When a business enters insolvency, there are specific rules about how remaining capital is distributed once the company has ceased trading and, if appropriate, it's shares suspended.

In general, the appointed Administrator, those who manage the affairs of the insolvent firm on behalf of the management team, will attempt to fulfil remaining orders from existing stock.

Creditors (including you, the customer, who has paid monies and not received any product) are refunded in a certain order.

Those at the top of the pile, aside from the administrator, are normally banks or financial institutions since as part of their terms and conditions they will normally state they are to receive the highest priority as a creditor if a company enters administration. Such entities are known as "Preferential creditors".

Contrary to popular belief preferencial creditors do not include HMRC but does include the DSS and employees wages covering 4 months up to a maximum of £800.

Next in line would be fixed and floating charge holders which may also be a bank or banks.

A floating charge is a charge held over general assets of a company. The assets may change (such as stock) and the company can use the assets without the consent of the secured creditor until the charge "crystallises" (becomes fixed).

Crystallisation occurs on the appointment of an administrative receiver, on the presentation of a winding-up petition or as otherwise provided for in the document creating the charge. In the case of a fixed charge, the assets are normally static.

Unsecured creditors are almost the last to receive any kind of payment. Unless a customer has specific terms under contact or has security (a mortgage is a secured loan for example), they are classed as unsecured. As a result of this, significant delays can arise in relation to repayment. It is highly likely that you would have the standing of an unsecured creditor unless you hold security.

Finally, shareholders and contributories are repaid from remaining funds after all other debts are paid. This is why, when a company enters administration, shareholders receive meagre payouts when compared to their initial investment.

If any payment is received from the insolvent company, it is known as a dividend.

Many times over I have seen situations where unsecured creditors receive as little as 5% of the money owed and shareholders receive nothing at all.

Proper financial planning is important and is often forgotten when people chase a "quick buck".

A good rule in business is never to have all your eggs in one basket, for this very reason. Anyone entering agreements as an unsecured creditor may be wise to plan financially for this eventuality as unfortunately, insolvency is not as uncommon as one might think.

good article

Good post

Nice post there mate

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Excellent post, well written and good info!