When cash is tight, the loudest voices tend to get paid first. That’s understandable, but it’s risky. In UK insolvency, unsecured creditors (your trade suppliers, many customers with deposits, and landlords for arrears) have specific rights. Treating them fairly and documenting your reasoning can reduce the risk of preference, misfeasance or wrongful trading claims later.
This practical guide explains who counts as unsecured, how they’re paid, what rights they have during a CVL or administration, and what you – as a director – should do to stay on the right side of the rules.
If you missed them, read these foundations first: What Is Formal Insolvency?, CVL – A Director’s Guide, Administration Explained, and Contemporaneous Notes: Your Best Defence.
Who is an unsecured creditor?
Typically:
- Trade suppliers without effective security or retention of title (ROT).
- Landlords for arrears of rent (future rent is treated differently).
- Customers who paid deposits for undelivered goods/services (unless protected by trust/escrow).
- HMRC for some taxes.
- Anyone else owed money without security (no fixed or floating charge).
Note: For certain taxes (e.g. VAT, PAYE, NIC), HMRC is secondary preferential in insolvency. That changes the order of payment. For an overview of creditor priority and liquidation process, see the Insolvency Service guides on liquidation and administration.
Where do unsecured creditors sit in the payment ‘waterfall’?
In a typical liquidation the order is, broadly:
- Fixed‑charge holders from their specific security.
- Costs and expenses of the insolvency.
- Preferential creditors (employees for certain claims; HMRC for specific taxes as above).
- Floating‑charge holders, with a prescribed part carved out for unsecured creditors.
- Unsecured creditors share any remaining funds pari passu (pro‑rata).
- Shareholders (rarely anything left).
For a plain‑English explanation and creditor guidance, see the Insolvency Service’s publications for creditors. As you can see from the image supoporting this blog, unsecured creditors are at the bottom of the heap.
What rights do unsecured creditors have?
- Information: They’re entitled to certain documents (e.g., the Statement of Affairs, progress reports, receipts & payments).
- Voting/decisions: In a CVL, creditors can nominate/confirm the liquidator and approve fees via the decision procedures (usually remote; physical meetings are exceptional).
- Claims & dividends: They can submit a proof of debt and receive dividends if funds permit. See Insolvency Service guidance on making a claim as a creditor within liquidation/administration pages.
- Challenge & complaint: Creditors may challenge remuneration or conduct and may complain to the relevant regulator via the Insolvency Service: Complain about an insolvency practitioner.
Companies House hosts statutory filings and notices: Companies House. London Gazette notices will also show key insolvency milestones.
Director pitfalls that harm unsecured creditors (and how to avoid them)
- Paying the ‘squeakiest wheel’
Preferential treatment (e.g., paying a friendly supplier or a personally guaranteed lender) can be challenged as a preference. Take advice before making selective payments. - Trading on without a plan
Continuing losses can worsen the position for unsecured creditors and trigger wrongful trading risk. Keep a 13‑week cashflow and board notes (see our Pre‑Insolvency Health Check). - Ignoring ROT
Some suppliers may validly reclaim goods. Mishandling ROT can create disputes and reduce overall realisations. See our guide: Reservation of Title – Practical Tips. - Poor records
Incomplete ledgers, missing contracts and vague emails make distributions slower and more expensive – reducing what unsecured creditors ultimately receive. Keep tight records and save them in one place. - Radio silence
Creditor confidence improves when directors (or the IP) communicate early with honest, factual updates. Silence invites escalation.
Practical steps for directors
- Map your creditor classes. List secured (fixed/floating), preferential, and unsecured. Note any personal guarantees separately.
- Freeze preferential behaviour. Avoid paying connected parties or PG‑backed creditors without advice.
- Keep a running cashflow. Update the 13‑week forecast weekly; document assumptions.
- Standardise supplier comms. A short, factual note explaining the plan (finance, CVA, administration or CVL) reduces rumours and threats.
- Collect paperwork. Contracts, order books, delivery notes, title terms—file them together for the IP.
- Invite early dialogue. Ask key unsecured creditors about continued supply on sensible terms (yes, even in distress).
- Record decisions properly. Use the one‑page minute structure from our Contemporaneous Notes.
Takeaway checklist
✅ Prepare a creditor matrix (secured / preferential / unsecured)
✅ Maintain a 13‑week cashflow and update it weekly
✅ Stop selective payments – seek advice before paying any one creditor ahead of others
✅ Communicate facts to suppliers and customers; avoid promises you can’t keep
✅ Collate proof‑friendly records (invoices, statements, contracts, ROT terms)
✅ Keep board minutes evidencing creditor‑focused decision‑making
✅ If enforcement is threatened, consider administration for a moratorium or a CVL for an orderly wind‑down – see Administration and CVL Guide
✅ If in doubt, speak to a licensed IP early – it expands your options and reduces risk
Useful links
- Insolvency Service – Guidance for creditors
- Gov.uk – Liquidate your company and Company administration
- Companies House – Company filings & insolvency information
Paul Brindley FCA
Licensed Insolvency Practitioner
Midlands Business Recovery
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#Insolvency #UnsecuredCreditors #DirectorAdvice #CVL #Administration #UKBusiness #Governance #MidlandsBusinessRecovery