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Company Law

Q: Liquidations and non-preferential creditors

The production company which employed me went into liquidation. I am owed several thousand pounds but the receivers tell me that I am a 'non preferential creditor' and stand little chance of recovering my money. What should I do?

A: You refer to 'liquidation' and 'receivers' but liquidation and receivership are different. For present purposes I will assume that by 'receivers' you mean 'liquidator'. In a liquidation the first £800 arrears of each employee's wages and salary referable to a period of four months prior to the commencement of the liquidation is 'preferential', which means that (with other preferential debts) it ranks ahead of ordinary unsecured creditors for payment out of the net proceeds of the liquidation, if any.

If anything is available for preferential creditors it is necessary to consider whether you were in truth an 'employee'. You use the word 'employed' but the status of an artist or other person 'engaged' (to use a neutral word) for a specific production or other project is sometimes difficult to determine, i.e. as to whether employed or self-employed. This may, need a more detailed examination of the circumstances but generally the pendulum is currently swinging in favour of self-employment.

The tax status of the individual is not necessarily conclusive although the Inland Revenue has recently changed its mind (for the second time) about this and, after some years of insisting on treating the individual concerned as employed and therefore subject to PAYE, it is now in the process of' reversing that (in consequence of a recent court case on the topic) and is prepared to treat most individuals in such circumstances (with certain exceptions) as self-employed.

You should therefore first check with the liquidator whether funds are available for preferential creditors and if so to what extent. This will enable you to determine whether there is any point in your challenging the liquidator's contention and, if so, whether the cost of taking advice on your 'employment' status (i.e. 'employed' or 'self-employed') is worthwhile. You should also enquire whether there is any realistic prospect of any money being available for unsecured creditors (of whom you will be one to the extent that you are not preferential) and if so when and to what extent.

The liquidator is likely to be noncommittal about this but you should get at least a rough idea from him. In any event you should lodge a formal claim with him by letter, giving him details of the nature of your claim and the amount and the period to which it relates. This is because sometimes, although not often, funds become available for creditors to an extent which was originally thought to be unlikely. You should then check the status of the liquidation annually with the liquidator until the liquidation is closed or you get paid out. Next time make sure you get paid as you go along and take legal advice before letting the arrears mount up as far as they apparently did.

First published November 1994