Understanding Insolvency Law
At Insolvency.com we believe that there is great benefit in understanding the workings of insolvency law.
No Company Directors sets out to fail but some analysis on the possible impacts of circumstances beyond their control which might lead to insolvency is a worthwhile exercise.
Careful planning can help to protect the key assets of a company and give resilience to the business that lives within the company.
Which company creditors are paid first?
Insolvency law lays out which of the people that your Company owes money to (your company creditors) should be paid first in the event of formal insolvency of your company.
There is a need to consider the different types of creditors.
A secured creditor will be able to rely upon the value of the assets upon which it is secured for repayment of money that is owed. A secured creditor is more often a finance company such as a bank, invoice factor or asset finance provider. Some secured assets may fall behind the next preferential category but before the following unsecured category.
The next category is preferential creditor is generally reserved for unpaid employee wages and holiday pay.
Next is monies due to general trade creditors and HMRC, categorised simply as Unsecured Creditors.
The last in line are shareholders who will only receive payment when all others creditors have been paid in full.
Preference to Creditors – What is a Preference Payment?
Principally applicable to the creditors who are not secured; legislation demands that creditors are treated evenly within their respective classes.
If ten unsecured creditors are each owed £1,000 and there is only £1,000 to pay to creditors then they should each receive an even share of the £1,000; £100 each.
When a company is insolvent or becomes insolvent because of the specific payment in question, then any payment that upsets that even distribution of money to creditors within the class may be classed as a preference payment. Any such preference payment could be reversed by an appointed Insolvency Practitioner.
What is Wrongful Trading?
Wrongful trading looks at the position of a stakeholders of a company. At any two points in time it would be possible to re-create a picture of what was owed to stakeholders in comparison to the value of company assets.
It’s the worsening of the position between these points in time that will raise the question of whether a reasonable person should have ceased to trade at an earlier point and not therefore worsened the position to the extent that it was.