When a company becomes insolvent, it can be a worrying and uncertain time for creditors. Whether you’re a supplier awaiting payment, a lender with an outstanding loan, or a customer with a deposit at risk, understanding your rights and the process of recovering debts is crucial. Insolvency doesn’t always mean that your claim is lost — but it does determine when and how much you might get back.
Understanding Insolvency
A company is considered insolvent when it can’t pay its debts as they fall due or when its liabilities exceed its assets. At this point, the company may enter a formal insolvency procedure — such as liquidation, administration, or a company voluntary arrangement (CVA). Each process has different implications for creditors, but the priority order of payments remains broadly similar.
The Priority Order of Payments
Once a company enters liquidation or administration, its assets are sold to repay debts. The law sets out a strict hierarchy of who gets paid first. Here’s how it typically works:
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Secured Creditors (Fixed Charge Holders)
These are usually banks or lenders who hold security over specific assets, like property, vehicles, or machinery. They are first in line and can recover money from the sale of those secured assets. -
Insolvency Practitioner’s Fees and Costs
The costs of managing the insolvency — including the fees of the appointed insolvency practitioner — are paid next. These costs are deducted from the company’s assets before other creditors see any return. -
Preferential Creditors
This category includes certain employee claims, such as unpaid wages (up to a statutory limit) and holiday pay. In some cases, contributions owed to workplace pension schemes also fall into this group. -
Secured Creditors (Floating Charge Holders)
These creditors have security over assets that fluctuate in value, such as stock, debtors, or work-in-progress. After the preferential creditors are paid, they receive a share from the remaining assets. -
Unsecured Creditors
This is the largest group and includes trade suppliers, customers, contractors, and HMRC (for most taxes). Unfortunately, unsecured creditors often receive only a small percentage of what they are owed — and sometimes nothing at all. -
Shareholders
If anything is left after all creditors are paid (which is rare), shareholders receive the balance.
How Creditors Can Recover Debts
Creditors do have several ways to protect and pursue their claims during insolvency:
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Submit a Proof of Debt: You must formally register your claim with the insolvency practitioner. This ensures your debt is recognised and you’re included in any potential distribution.
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Attend Creditor Meetings: In some insolvency cases, creditors can vote on key decisions, such as appointing the liquidator or approving proposals in a CVA.
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Monitor Security Rights: If you hold a charge or lien over company assets, you may be able to enforce it independently, outside of the main insolvency process.
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Stay Informed: Regular updates are provided by the insolvency practitioner. Keeping in contact and reviewing reports ensures you understand how the case is progressing.
Final Thoughts
Insolvency can be a frustrating process for creditors, but knowing where you stand in the payment hierarchy and what actions you can take gives you the best chance of recovery. Acting promptly, maintaining proper documentation, and engaging with the insolvency practitioner are key steps in protecting your interests.
Even if full recovery isn’t possible, understanding your rights helps you make informed decisions — and better manage risk in future business dealings.
Imperium Financial Recruitment connects professionals across the insolvency and accountancy sectors. For more insights and opportunities, visit Imperium Financial Recruitment.
