WHO
GETS PAID FIRST IN THE CASE OF A COMPANY IN
LIQUIDATION?
The order in which payments are made
is fixed by statute. The general rule is that
the creditors are paid in the following priority:-
(i) Secured creditors holding fixed charges
such as a bank lending money backed by a mortgage
on land and buildings (and sometimes fixed
plant) typically bargained for taking less
risk. Assets of the company usually back the
credit that they extend. They know they should
get paid very early on the list if the company
is liquidated. They will only receive payment
to the extent of the value of the asset that
is subject to the charge. They will have to
prove as unsecured creditors for the excess
if there is a shortfall.
(ii) Preferential creditors. These are creditors
particularly government/crown departments
who are statutorily preferred in the order
of payment.
(iii) Floating charge holders. These differ
from (i) above (fixed charge holders) in that
fixed charges relate to specific assets such
as land/buildings/fixed plant and machinery.
Fixed charges only relate to specific named
assets. Floating charges "crystallise" on
assets which are held by companies from time
to time, e.g. ???? of perishables. They are
typically taken by banks and other lending
institutions in conjunction with a fixed charge
as outline at (i) above.
(iv) General creditors, such as suppliers
of goods and services, and other lenders have
a higher priority for recovering their losses
than shareholders.
Shareholders own the company, and take greater
risk. They could make more money if the company
does well, but they could lose money if the
company does poorly. The owners are last in
line to be repaid if the company fails. Insolvency
laws determine the order of payment.
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