Creditor Hierarchy

Running a business is a fantastic ride, but sometimes it hits a bumpy patch. If you’re facing financial difficulties and have multiple creditors knocking on your door, understanding creditor hierarchy can be a lifesaver. It essentially tells you who gets paid first when things get tough. Here at Blackstone Solicitors, we’ve helped numerous companies across England and Wales navigate the often complex implications of negotiating with creditors. This article will shed light on creditor hierarchy and how it might impact your business.

Free Initial Telephone Discussion

For a free initial discussion with a member of our New Enquiries Team, get in touch with us today. We are experienced in dealing with all the legal aspects of a business looking to negotiate with creditors, and once instructed, we will review your situation and discuss the options open to you in a clear and approachable manner. Early expert legal assistance can help ensure you are on the best possible footing from the start and also avoid the stress of dealing with these issues on your own. Simply call us on 0345 901 0445 or click here to make a free enquiry and a member of the team will get back to you.

When Does Creditor Hierarchy Come into Play?

Creditor hierarchy becomes a major factor when a company enters a formal insolvency process, such as liquidation or administration. Liquidation is the formal closure of your company, with assets sold off to repay creditors as much as possible. Administration is a process where an insolvency practitioner takes control of your company, aiming to save it as a going concern and potentially restructure debt.

In both these scenarios, the law dictates a specific order in which creditors are paid. Think of it as a queue – some creditors are at the front, getting paid first, while others wait their turn further back.

The Creditor Hierarchy: Who Gets Paid First?

Here’s a breakdown of the creditor hierarchy in England and Wales, with those at the top getting paid first:

• Costs of Insolvency Process: The fees and expenses of the insolvency practitioner overseeing the liquidation or administration come first. They need to be paid before any creditor claims are settled.
• Secured Creditors with Fixed Charges: These are creditors who have a legal claim over specific assets of your company, such as property or equipment. In simple terms, they have a secured loan backed by collateral. If the company is liquidated, they can repossess these assets and sell them to recoup their debt. However, if the value of the secured asset is less than the debt owed, they become unsecured creditors for the remaining amount.
• Preferential Creditors: These are a special category of unsecured creditors who get priority due to the nature of their debt. They include:

– HM Revenue & Customs (HMRC) for unpaid taxes like VAT and PAYE (Pay As You Earn).

– Employee wages, holiday pay, and redundancy pay (up to a certain limit).

– Certain pension contributions.

• Floating Charge Secured Creditors: These creditors have a security interest over a broader category of assets, like inventory or receivables. This “floating charge” becomes fixed when the company enters insolvency. However, their claim comes after secured creditors with fixed charges.
• Unsecured Creditors: These are creditors with no specific security over your company’s assets. This is the largest group and includes suppliers, banks with unsecured loans, and utility companies. Unfortunately, unsecured creditors often receive very little, if anything, during an insolvency process.
• Shareholders: Shareholders are the last in line. They only receive any remaining funds after all other creditors have been paid in full, which is highly unlikely in an insolvency situation.

Understanding What it Means for Your Business

The creditor hierarchy can significantly impact your business during insolvency proceedings. Here’s what you need to consider:

• Secured Debt vs. Unsecured Debt: The type of debt you have can make a big difference. Secured creditors have a much higher chance of recovering their money compared to unsecured creditors.
• Negotiation is Key: Even with a secured position, creditors might be willing to negotiate a settlement to receive their money faster.
• Alternatives to Insolvency: Creditor hierarchy applies during formal insolvency processes. Exploring restructuring options might help you avoid insolvency and negotiate with creditors outside of this framework.

Remember, even in challenging situations, there are options available. With the right guidance and legal support, you can navigate your financial difficulties and find a path forward for your business.

How we can help

We have a proven track record of helping clients deal with the legal process involved with a business looking to negotiate with its creditors. We will guide you diligently and ensure all checks are carried out swiftly and efficiently and we firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting. You can read more about the range of corporate services we offer by clicking here: https://blackstonesolicitorsltd.co.uk/corporate-legal-services/

How to Contact Our Corporate Solicitors

It is important for you to be well informed about the issues and possible implications of creditor negotiations. However, expert legal support is crucial in terms of ensuring a positive outcome to your case.

To speak to our Corporate solicitors today, simply call us on 0345 901 0445, or click here to make a free enquiry. We are well known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.

Authored by Ben Posted in Blog, News Tagged as

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