Who Gets Paid First During Liquidation Proceedings?
When a company has too much debt with no ability to pay its creditors, and it is determined that an end to the business is necessary, it will be considered insolvent. As a result, the company may liquidate all of its assets and use the proceeds of those funds to pay different creditors and even shareholders. Who obtains payment from selling off of assets is dependent on who has a higher priority claim. This process is known as liquidation.
It can be incredibly difficult to come to the point where your financial obligations are far too high for what you can manage. The type of bankruptcy filed will dictate how liquidation proceedings are governed. For more information about bankruptcy and liquidation for small businesses, the New York City business bankruptcy lawyer Harry D. Lewis is here for you and can help.
How Does Liquidation Work?
Following guidelines in Chapter 7 bankruptcy, liquidation will use the proceeds from the sale of a business’s assets and collateral to pay various parties. Typically, those entities that are considered secured creditors or those that have collateral for a business loan will take precedence. In these situations, the collateral that was put up will be taken by the creditors and sold. Usually, the sale of such items is at a greatly reduced rate to promote a faster sale.
Here, one of two things can happen. The sale of the collateral is enough to satisfy the creditor’s debt or it is not enough. When the sale of collateral is insufficient, any remaining assets the business has can be seized to cover the deficit.
After secured creditors have been satisfied, unsecured creditors have a chance for repayment. This would encompass taxes that have to be paid or employees that also must receive payment for their work.
Finally, the lowest on the totem pole to obtaining compensation are the shareholders. By this point, there may be little to nothing left for shareholders to recover.
Every business liquidation is different. Sometimes, there may exist a situation where the creditors use proceeds from the sale of collateral and assets to cover the debt but even in these situations, it is not all recouped. In this scenario, with nothing left to even fully repay secured creditor debt, the outlook for others in line waiting for some amount of payment is grim.
The best scenario for those that have a right to payment from a liquidation proceeding, is that everyone gets compensation in some amount. Even if shareholders only have access to a smaller amount than they’d prefer, getting something over nothing is usually favored.
Speak to a New York City Bankruptcy Attorney Today
If you are thinking about liquidation and that it may be necessary as you shut down your business, you could have questions and need support. Consider calling the experienced and seasoned New York City business bankruptcy attorney at the Law Office of Harry D. Lewis to schedule a free consultation to discuss your unique situation at 212-859-5067.