What happens to creditors, employees, VAT, ROT, Bank, secured, landlords during a company administration?

In brief

When a company goes into administration the administrator will aim to rescue the company in order to get the best possible result for the creditor(s). 

In more detail

In administration debts are paid to creditors through assets of the business in a descending order of priority.  Generally the order is:

  • Secured creditors (Fixed Charge Creditors)
  • Preferential creditors (employees, HMRC)
  • Floating Charge Creditors
  • Unsecured creditors (trade creditors, suppliers, customers)
  • Shareholders/members

Secured creditors – at the top are secured creditors (fixed charges) who have a legal right or charge over property which is usually bricks and mortar.

Preferential creditors

  • Employees – the Administrator takes responsibility for their rights in employment after the initial two weeks of Administration until such time as the business is sold on.  If a new company purchases the business employee rights are protected under TUPE -Transfer of Undertakings (Protection of Employment) legislation.
  • HMRC – from 1 December 2020 HMRC regained their preferential status .  If a company goes into Administration HMRC will only be paid back what they are owed after Fixed Charges creditors and employees are paid.

Floating charge creditors – this can be attached to all of a company’s assets or specific classes of assets including stock, vehicles, raw material, debtors, fixtures and fittings and cash.

Unsecured creditors – all other non secured and non preferential creditors – these are normally ‘trade’ creditors.

Shareholders/members – these will be the last class of creditor to receive a distribution and they will only receive a distribution after everyone else has been paid in full.

Retention of title claims – a retention of title clause acts as a form of protection for creditors and means they can get their goods back if they are not paid.  The clause will form part of a sales contract.  There are different types of clauses and there are limitations.

Landlords – as soon as a tenant enters administration a moratorium comes into effect which prevents a landlord from either commencing the Commercial Rent Arrears Recovery process or bringing any court proceedings including the forfeiture of the lease.

VAT – during administration the administrator (insolvency practitioner) is responsible for the calculation and payment of VAT due.  The VAT due prior to the appointment of the administration will form part of any claim of HMRC as either preferential or unsecured creditor. 

Banks – your bank will be an unsecured creditor in administration unless, as is usual, your bank has a registered a debenture (a fixed and floating charge) with Companies House.  Banks can appoint an administrator of their choice.

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