Guide
Creditor priority in company insolvency
The order in which creditors are paid when a company goes into liquidation or administration. Covers fixed and floating charges, preferential debts, the prescribed part, and what unsecured creditors can expect.
When a company enters liquidation or administration, its assets are distributed to creditors in a strict order of priority defined by the Insolvency Act 1986. Understanding this order is essential for directors, creditors, and anyone involved in company insolvency.
In practice, unsecured creditors often receive only a small percentage of what they are owed, or nothing at all. Secured creditors with fixed charges usually recover the most.
Fixed charge holders
Fixed charge holders have security over specific assets (such as property, plant, or equipment). They are paid first from the proceeds of selling those specific assets.
If the secured asset sells for more than the debt, the surplus goes into the pool for other creditors. If it sells for less, the shortfall becomes an unsecured debt.
Expenses of the winding up
Before any creditors are paid, the costs of the liquidation or administration must be met. This includes:
- Liquidator's or administrator's fees
- Legal costs
- Costs of preserving and selling assets
- Employee wages during administration
These costs come out of the remaining assets before distribution to creditors. In small insolvencies, expenses can consume most of the estate.
Secondary preferential debts (HMRC)
From 1 December 2020, HMRC regained preferential status for certain taxes that the company collected on behalf of HMRC but did not pay over:
- VAT
- PAYE income tax deducted from employees
- Employee National Insurance contributions
- Construction Industry Scheme (CIS) deductions
These amounts were held in trust by the company and are now paid before floating charge holders and unsecured creditors. This change has significantly reduced recoveries for other unsecured creditors.
Floating charge holders
Floating charge holders have security over a class of assets (such as stock, debtors, or general business assets) rather than specific items. They are paid after:
- Fixed charge holders (from their specific assets)
- Expenses of winding up
- Preferential debts (ordinary and secondary)
- The prescribed part has been set aside for unsecured creditors
Floating charges created after 15 September 2003 are subject to the prescribed part. Older charges are not.
Unsecured creditors
Unsecured creditors have no security over company assets. They share in:
- The prescribed part (ring-fenced from floating charge realisations)
- Any remaining assets after all higher-ranking claims are paid
Unsecured creditors rank equally and share the available funds proportionally (pari passu). If £100,000 is available for unsecured creditors owed £1 million, each receives 10p in the pound.
Typical unsecured creditors
- Trade suppliers
- Landlords (for rent arrears beyond preferential period)
- HMRC (for non-secondary preferential taxes)
- Customers with refund claims
- Personal injury claimants
Shareholders
Shareholders are paid last, only if all debts and expenses are paid in full. In an insolvent liquidation, shareholders almost never receive anything.
In a Members' Voluntary Liquidation (solvent winding up), surplus assets are distributed to shareholders after all debts are paid.
Practical implications for creditors
Secured creditors
If you have properly registered security, you are likely to recover most or all of your debt. Ensure your charge is registered at Companies House within 21 days of creation.
Preferential creditors
Employees are protected for up to 4 months' wages (to a prescribed limit) and accrued holiday pay. HMRC now has secondary preferential status for VAT and PAYE.
Unsecured creditors
Be realistic about recovery. Monitor the liquidator's progress reports. Attend creditors' meetings or participate in decision procedures. You have the right to challenge the liquidator's fees if you hold more than 5% of unsecured claims.