if you get paid will depend largely on the value of the liquidated assets of the business and the category of creditor you fall into.