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ACCA Applied Skills · Corporate and Business Law (Global) · Insolvency and administration

Zentra Ltd is being wound up and its liquidator has realised the assets. The company has a bank loan secured by a fixed charge over its freehold factory, unsecured trade suppliers, employees owed wages, and the costs of the liquidation itself. Under the general order of payment in a liquidation, which of the following is paid first from the proceeds of the factory?

The bank is paid first from the factory proceeds, up to the amount secured. A fixed charge holder has security over the specific asset and is satisfied from it before liquidation costs, preferential creditors or unsecured creditors, who are paid only from remaining free assets.

  1. AThe unsecured trade suppliers, because they supplied goods on credit
  2. BThe employees owed wages, because employees are always paid before any creditor
  3. CThe costs of the liquidation, because they rank above every other claim
  4. DThe bank, to the extent of its fixed charge over the factoryCorrect

Explanation

A creditor holding a fixed charge has a proprietary claim over the charged asset and is paid from its proceeds first, before the liquidation costs, preferential creditors and unsecured creditors. The costs of the liquidation are met from the remaining free assets, not from fixed charge assets. Option C is wrong because costs rank after fixed charge holders on the charged asset.

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