Who Gets Paid First in an Insolvency?
Fixed charge holders, then the costs of the insolvency, then employees, then HMRC for taxes the company collected on its behalf, then the ring-fenced prescribed part, then floating charge holders, then ordinary unsecured creditors, then shareholders. Each rank is paid in full before a penny reaches the next one — which is why unsecured suppliers so often receive nothing.
The waterfall, rank by rank
Insolvency distributions work like a waterfall. Money fills the top tier completely before any of it spills into the next. There is no discretion and no negotiating your way up the list.
Fixed charge holders
Paid out of the specific asset they hold security over — typically a bank with a legal charge over a property — less the costs of realising that asset. If the asset sells for less than the debt, the shortfall drops down and ranks as an unsecured claim.
Expenses of the insolvency
The office holder's fees and the costs of running the case — legal advice, agents, storage, insurance, realising assets. This is the tier creditors most often object to, but the practical reality is that without someone to collect the assets there is nothing to distribute at all.
Ordinary preferential creditors — employees
Unpaid wages for a limited period before the insolvency, subject to a statutory cap per employee, plus accrued holiday pay and certain unpaid occupational pension contributions. In practice much of this is paid up front by the Redundancy Payments Service, which then steps into the employee's place in this rank.
Secondary preferential creditors — HMRC
Since 1 December 2020, HMRC ranks preferentially for taxes the company collected from others on its behalf: VAT, PAYE income tax, employee National Insurance, Construction Industry Scheme deductions and student loan deductions. Taxes the company owed in its own right — corporation tax, employer National Insurance — are not preferential. This change pushed a large amount of debt above the floating charge holder and the unsecured creditors, and materially reduced what is left for suppliers.
The prescribed part
A slice carved out of floating charge realisations and ring-fenced for ordinary unsecured creditors: 50% of the first £10,000 of net floating charge property plus 20% of the remainder, capped at £800,000 where the floating charge was created on or after 6 April 2020, and £600,000 for older charges. For many unsecured creditors this fund is the only money they will ever see.
Floating charge holders
Usually the bank or an invoice financier, holding security over stock, book debts and the general run of assets. They take what remains of the floating charge realisations after the expenses, both preferential ranks and the prescribed part have come out.
Ordinary unsecured creditors — this is you
Trade suppliers, subcontractors, landlords, customers with deposits, HMRC for non-preferential taxes, and any secured lender's shortfall. Everyone in this class is paid at the same pence-in-the-pound rate. Frequently that rate is zero.
Interest, then shareholders
Interest accruing after the date of the insolvency is paid only once every unsecured claim has been met in full. Anything still left goes to shareholders. Outside a solvent liquidation, this almost never happens.
What sits outside the waterfall entirely
Some assets never enter the pot in the first place. If you can get into one of these categories, you are in a far better position than any rank in the list above:
Retention of title goods
If ownership never passed to the company because your terms said so, the goods are not the company's to distribute. They are yours to recover, provided they are identifiable and unsold.
Assets held on trust
Client money properly segregated in a designated account, or deposits held on trust under a valid arrangement, do not form part of the insolvent estate.
Leased and hired equipment
Assets on hire purchase, lease or rental still belong to the owner, who recovers them directly rather than claiming in the insolvency.
Personal guarantees
A guarantee given by a director is a claim against that individual personally. It is entirely unaffected by the company's liquidation and sits outside the waterfall.
Set-off also operates before the waterfall: mutual debts between you and the insolvent company are netted automatically, so you only claim the balance.
What this means in practice
If you are an unsecured supplier: assume nothing. Between the insolvency expenses, the employees, HMRC's secondary preferential claim and the bank's floating charge, the money is usually gone long before your rank is reached. Submit your proof of debt because it costs you an hour, then focus your energy on the recoveries that sit outside the waterfall — retention of title, VAT bad debt relief, tax relief on the write-off, credit insurance and any personal guarantee you hold.
If you are an employee: you rank higher than the suppliers, and more importantly most of what you are owed comes from the Redundancy Payments Service rather than from the company at all. Here is how to claim.
If you are a director: this list is the reason early action matters so much. Once a company reaches formal insolvency the waterfall dictates the outcome and nobody has any discretion left. Every option that produces a better result for creditors — a CVA, a restructuring, a solvent sale, refinancing — has to be put in place before that point. Note too that HMRC's secondary preferential status means unpaid VAT and PAYE now sit ahead of the bank's floating charge, which is precisely why lenders react so sharply to tax arrears.
One more thing directors should know: if you lent the company money, you rank with the ordinary suppliers, not above them. And if the company repaid your loan in the months before it failed, that payment can be challenged as a preference with a two-year look-back for connected parties. Take advice before moving money.
Frequently asked questions
Who gets paid first when a company goes into liquidation?
Fixed charge holders, out of the asset they hold security over. Then the expenses of the insolvency, ordinary preferential creditors (employees), secondary preferential creditors (HMRC for collected taxes), the prescribed part, floating charge holders, ordinary unsecured creditors, and finally shareholders. Each rank must be paid in full before the next receives anything.
Who are preferential creditors?
Ordinary preferential creditors are principally employees — capped unpaid wages, accrued holiday pay and certain pension contributions. Secondary preferential creditors are HMRC, but only for taxes collected from others on its behalf: VAT, PAYE, employee NICs, CIS and student loan deductions. Corporation tax and employer NICs are not preferential.
What is the prescribed part?
A fund ring-fenced out of floating charge realisations for unsecured creditors: 50% of the first £10,000 of net floating charge property plus 20% of the remainder, capped at £800,000 for floating charges created on or after 6 April 2020 (£600,000 for older charges). It applies only where there is a floating charge and only where something remains after expenses and preferential creditors.
What is the difference between a fixed and floating charge?
A fixed charge attaches to a specific identified asset the company cannot freely dispose of. A floating charge hovers over a shifting class of assets such as stock and book debts until it crystallises on insolvency. The fixed charge holder is paid first out of its asset; the floating charge holder ranks behind the expenses, the preferential creditors and the prescribed part.
Where do directors rank if they lent the company money?
As ordinary unsecured creditors, alongside the trade suppliers, and subject to more scrutiny rather than less. Security taken shortly before insolvency can be challenged, and a floating charge created within twelve months (two years for a connected party) may be void except for new money advanced at the time. Repayments to directors before insolvency are also open to challenge as preferences.
Do unsecured creditors ever get paid in full?
Rarely in an insolvent liquidation — many return nothing at all, and a dividend is commonly a few pence in the pound. The exception is a solvent Members' Voluntary Liquidation, where by definition all creditors are paid in full with statutory interest before anything returns to shareholders.
Better to act before the waterfall applies
Whether you have just written off a customer's debt or you are the director watching your own cash run down, the options that produce a decent outcome all exist before formal insolvency, not after it. K2 has worked with UK directors since 1990 and will tell you straight where you stand.
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