The Hierarchy of Insolvency - Where Are You on the Priority List?

Business operates on credit and it serves an invaluable economic function. However, it also means that many businesses entire revenue stream is potentially at risk of bad debt.

When a company goes insolvent it is unlikely that its trade creditors will recover any meaningful portion of the money owed.

This poses a risk to these creditors, as they must somehow absorb the lost revenue if they're to stay solvent. Unfortunately, insolvency is a fact of life and is currently rife within our economy, making it highly likely that any given business will experience it at some time.

So, if a company’s debtor became insolvent, how likely are they to receive payment? 

Procedures, Challenges, and Creditor Considerations in the Face of Insolvency

Insolvency is the financial state where a company is unable to meet its financial obligations, leading to potential liquidation or restructuring.  

When a business becomes insolvent, its assets may not be sufficient to cover its debts, prompting the involvement of insolvency procedures to address the financial distress. In the UK, the primary insolvency procedures include administration, liquidation, and company voluntary arrangements.

Trade creditors of an insolvent business face significant challenges, as they almost certainly will not receive the full amount owed to them.  

In the event of liquidation, secured creditors always have priority over unsecured creditors, and the distribution of assets is determined by a statutory hierarchy. Unsecured creditors, such as trade creditors, may only receive a fraction of their outstanding debts.  

The insolvency process aims to balance the interests of various creditors and the economy while providing a structured framework for the resolution of financial difficulties. This balance is important, however, it actively benefits some businesses over others.

Payment Priorities in Business Liquidation

In the complex process of business liquidation, payment priorities follow a structured hierarchy, outlining who gets paid first.  

Initially, the fees associated with the liquidation process take precedence. Subsequently, the process unfolds across three primary creditor groups.

Secured creditors on a fixed charge, where the debt is secured against a prespecified asset, top the hierarchy. One of the most common examples of this is a bank lending a mortgage which is secured against a property.

Next in the hierarchy are preferred creditors, which are legally protected unsecured creditors, mot commonly employees and HMRC. 

The hierarchy then moves to secured creditors on a floating charge.

Finally it is unsecured creditors, which trade creditors fall into.

By virtue of a company being insolvent, there is not enough money to repay all its debts and typically there is a significant shortfall. 

This reality can be seen within the popular homeware chain Wilko collapse, as it left £548 million unpaid to unsecured creditors, of which less than 8% will be reimbursed. For the fraction that will receive payment, the time it takes to complete the liquidation process could mean those affected could become insolvent themselves.

Ultimately, shareholders stand at the bottom, seldom receiving returns in the intricate web of liquidation.

Mitigating Bad Debt through Proactive Credit Management

For most businesses, they will land in the unsecured creditors category, leaving them vulnerable to unsatisfied debts. Once laden with bad debt, a company is three times more likely to become insolvent within the next 12 months. 

For a company to do business safely it is imperative that they prioritise and maintain strong credit management processes.

Red Flag Alert's company credit checks and growth score tools are crucial assets for businesses aiming to safeguard against bad debt from insolvent debtors. 

By providing real-time, detailed financial health reports on every UK company, our platform allows you to quickly and easily credit check a company before extending credit and avoid the majority of bad debt risks before a deal is even made. 

We are the industry leaders in analysing company financial health and predicting insolvency, maintaining a 92% accuracy rating.

With our B2B Prospecting Tool you are able to target businesses using over 100 filters including financial health, meaning that you can effectively credit check every company in the UK with one click of a button. Taking you seconds and leaving you with a sales list of prospects that fit your ideal customer profile and can afford to pay you.

Once a debtor has been onboarded, company monitoring with Red Flag Alert allows for constant peace of mind. Allowing you to create separate monitoring lists, customise what events send alerts and even share alerts between others in your organisation. Meaning that if the worst should happen and one of your debtors is exposed to the risk of insolvency you will know immediately and just as importantly

Automated Monitoring for Proactive Risk Mitigation with Red Flag Alert

Suffering a bad debt has always been one of the most common causes of companies going insolvent and it is now occurring at record rates. 

Company directors must practice caution in the modern economy but they can not afford to let opportunity pass them by. This makes effective credit risk management one of the most important factors in both a company's safety and its success. 

Red Flag Alert fits seamlessly into your existing processes and allows you to practice best in class credit and business risk mitigation, whilst also providing the data you need to find and exploit opportunities ahead of your competitors.

Make the most of your business, rely on Red Flag Alert to keep you in the know with potential and current debtors, and see success. Try Red Flag Alert for free, today!