Aug 1, 2017

Who gets paid first when a company goes into liquidation? | Rosemond Phil-Othihiwa

The order in which assets of the company are to be applied is laid down in both the Companies and Allied Matters Act and the Companies Winding Up Rules. Certain debts must be paid in priority to all other debts and they will rank equally among themselves and be paid in full unless the assets are not sufficient to meet them in which case they will abate in equal proportions and so far as the assets are insufficient to meet the claims of creditors, these debts have priority over the other debts and may be paid out of property subject to a charge.

Section 494 of the Companies and Allied Matters Act C20 LFN, 2004 states:
(1)                    In a winding up there shall be paid in priority to all other debts –

(a) All local rates and charges due from the company at the relevant date, and having become due and payable within 12 months next before that date, and all Pay-As-You-Earn tax deductions, assessed taxes, land tax, property or income tax assessed on or due from the company up to the annual day of assessment next before the relevant date, and in the case of Pay-As-You-Earn tax deductions, not exceeding deductions made in respect of one year of assessment and, ion any other case, not exceeding in the whole one year's assessment;

(b) deductions under the National Provident Fund Act 1961;
(c)  all wages or salary of any clerk or servant in respect of services rendered to the company;
(d) All wages of any workman or labourer whether payable for time or for piece work, in respect of services rendered to the company;
(e)   All accrued holiday remuneration becoming payable to any clerk, servant, workman or labourer (or in the case of his death to any other person in his rights) on the termination of his employment before or by the effect of the winding up order or resolution;
(f)    Unless the company is being wound up voluntarily merely for the purpose of reconstruction or of amalgamation with another company or unless the company has at the commencement of the winding up under such a contract with insurers as is mentioned in section 26 of the Workmen's Compensation Decree 1988, rights capable of being transferred to and vested in the workman, all amounts due in respect of any compensation or liability for compensation under the Decree aforesaid, accrued before the relevant date.

 When the liquidator has collected the assets, and provided for the costs and expenses of winding-up and for the preferential debts, he will proceed to distribute the assets among other creditors.

The distribution takes the form of declaration and payment of dividends so that if there are insufficient assets to meet all the claims of the creditors, they are paid in proportion to the amount of their claims.

 493.        In the winding up of an insolvent company registered in Nigeria the same rules shall prevail and be observed with regard to the respective rights of secured and unsecured creditors and to debts provable and to the valuation of annuities and future and contingent liabilities as are in force for the time being under the law of bankruptcy in Nigeria with respect to the estates of persons adjudged bankrupt, and all persons who in any such case would be entitled to prove for and receive dividends out of the assets of the company may come in under the winding up and make such claims against the company as they respectively are entitled to by virtue of this section.

Secured Creditors
Any unclaimed share is paid into the company’s liquidation account and any person entitled may apply to the Commission which may if the liquidator so certifies, make an order for payment.

 Section 516 CAMA states thus:
 6) Any person claiming to be entitled to money paid into the company’s liquidation account in pursuance of this section may apply to the Commission for payment and the Commission, if the liquidator certifies the claim, may make an order for payment accordingly.
 Creditors are divided into two separate categories:
·         Secured
·         Unsecured
The question of who gets paid first when the debtor company becomes insolvent depends on their priority status as a creditor. The ranking or ‘priority’ of creditors will dictate the dividend in a winding up of the company or payable under a Deed of Company Arrangement (in the case of a voluntary administration).

A secured creditor is someone who has a security interest such as a mortgage or a charge, over some or all of the company’s assets, to secure a debt owed by the company.
In the event that a company defaults on its obligations under a security interest, a secured creditor can appoint an independent, qualified receiver to take control of and realise some or all of the secured assets to satisfy the secured creditor’s debt. The assets must be sold at market value (or the best reasonably attainable price) .

A secured creditor is entitled to:
·         vote at creditors’ meetings for the amount the company owes them that exceeds the amount they are likely to receive from realisation of the secured assets;
·         participate in any dividend to unsecured creditors on a similar basis.
Unsecured Creditors
Unsecured creditors rank lower in priority than secured creditors as they have no ‘security’ over company assets. Unsecured creditors may include companies that sold goods or services to the company, ie, suppliers and the Australian Taxation Office.

If a company goes into liquidation, once a creditor has lodged a proof of debt, they will need to await the outcome of the liquidator’s investigations. If there are sufficient funds left in the liquidation after payment of liquidator’s fees and costs, and payment to priority creditors (ie, employees and secured creditors), the liquidator will distribute remaining monies to unsecured creditors as a dividend payment.

Each category of creditor is paid in full before the next category is paid. If there are insufficient funds to pay a category in full, the available funds are paid on a pro rata basis (and the next category or categories will be paid nothing). Unfortunately, there is no guarantee that creditors will get paid at all – in certain cases, there will be no money (or only a percentage) left in the pool to satisfy creditor claims.

When the claims of the creditors have been met in full, the court will adjust the right of the contributories among themselves make an order for distributing any surplus among the contributories entitled. Section 446 of CAMA provides thus:

“The court shall adjust the rights of the contributories among themselves, and distribute any surplus among the persons entitled thereto.”
Priority Unsecured Creditors
So what happens when an employee loses their job after their employer company becomes insolvent? Facing unemployment and the unlikely payment of outstanding entitlements is a daunting prospect for those who have been cast out after a company enters liquidation. Secton 518 of CAMA provides that upon the winding up of a company, the liquidator may make any payment which the company has before the commencement of the winding up under section 566 of CAMA which empowers a company to provide for employees on cessation or transfer of business.

Employees can, however, take comfort in the fact that they are a special class of unsecured creditors with priority over other unsecured creditors to obtain employment entitlements.

 SECTION 518 OF CAMA provides thus:

   (1)On the winding up of a company (whether by the court or voluntarily), the liquidator may, subject to the following provisions of this section, make any payment which the company has, before the commencement of the winding up, decided to make under section 566 of this Act.

  (3)         Any payment which may be made by a company under this section may be made out of the company's assets are available to the members on the winding up.

Unclaimed Funds and Undistributed Assets
All money in the hands or under the contract of the liquidator representing unclaimed dividends, which for six months from the date which the dividend became payable have remained in the hands or under the control of the liquidator, shall forthwith on the expiration of six months be paid into the company’s liquidation account. See Rule 171 See Rule 171 of the Companies Winding Up Rules.

Associate Counsel at OLATUNDE ADEJUYIGBE & CO. SAN

Ed’s Note – Article was first published here