Company insolvency

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.

UK-wide
Guide summary

If your company goes into liquidation or administration, creditors are paid in a set order. Secured creditors get paid first, employees’ unpaid wages come next, then HMRC for certain taxes. Unsecured creditors often receive little or nothing.

  • Fixed charge creditors are paid first from specific asset sales
  • Pay liquidation costs before paying any creditors
  • Unpaid employee wages (up to 4 months, max £800 each) come next
  • HMRC gets priority for VAT, PAYE and NI from December 2020
  • Set aside part of floating charge money for unsecured creditors
  • Floating charge holders get paid after preferential debts
  • Unsecured creditors share remaining assets proportionally
  • Shareholders only get paid if all debts are cleared
  • Check your creditor status to estimate likely recovery
  • Monitor liquidator's reports if you're an unsecured creditor
On this page
UK-wide

Related guides in Compliance & Legal

Company rescue and insolvency options

Comprehensive guide to insolvency procedures for UK limited companies facing financial distress. Covers rescue options (CVA, administration), solvent …

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.