Written ByRobert Moore
Marketing Manager
Rob has over a decade of experience in web and general marketing. He has extensive knowledge of the Insolvency sector and has helped many worried directors with their questions.
Rob is now working with the Board at KSA Group Ltd to develop strategic marketing programmes to support the business plan and drive more company rescues.
When dealing with creditors in insolvency situations, it is vital to remember the order of priority. Who ranks above whom? Where does the bank and HMRC rank? If the bank has security, do employees rank ahead of them? These are all common questions we get asked.
The simplest way to answer these questions is to imagine creditor ranking as a ladder. Here we explain both pictorially and in written format.
Secured creditors are paid first over any other creditor. Secured creditors have a legal right or charge over property. Property can mean anything from bricks and mortar to plant and equipment, motor vehicles, fixtures and fittings, particular pieces of machinery or things such as patents or intellectual property. This charge is called a debenture and is taken out at the time of the loan.
HMRC is what is called secondary preferential creditors. VAT and PAYE are classed as such but other taxes on the company like corporation tax are not.
Employees retain the status of preferential creditors for their arrears of pay and for holiday pay claims in insolvency situations.
Usually the fixed and floating charge is given under a debenture and this must be considered carefully.
The easiest way to understand a fixed charge creditor’s rights is to think of their position as holding title to or ownership of the property in question. Whilst this isn’t strictly legally correct, it is a simple way to understand their position. This means that the person (company) who has given the fixed charge to a bank or other lender (there must be a consideration for fixed and floating charges) has relinquished permission to trade or sell the property in question, without the explicit permission of the charge holders. Usually a fixed charge exists over, for example, a piece of machinery. Because this machinery is used to develop the economic activity of the business in question, it is unusual or abnormal for the business to want to sell or trade this piece of equipment. If the machinery in question was redundant or no longer sufficiently efficient, then the company may seek to sell this equipment (but would have to seek permission from the fixed charge holder first). Usually, this is not withheld as the proceeds for the sale would probably be used to pay down borrowings.
Essentially the way to remember how floating charge works is as follows: all items that the company uses, or sells or trades in the normal course of business where it isn’t possible to refer to a fixed charge holder for permission are covered by floating charges. This can be complicated to apply, for example a fixed charge may exist on a piece of machinery which is sold in liquidation, the proceeds of which would go to the fixed charge holder. If the machinery was sold for say £10,000 more than the fixed charge, then this amount is covered under the floating charge collection. Under any floating charge created before 15th September 2003, any floating charge collections are payable to preferential creditors first. Under any new floating charges created from September 15th 2003, all collections are first subject to a prescribed PART which must be set aside for the unsecured creditors. This is calculated as follows 50% of first realisation up to £10k and 20% of £10k to £600k is paid to unsecured creditors with the balance going to the floating charge.
This is a very complex area and advice should be taken a soon as possible if you do not understand the position.
Please feel free to call us on 08009700539 or use our contact form on our website.
Unsecured creditors now include HMRC for some monies like corporation tax but not for deductions for employees through a PAYE Scheme and for VAT as that is now preferential. Trade creditors, suppliers, unsecured portion of fixed charge debts, national non-domestic rates and some employees’ claims for example.
Usually this is where a director or employee has provided money to the company on an unsecured basis, non-payment of expenses can fall into this area. The technical term is “associate creditors” this means that the creditor is in some way associated with the company. Associate or connected creditors can include family members of staff or director’s spouses etc. Connected creditors will not generally receive a dividend in a CVA but would be eligible for a dividend in liquidation. Usually, however, the dividend for unsecured / connected creditors is nil in liquidation.
This is a complex area and advice should be taken a soon as possible if you do not understand the position. Please feel free to call us on 08009700539 or use our contact form on our website.
