Will I get my money? The order of payment for creditors.Posted: Nov 30, 2020

There is no such thing as a simple way to close a business. Whether it is an administration or a liquidation, the process is something that requires careful management. The order in which creditors are paid is no different. As Insolvency Practitioners we get asked a lot of questions and frequently need to dispel some myths. One area where it is common for people to harbour a mistaken belief is in the chain of payment for creditors. The way it is worked out is not overly complex in itself, but this is often not the case with the actual assets, cash on hand and various other aspects that affect the payment process. No wonder then that ‘will I get my money’? is one of the more common questions we get asked.

In terms of the order of payment, there are several categories of creditors and it is important to understand them. 

Preferential creditors are, as the name suggests, at the top of the list when it comes to who will be paid. There is a second consideration as well because this level of creditor is further split into 1st and 2nd preferential.

Here is the bad news. If you are a supplier to a business in the process of insolvency you are not going to be a preferential creditor. 

1st Preferential Creditors are:

Wages that are owed

Holiday Pay due to staff

Any Occupational Pension Scheme Employer and Employee contributions due for the previous 12 months.

2nd Preferential creditors are:

Outstanding VAT

PAYE due

Student Loan Payments

Employee National Insurance Contributions

Construction Industry Scheme Deductions

Sums due under the FSCS scheme

Sadly, for those further down the list, in most cases, this is all going to make a big dent in any available funds before the remaining creditors are addressed.

What happens after preferential creditors?

The good news, well relatively good news, is that there is an amount of money ring fenced at this stage for later use to pay unsecured creditors. This is called the Prescribed Part. The amount of ringfenced money varies but it is usually 50% of the first £10,000 of assets that would otherwise be given to the Qualifying Floating Charge Holders (QFCH) and 20% of the balance of assets up to a maximum of £600,000 or £800,000 depending when the charge was granted. As you have probably worked out by now, after the preferential creditors have had their cut, the ringfenced amount is usually not going to be much, particularly in very large insolvencies when unsecured creditors could be in the millions of pounds.

Qualifying Floating Charge Holders (QFCH) come next in the list. These are the people who have secured money loaned to the business on property or other assets. Again, most suppliers with outstanding amounts owed to them are unlikely to be in this category.

So, the QFCH get paid and you get your payment? Well, yes, that is pretty much what happens. Except that realistically, as we already worked out, there is not going to be much left in many cases. What there is left will be divided out amongst the remaining unsecured creditors.

So, in answer to the question of whether you will get paid or not, you probably need to be realistic about how much that will be because it may be pennies on the pound.