If you or your company is insolvent and unable to repay debts when they fall due, you’ll probably experience some pressure from your creditors. So, what can your creditors do if you or your company becomes insolvent? Are they entitled to anything? And if the company undergoes a liquidation, who gets paid first?
What is insolvency?
Insolvency is a financial state that can apply to businesses and individuals where they cannot repay their debts due to insufficient assets or cash flow. If you’re aware that either you or your business is insolvent, you should act immediately. Failure to act can result in accusations of wrongful trading being levied at businesses.
What can creditors do in insolvency?
If you or your business is insolvent, your creditors are likely to pressure you into repaying those debts, which will only escalate if that pressure is ignored. It could even result in the business being forcefully wound up or the insolvent individual being forced into personal bankruptcy. Regardless of whether you’re running a business, your creditors are allowed to chase you for repayment and send reminders. Reminders are not the same as harassment, which may involve threatening language and attempts at communication during unsociable hours.
What can you do to relieve your debts?
Even if you’re insolvent and without the funds to repay your creditors, your debts to them still need repaying. You shouldn’t just pay them in a random order; this can lead to accusations of preferential treatment. You should seek professional help from a licensed insolvency practitioner who can advise you of the suitable options and put you into an arrangement best suited for your circumstances.
The faster you act, the better the chances of saving the company or minimising the long-term effects if saving it isn’t possible. Speak to a licensed insolvency practitioner to discuss your options, which could include repaying your company’s debts monthly via a formal repayment arrangement, restructuring a company to make it profitable again, or closing that company via liquidation.
If your insolvency practitioner decides liquidation is the best route forward, the funds from that liquidation are distributed to your creditors in the order set out in the payment hierarchy.
What is the payment hierarchy?
In the UK, the payment hierarchy sets out the order in which your creditors are repaid while a company undergoes liquidation. This hierarchy is set out in the Insolvency Act, 1986.
The first group to be repaid would be your secured creditors and those with guaranteed fixed charges over the company’s assets. Preferential creditors are second in line, including employees and, as of December 2020, tax-related debts to HM Revenue & Customs (HMRC) aside from Corporation Tax and National Insurance Contributions. Secured creditors with floating charges, where there is less of a physical asset, are third in the payment hierarchy. Unsecured creditors are fourth. Shareholders are last as all other creditors need repaying beforehand, so it’s unlikely there will be any remaining funds available to distribute.
If you or your business becomes insolvent and unable to repay debts when they fall due, your creditors are entitled to remind and chase you or your company for repayment, depending on who owes the money. The previously described payment hierarchy decides the order in which your creditors receive anything due to them. If you’re without the funds, you should speak to a licensed insolvency practitioner.