Unfortunately, at the bottom of the pile comes members, otherwise known as shareholders. Shareholders are people (or companies) who have provided money to the business on a risk basis and are therefore not entitled to remuneration, dividend or repayment of their exposure until all of the above creditors are satisfied. Hence the name risk capital! Shareholders are at the biggest risk of losing their money.
There are, of course, many different classes of shareholders and there are many complex issues appertaining equity – it is not the purpose of this guide to go into these areas but should the reader require advice they are encouraged to discuss this matter with their professional advisors or call 08009700539 or use our contact form on the website. It is quite common for shareholders to covert some of the equity into secured debt to ensure that they are paid in the event of collapse.
Above all the reader should remember this key point.
How Much Does It Cost To Liquidate A Company?
If your company is insolvent, then you are likely to be concerned about the costs of liquidation.The cost of liquidation depends on the complexity of the case. This is based on factors such as;Whether the company is trading or not. Number of employees Number of creditors, and how much it owes them Value of its assets, including money it is owed by debtors Director and shareholder profile The quality of the financial information available.How Much Does A Liquidation Cost? Generally, the costs of liquidation start at around £4000 + VAT. This would be for liquidating a company with a single creditor, such as having an unpaid Bounce Back Loan (BBL) or HMRC. For more than one creditor issue, we would expect the fee to be approximately £4,000 - £6,000 plus VAT. For more complex issues including companies who have landlords, employees, BBLs and supplier debts we will provide a written quote after our meeting with the directors to discuss the company’s options. Do get in touch to discuss your company’s liquidation, don’t delay and hope the problem will go away!Be wary of websites (not actual insolvency practitioners) saying they can do it for £1500 or so - this is for sure, too good to be true. The cost of the liquidation may be lower but the risk to you personally is very high, especially if you owe the company any money. Additionally, you will probably end up dealing with all the creditors and will find it difficult to move on. Liquidation is heavily regulated and there are no shortcuts. You may also be asked to sign personal guarantees.Here, we’ll explain how much voluntary liquidation costs, so you know exactly what to expect if you’re in a situation where you need to consider it. When Should I Consider Voluntary Liquidation? Voluntary liquidation is when a company’s directors choose to close the company down and disband. The process is quite straightforward:First, the company appoints a licensed insolvency practitioner as the liquidator, Then, control of the company is handed to the liquidator and the business ceases to trade, The liquidator sells all of the company assets, The liquidator removes the company from the Companies House register.There are two core types of voluntary liquidation, so it’s important to understand which one your company is facing.Members’ voluntary liquidation – This occurs when the company has enough assets to cover its debts. The directors must make a declaration of solvency before proceeding. Creditors’ voluntary liquidation – This is a popular method for closing down insolvent businesses. 75% of creditors must agree with the liquidation proposal put forward at a creditors’ meeting.It is important that directors assist their liquidator in all areas. They must hand over company assets, records and paperwork, and agree to interviews if requested.In a creditors’ voluntary liquidation (CVL) it’s important to remember that the liquidator acts in the interest of the creditors, not the directors. If the liquidator finds that a director’s conduct was ‘unfit’, the director could face fines, or even disqualification for 2-15 years. What’s Included in the cost of voluntary liquidation? This covers the cost of hiring an insolvency practitioner to act as liquidator and organise the creditors’ meeting. It also includes the preparation of the statement of affairs and section 98 reports.Further liquidation costs will accrue as the process moves forward. This is because the liquidator will perform a wide range of duties during this time, which include:Advising directors of their duties Settling legal disputes or outstanding contracts Making people redundant and processing their claims Collecting debts, including those owed by company directors Meeting deadlines for paperwork and keeping the relative authorities informed i.e. Companies House, HMRC, Insolvency Service and Department for Business, Energy, Innovation and Skills Investigating transactions prior to the liquidation to check for discrepancies and obvious preferences/undervalued transactions Alerting creditors to progress every 12 months and involving them in decisions where necessary Valuing and realising assets Distributing monies to creditors and accounting for themThe cost of voluntary liquidation – excluding the initial fee – is charged according to time spent, usually over a period of five years. How do companies pay for voluntary liquidation? Proceeds from the sale of the company’s assets usually pay the costs for three different areas:The cost of voluntary liquidation Money owed to creditors Shareholder debtsHowever, the second and third tier only receive funds after payment of the cost associated with the previous tier. Therefore, as the process continues, it could become increasingly unlikely that shareholders will receive the full amount owed to them.Sometimes, the cost of voluntary liquidation cannot be met through the sale of assets. In such cases, liquidators will require payment in advance.When this occurs, or directors require a more efficient process, directors often pay for liquidation out of their own funds.The cost of voluntary liquidation can be daunting, but this process is the correct way to close an insolvent company and stop the position getting worse. It can help protect directors from wrongful trading accusations, stop the risk of personal liability, ensure all staff are paid compensation quickly and perhaps most importantly spare the director time to get on with their life.
