When directors first see a company’s estimated insolvency position, they often make a perfectly understandable assumption:
“The company has £200,000 of assets and owes £300,000, so creditors should receive about 67p in the pound.”
Sadly, it rarely works like that. Why? Becauise…
…Not all assets fall into the same pot… Not all creditors rank equally… And before most creditors receive anything, there may be asset realisation costs, legal costs and the expenses of the insolvency itself.
The order of payment is set by law. Directors cannot simply decide who deserves to be paid first.
There isn’t always one pot of money
Suppose a company owns:
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a property worth £300,000 subject to a bank’s fixed charge;
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plant and machinery worth £100,000;
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stock worth £50,000;
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unpaid customer invoices worth £80,000.
The bank may have first claim over the proceeds of the charged property.
The remaining assets may be subject to a floating charge.
Some goods might not belong to the company at all because they are leased or subject to a valid reservation of title claim.
So before estimating what creditors might receive, the liquidator must establish:
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what the company actually owns;
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what security has been granted;
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whether that security is valid;
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what it costs to collect or sell each asset;
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which creditor category each claim falls into.
The basic order of payment
At a high level, the statutory order is:
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Fixed-charge creditors, from the assets covered by their security
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Costs and expenses of the insolvency
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Ordinary preferential creditors
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Secondary preferential creditors
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The prescribed part for unsecured creditors
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Floating-charge creditors
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Ordinary unsecured creditors
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Interest on debts
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Shareholders
Not every insolvency will include every category. The precise outcome also depends on the company’s assets and security arrangements.
Government guidance summarises this statutory order and confirms that shareholders rank last.
1. Fixed-charge creditors
A fixed charge is usually taken over a specific asset, such as:
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land or buildings;
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certain machinery;
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investments;
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sometimes specific book debts or bank accounts.
The fixed-charge creditor is generally paid from the proceeds of that asset after the direct costs of preserving and selling it.
For example, if a property sells for £300,000, costs £15,000 to realise and the bank is owed £250,000, the bank may receive £250,000 and the remaining £35,000 passes into the wider estate.
If the proceeds are insufficient, the unpaid balance will usually become an unsecured claim, unless other security is available.
2. The costs and expenses of the insolvency
A liquidator cannot realise assets, investigate claims, deal with employees and distribute funds without incurring costs.
Relevant expenses may include:
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agents’ and auctioneers’ costs;
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legal fees;
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storage and insurance;
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statutory advertising;
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the liquidator’s remuneration;
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other properly incurred expenses.
These are generally paid before distributions are made to preferential and unsecured creditors.
This sometimes surprises creditors.
They may see substantial asset realisations but receive little because recovering those assets was expensive or the case required significant legal and investigative work.
3. Ordinary preferential creditors
Certain employee and pension claims receive preferential status.
These can include:
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limited arrears of wages;
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accrued holiday pay;
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certain occupational pension scheme contributions.
The preferential element of an employee’s unpaid wages is generally limited to remuneration arising during the relevant four-month period and is subject to an £800 cap. Other parts of an employee’s claim may rank as ordinary unsecured debt.
Where the Redundancy Payments Service pays employees, it may take over their rights against the company to the extent of those payments.
4. HMRC as a secondary preferential creditor
Since 1 December 2020, HMRC has ranked as a secondary preferential creditor for certain taxes collected by a business from employees and customers.
These include:
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VAT;
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PAYE Income Tax;
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employee National Insurance contributions;
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student loan deductions;
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Construction Industry Scheme deductions.
HMRC ranks after ordinary preferential creditors but before floating-charge and ordinary unsecured creditors. There is no general time limit restricting how far back these specified preferential tax debts can extend.
Not all HMRC debt is preferential. Corporation Tax and employer National Insurance contributions generally remain ordinary unsecured claims.
That distinction can materially affect estimated returns.
5. The prescribed part
Where a company has granted a qualifying floating charge, part of the floating-charge assets may have to be ring-fenced for ordinary unsecured creditors.
This is called the prescribed part.
It is broadly calculated as:
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50% of the first £10,000 of net floating-charge property;
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20% of the balance;
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subject to the applicable statutory cap.
The current maximum is generally £800,000, although transitional provisions can apply to older charges.
For example, net floating-charge property of £100,000 would produce a prescribed part of:
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£5,000 from the first £10,000;
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£18,000 from the remaining £90,000;
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total prescribed part: £23,000.
That £23,000 would normally be set aside for unsecured creditors rather than paid to the floating-charge holder.
6. Floating-charge creditors
A floating charge commonly covers changing business assets such as:
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stock;
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machinery;
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vehicles;
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book debts;
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general business assets.
The floating-charge holder is paid after expenses, preferential creditors and the prescribed part have been dealt with.
This means a lender described as “secured” may still suffer a substantial shortfall.
7. Ordinary unsecured creditors
This category commonly includes:
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trade suppliers;
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landlords;
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customers who paid deposits;
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professional advisers;
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utility companies;
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Corporation Tax;
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employer National Insurance;
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money genuinely lent to the company by directors;
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the unsecured part of employee claims.
Unsecured creditors usually rank equally.
If £100,000 is available and valid unsecured claims total £500,000, creditors may receive approximately 20p for every £1 owed.
A supplier owed £10,000 would therefore receive about £2,000.
It does not matter who supplied the company for longest, complained most loudly or obtained judgment first. Subject to specific legal rights, unsecured creditors share proportionately.
Can directors pay selected creditors before liquidation?
This needs care.
Paying a supplier because it is genuinely necessary to complete profitable work may be defensible.
Paying a connected company, repaying a director’s loan or clearing a debt personally guaranteed by a director will attract much closer scrutiny.
A payment can amount to a preference if it puts a creditor, guarantor or surety into a better position than they would otherwise occupy in the insolvency and the statutory conditions are met.
Directors should not improvise a payment strategy once insolvency is likely.
Record the commercial reason for significant payments and take advice.
8. Interest and shareholders
Interest arising after liquidation is only paid once proved creditor claims have been paid in full.
Shareholders come last.
They receive a return only after:
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secured creditors;
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insolvency expenses;
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preferential creditors;
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floating-charge creditors;
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unsecured creditors;
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applicable interest
have all been paid.
In an insolvent liquidation, that outcome is rare.
Takeaway checklist
When assessing creditor returns, establish:
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What assets does the company actually own?
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Which assets are subject to fixed charges?
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Is there a floating charge?
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When was the charge created?
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What will the assets cost to realise?
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What employee claims are preferential?
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How much of HMRC’s claim is preferential?
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Will a prescribed part be available?
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Which creditors are ordinary unsecured creditors?
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Have any creditors recently received unusual payments?
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Are directors avoiding promises about likely dividends before the position is properly calculated?
Final thought
The insolvency payment waterfall can feel harsh.
Two creditors may both be owed £50,000, yet one may be paid in full while the other receives almost nothing.
That is not the liquidator choosing favourites.
It is the statutory order of priority.
For directors, the important lesson is simple…
Do not look only at the company’s total asset value.
Look at who owns the assets, who holds security over them, what the insolvency will cost and where each creditor sits in the queue.
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