How can a liquidator prioritize claims?

1 Liquidation priority and claims

Liquidation priority is the order in which creditors are paid from the liquidated assets of a company. It is based on the type and nature of the claims, as well as the laws and regulations of the jurisdiction where the company operates. Generally, payment is distributed in this order: Secured creditors are paid first from the sale of their asset; preferential creditors receive the remaining assets after secured creditors are satisfied; unsecured creditors are paid last from leftover funds after preferential creditors have been paid, usually receiving a proportionate share; and finally, shareholders who have a residual claim on the company's assets receive any payment, if any, after all other creditors have been paid.

2 The role of a liquidator

A liquidator is a person or a firm appointed by the court, the creditors, or the company itself to carry out the liquidation process. This individual has several duties and responsibilities, such as taking control of the company's assets and records, valuing and selling them to raise funds, investigating any misconduct or fraud, paying the creditors according to the liquidation priority, closing the company's accounts and filing necessary documents, and dissolving the company and removing it from the register. As an agent of the company, the liquidator must act impartially, fairly, and professionally while fulfilling their role. They owe a duty of care to the creditors to ensure that all obligations are met.

3 Factors that can affect liquidation priority

Liquidation priority is not always fixed and clear-cut. There may be various factors that can affect the order of payment, such as the terms and conditions of contracts between the company and its creditors, subordination or intercreditor agreements, set-off or netting rules, the presence of floating charges, claims of contingent or disputed creditors, and preferential shareholders. The liquidator must take these factors into account and resolve any disputes or uncertainties that may arise in the process of liquidation. In some cases, the liquidator may need to seek guidance or approval from the court or creditors' committee.

4 The benefits of liquidation priority

Liquidation priority serves several purposes and benefits for the company and its creditors. It provides a clear and predictable framework for the distribution of funds, protects the rights and interests of different classes of creditors, and encourages lending and investment by reducing the risk of loss. Additionally, liquidation priority facilitates an orderly and efficient winding up of the company, as well as promoting fairness and transparency in the liquidation process. Understanding how a liquidator can prioritize claims is an important aspect of corporate finance that can affect the outcomes and consequences of a company's failure. By being aware of liquidation priority, you can better prepare and protect yourself as a creditor or a shareholder in the event of liquidation.

5 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?