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Our Guide To Compulsory Liquidation & What It Means For Companies
Compulsory liquidation is a court led process where a judge orders that a company be liquidated as it cannot pay its debts and is insolvent.
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Liquidation Myths and Untruths
Below are the most common reasons why people are discouraged from taking necessary action to liquidate their company. In some cases actually trying to avoid liquidation by selling the company. Reputational damage If you do not pay your creditors you will suffer reputational damage whether you have sold it to another company or liquidated it formally. You may not be able to get business insurance and your current insurance may not be renewed if you have another company. This is completely untrue. We liquidate companies all the time and the directors do not have this problem. They might have issues getting cover if they do it more than once. Some very riskaverse insurers might turn you down but there are literally thousands out there. There may be a tiny increase in the premium and you may have to answer a few more questions for the insurers piece of mind. You won't be eligible for any business finance or loans from banks or other lenders Again this is simply not true. All banks and lenders recognize there is some risk in running a business and a failure of a start up or a liquidation is not going to be a problem. It will be if there appears to be a pattern of multiple liquidations though. Even then it will not have any affect on your personal credit rating. Company credit scores are totally separate. You will be disqualified as a director if the company goes into liquidation This is completely wrong. Only if you have been fraudulent or deliberately misled creditors knowing the business is going to fail will you face disqualification or be personally liable for the debts (note that if you have personally guaranteed loans then yes you will be liable ). This worry tends to make directors “freeze up” and take no action out of sheer panic. You can’t be a director again if the company fails Completely wrong again (see above). You may not be able to obtain another VAT registration. If you do, HMRC may require you to pay a significant deposit. If you owe the HMRC a substantial amount of VAT then they will wind the company up with a petition, so it will be liquidated anyway. The former directors during the time the money was owed will be on their radar. It is better to do a voluntary liquidation in these circumstances. Yes you may need to provide a deposit in a new company but probably only if you owed them substantial sums. Large companies and local authorities wont grant tenders to directors of liquidated companies What is actually being said here is that large companies won't give tenders to insolvent companies! Well of course they wouldn't. A previous liquidation by a director will not preclude them. There is no mention of any such exclusions in the The Public Contracts Regulations 2015. The NHS will not employ anyone who has liquidated a company Err no.The one area where liquidating a company can have some personal issues is if you are going to work in very sensitive finance areas and perhaps national security. This is mainly because they worry that a creditor could apply pressure on you or you could be more easily bribed if you have lost a lot of money in the past. However, avoiding voluntary liquidation may well result in a compulsory court liquidation process that is likely to lead to even worse outcomes.
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Secured And Unsecured Creditors – What Is The Difference?
