Who gets paid first in Liquidation?
Posted on 28th January 2022 at 14:05
When a company or a business is unable to pay its debts on the due date, becomes insolvent, or its debts and liabilities exceed the value of its assets, a process is initiated to bring the business to an end. This process includes the proceeds of the assets being distributed amongst the shareholders, creditors, and claimants, and it is known as liquidation. Claims are settled based on the priority of the claimants. General partners are subject to liquidation.
In a liquidation case, the court in its winding-up order, appoints an Official Receiver to act as liquidator to wind up the affairs of the company or business. The Official Receiver may decide to ask the creditors and contributories to nominate a liquidator. If they do not nominate a liquidator, despite the notice, then the Official Receiver may apply to the Secretary of State to appoint an insolvency practitioner.
When a company goes into liquidation, its debts are separated into two categories secured debts guaranteed by collateral and unsecured debts, distributed to its creditors in the following order. In bankruptcy law, the assets are further divided into priority debts entitled to be paid first and nonpriority debts.
Secured Creditors are the first in line to receive their dues. Secured creditors issue products that are backed by collateral so that in the event of any default in repayment of credit by the borrower their assets are forfeited, and the creditor recovers their dues. A secured creditor must relinquish their security interests to realise their dues.
Next in line are unsecured creditors, Revenue Commissioners including employees for whom the company owed money. An unsecured creditor is an individual or an institution that lends money without obtaining any collateral. This poses a higher risk to the creditor as they will have nothing to fall back upon in the event of default by the borrower on loan. If the borrower fails to make a payment on a debt that is unsecured, the creditor cannot take any of the borrower’s assets without winning a lawsuit.
Stakeholders are the last to be paid in a liquidation. A stakeholder is a party who has an interest in the company and is affected by the business, investors, contractors, suppliers, and employees are the primary stakeholders in a corporation.
During liquidation, payments to creditors are made as per the hierarchy of their claims. The claims in descending order are:
FIRST - holders of fixed charges and creditors with a proprietary interest in assets (first)
SECOND - expenses of the insolvent estate (second)
THIRD - the insolvency practitioner’s fees (third)
FOURTH - preferential creditors such as employees (third)
FIFTH - the ‘prescribed part’ set aside for unsecured creditors from funds owned to holders of floating charges up to a maximum financial cap, depending on when the charge was created
SIXTH - holders of floating charges (fifth)
SEVENTH - unsecured creditors (sixth)
EIGHTH - shareholders (seventh)
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