Order of Priority of Creditors
There are various types of creditors and these have different levels of priority when a dividend payment is made. This list and explanation places the creditors in order with the top ranking creditor taking first priority. Please ensure that you take independent advice from a solicitor on any debentures and security held by the company as this will affect the options available to your company.
These have a legal charge over assets owned by a company. This could, for example, be over buildings and land, plant, machinery, patents, goodwill and other intellectual property. Invoice factoring companies usually hold security over the book debts which are in their control. Where there is more than one fixed charge creditor, (and no deed of priority exists) they rank in order of the date the charge was registered with the oldest charge-holder ranking first.
Creditors who hold a fixed and floating charge
This occurs where a valid debenture has been registered against the assets of the company and the assets comprise an element of both fixed and floating assets. Fixed charge assets are referred to in the section above on secured creditors.
Floating charge assets relate to assets that the company utilises in its day to day trading. This would include stock, work in progress and non-factored book debts and office furniture.
The creditor would, therefore, initially be entitled to monies under the fixed charge and would then rank as floating charge creditor.
Preferential creditors consist of employees’ claims for arrears of wages, holiday pay and pension payments. The Inland Revenue and H M Customs and Excise rank as preferential creditors.
For insolvency appointments made prior to 15 September 2003, the Inland Revenue and H M Customs and Excise rank as preferential creditors.
Creditors who hold a floating charge
The quantum of funds available to a Floating chargeholder depends on the date the charge was registered. If the charge was registered before 15 September 2003 the Floating charge holder will be entitled to all the funds available to them under their charge.
However, if the charge was registered after 15 September 2003 a proportion of the funds to which the floating charge holder is entitled to will be made available to unsecured creditors.
This relates to other creditors examples of which are trade and expense creditors, utility creditors, VAT and PAYE and loans which are not secured. Some of these creditors may be connected to the company.
For example, if a Director has injected money into the company and has not been repaid, he is a connected unsecured creditor. Connected creditors can also include family or members of staff.
If the company enters into a Company Voluntary Arrangement, the connected creditors may agree to rank behind the unsecured creditors for payment.
These are the lowest ranking creditor and only receive a dividend if the unsecured creditors receive full repayment plus interest.
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