I am confused about secured and unsecured creditors. What is the difference? As a director of a company that is doing well and making money you may have no real understanding about the important differences between certain types of creditors. The only time it really comes up is if you apply for a loan for the business and the lender talks about security and the loan being secured etc. Secured Creditors A secured creditor is a creditor that has security over an asset or assets of the company. So, if the company can't pay then they have the right to the proceeds of the sale or proceeds of the asset. This is enabled by a legal document called a charge or debenture. There are two kinds of charge; A Fixed Charge and a Floating Charge. The difference is quite hard to explain in a few words so we have a dedicated page on the differences. Have a read here on fixed and floating charges. A fixed charge is essentially a charge on a very specific asset whereas a floating charge is across a range of assets or asset that can change.A charge is a bit like a mortgage on your house. If you fail to keep up your payments then the bank can effectively force the sale of the asset and reimburse themselves. In a company situation if the secured lender is owed money then they can "force" the company into the hands of administrators who will pay them having sold the assets. This description is simplistic and is more akin to the old system of receivership but it illustrates the principal. Unsecured Creditors These are essentially creditors that have no security over the assets. This can be a trade supplier, HMRC, a utility company. Banks will often lend without security but they will charge a higher rate of interest to offset the risk they can't get their money back.Be aware though that some creditors are called secured as they have a personal guarantee from the director and they may use terminology like "secured against the directors personal assets" In insolvency law they are not secured and so come after the secured creditors that have a "charge" over the company's assets when money is paid over in the event of a terminal insolvency event like liquidation. What about defacto secured creditors? These are creditors that do not have any security over the company's assets but they have control over the company in that they can shut it down. An example might be the creditor that runs their proprietory software, or their means of payment (this happens when Amazon have lent the company money to develop their online shop) such creditors are more properly referred to as "ransom creditors". Ransom creditors are more important if the company is insolvent but could be rescued and so need to continue to trade. So they need to be kept happy!In a liquidation scenario they would be behind a secured creditor that had a charge over the stock for example.For a more detailed explanation of the priority of creditors in an insolvency situation then please look at our page on creditor priority. There is even a handy infographic on there too.
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How to Liquidate A Company With No Money
Dissolution as a way to close a company with no money If the company has no money and it needs to close down then, providing that it does not owe creditors substantial sums, it can seek to be struck off or dissolved. This process is known as dissolution and is governed by Sections 1003 to 1008 of the Companies Act 2006 (formerly Section 652 of The Companies Act 1985)However, bear in mind that dissolving the company (removed from the Companies House Register) can only happen if the following conditions apply:The company has not traded for three months; there must be a genuine cessation of trade. The company has no assets, property or cash at the bank. The creditors are informed, requesting their permission for the company dissolution. Creditors are given three months to consider the request to dissolve the company and can reject such a request. The company has not changed its name during this period. The company has not disposed of any property or assets (this may include land and buildings, plant and equipment, debtors and other assets).If the company does have debts, say about £5000+, then really the company needs to be liquidated. A company that is insolvent will need to be liquidated using either a Creditors Voluntary Liquidation (CVL) or the creditors themselves will petition the court, using a winding up petition, to force the company into a court led process also known as a compulsory liquidation.So, if the company has no money and the directors do not have the funds to go down the route of a CVL then they will need to brace themselves for the compulsory process. This is risky for them personally and is not a pleasant process. What is more it can take about a year to be completed stopping the directors from moving on with their lives. This will be the consequence of running down all the funds in the company.Even if you do manage to dissolve the company with debts then it can actually be resurrected up to 3 years later and wound up by court with the directors being investigated. This is covered by the The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act. What about using directors' redundancy to pay for the liquidation? Beware companies telling you this. Directors will need to show that they were legitimately employed i.e. being paid a proper salary via PAYE for the work they have done. Being paid for holidays and having a proper contract. The Redundancy Payments Office (RPO) are routinely rejected directors claims as they see their "salaries" often as just extracting sums from the company in their capacity as office holder. If they are working all hours on the business but only paying themselves £700 a month on PAYE then that is below minimum wage so they are not actually "legally employed" Can I liquidate the company myself? No you can't. It is true that only its shareholders can start the process but a licensed insolvency practitioner has to actually do the liquidation.
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