Anytime that a company moves into the liquidation process, it means that they don’t have the funds to pay their debts and liabilities. There are likely many different creditors that the company owes money to which will more than likely be wondering when they will get paid. There is a process to liquidation and in the end, the goal is to pay those creditors the money they are rightfully owed. Principle Insolvency is here to talk about the order in which these creditors will be getting paid.
What Order are Creditors Paid in a Liquidation?
When a company is insolvent, it will likely move toward liquidation. There is a process that is involved in ensuring that creditors are paid the money that they are owed. It can be a tumultuous time for all that are involved, but the order that people get paid generally follows:
– Fixed Charge Secured Creditors: Business owners borrow money for a number of different reasons. They might need specialized equipment, work vehicles, and even intellectual property. When the company takes out a loan to purchase these necessities for running their business, it is usually done with the help of a bank or leasing company. This is known as fixed debt because should the borrower not pay, the bank knows that they can simply take back the property in the case of liquidation. They are one of the first to get paid when the process starts.
– Preferential Creditors: The next in line to get paid during liquidation are the individuals that are on staff at the company. Any unpaid salaries or holiday pay that is owed to these employees will be paid right away.
– Floating Charge Secure Creditors: Floating charges deal with non-constant assets which would include raw materials or work in progress. Once a company goes into liquidation, these floating charges morph into a fixed charge.
– Unsecured Creditors: When someone offers a company money but doesn’t have any asset to take as collateral, they are an unsecured creditor. This might include contractors, trade creditors, suppliers, customers and other claims. Sometimes, there are even employees or managers that will loan companies money unofficially that would fall into this category.
– Shareholders: Last on the list of those that get paid during a liquidation would be the shareholders. These are the people that have loaned the company money at some point. Shareholders always take risks when loaning a company money, and if the company goes into liquidation, they are the ones that lose.
Insolvency Services in Auckland, Hamilton, Levin & New Zealand Wide
If your company is in financial trouble and can’t pay its debts, you can turn to Principle Insolvency to help you get the process going. We will consult with you and map out the possible way forward. We will help you settle your debts and face your financial hardships and debt issues. Our team of professionals work to do what’s right for your company. Call us today!