How Funds Are Distributed in a Liquidation

Secured Creditors: The Preferential Position

Secured creditors are in a league of their own when it comes to priority. They have the first claim on the company’s assets and possess certain advantages:

• First Dibs: Secured creditors get the first opportunity to go into the company and, if the security agreement allows, appoint a receiver. This receiver can take control of the assets and realise them to satisfy the debt.
• Preferential Position: Secured creditors are in a highly preferential position – they generally get paid first out of the assets of the company (with only limited exceptions in place). Ideally, if you are a creditor in a liquidation, you would want to be a secured creditor.

Priority of Payments: Unraveling the Sequence

Once secured creditors are accounted for, the priority of payments typically follows the following sequence:

1. Liquidators’ Fees: Liquidators, who manage the entire process, pay their own fees and liquidation expenses. This ensures that the professionals overseeing the liquidation are compensated for their services and the costs like advertising and payments to external professionals who assist in the process are covered.
2. The Petitioning Creditor: This refers to the creditor who initiated the liquidation through court. They are entitled to have their reasonable legal fees paid for taking these steps in Court.
3. Protection of Assets: Creditors who have funded the protection of assets in the liquidation hold a preferred position. This might involve creditors who took possession of assets that were at risk or funded litigation pursued by the liquidator.
4. Employee Payments: Employees have specific maximums but are entitled to be paid next, ensuring that employee rights are protected.
5. IRD Debt: Certain parts of debt owed to the Inland Revenue Department are also included in the priority list.