Understanding Creditor Priorities in Corporate Insolvency

When a company becomes insolvent, it may not have enough assets to repay all its debts. In such cases, creditors are ranked according to legal priority, determining the order in which they’ll be paid from the company’s remaining assets. Here’s a look at how creditor priorities are structured in insolvency:

Secured Creditors

Secured creditors are first in line for repayment. These creditors hold security over specific company assets, like property or equipment, which can be sold to satisfy their claims. For example, a bank with a mortgage on a company’s property is a secured creditor and will be paid from the sale of that property.

Preferential Creditors

After secured creditors, preferential creditors have the next claim on the company’s assets. This group includes employees who are owed wages or redundancy payments and certain tax authorities for unpaid taxes. Governments often prioritize claims related to employees and public revenue to ensure fairness in insolvency proceedings.

Unsecured Creditors

Unsecured creditors—such as suppliers, contractors, and customers—come next in priority. Since they lack collateral or secured interests, they are often paid only after secured and preferential creditors. In many cases, unsecured creditors receive only a fraction of what they are owed, or sometimes nothing at all.

Shareholders

Finally, shareholders (or equity holders) are the last to be repaid, and they typically receive nothing unless all creditors’ claims have been fully settled. In most insolvency cases, shareholders are wiped out, as the company’s assets are usually insufficient to repay even the higher-priority creditors.

Insolvency Practitioners

Understanding the hierarchy of creditor priorities is essential in corporate insolvency, as it determines who gets paid and to what extent. While secured and preferential creditors are more likely to recover their debts, unsecured creditors and shareholders often bear the brunt of financial losses when a company collapses.

Keywood Group is a firm of Licensed Insolvency Practitioners with offices based in Birmingham and London. Please get in touch for a free consultation by calling us today on 0121 201 0399 or 0208 912 0399