Who Gets Paid First in Liquidation? A Complete Guide to Creditor Priority in the UK

When a company enters liquidation, every creditor wants to know the same thing: where do I sit in the queue?

The answer is set by statute, not by who shouts loudest, and the creditor priority order determines who gets paid in full, who gets pence in the pound, and who gets nothing at all.

We explain this to directors and creditors every week, and the reaction is almost always the same: surprise at how little unsecured creditors actually receive, occasional anger directed at us as though we wrote the rules, and confusion about where HMRC fits since it regained preferential status in 2020.

The distribution waterfall is not intuitive, and getting it wrong leads to bad decisions on both sides. Directors make preferential payments they should not make. Creditors wait for money that will never come.

This page sets out the exact creditor priority order in UK liquidation, explains what each class of creditor can realistically expect, and clarifies where the common misunderstandings sit.

Quick Answer: Creditor Priority Order in UK Liquidation

The statutory creditor priority order in UK liquidation is: (1) fixed charge holders, (2) costs of the liquidation, (3) preferential creditors (employees for wages and holiday, HMRC for certain taxes), (4) the prescribed part for unsecured creditors from floating charge realisations, (5) floating charge holders, (6) unsecured creditors, (7) shareholders.

In practice, most insolvent liquidations produce enough to pay the liquidator’s costs and some preferential claims. Unsecured creditors typically receive between 0p and 5p in the pound. Shareholders receive nothing.

We are direct about this because directors often delay liquidation hoping to protect specific creditors. You cannot choose who gets paid once the liquidator is appointed. The statutory waterfall applies regardless of your preferences, and payments you made before liquidation that disrupted this order can be clawed back as preferences under section 239 of the Insolvency Act 1986.

The Full Creditor Priority Waterfall in UK Liquidation

1. Fixed charge holders, paid from the specific secured asset first.
2. Costs of the liquidation, including the liquidator’s fees and expenses, before any creditor.
3. Preferential creditors: employees (primary) then HMRC collected taxes (secondary).
4. The prescribed part: ring-fenced share of floating charge realisations for unsecured creditors.
5. Floating charge holders, paid after preferential creditors and the prescribed part.
6. Unsecured creditors: trade suppliers, Corporation Tax, employer NICs, shortfalls.
7. Shareholders, only if every creditor above is paid in full. Never in an insolvent liquidation.

Fixed Charge Holders: Paid First in the Creditor Priority Order

Fixed charge holders sit at the top. A fixed charge is a security interest over a specific, identified asset: typically property, specific equipment, or intellectual property. The charge holder has a direct claim over that asset, and the liquidator must pay them from the proceeds of that specific asset before anyone else sees a penny from it.

In practice, fixed charge holders are usually banks that lent against commercial property or specific high-value equipment. We find that most fixed charge holders recover the majority of their debt, because the charge was granted against an asset with identifiable value.

But if the asset has fallen in value since the charge was granted, the shortfall becomes an unsecured claim and drops to position 6 in the waterfall.

Costs of the Liquidation: Paid Second in the Priority Order

The liquidator’s fees and the expenses of the liquidation rank ahead of all creditor claims except fixed charges. This includes the liquidator’s remuneration, legal costs, valuation fees, and any other expenses properly incurred in conducting the liquidation.

We mention this because directors sometimes assume the liquidator is paid from a separate pot. They are not. The liquidator is paid from whatever assets the company has, before any creditor receives a distribution.

This is why low-asset liquidations often produce no dividend at all for unsecured creditors. If the company has £15,000 in assets and the liquidator’s costs are £12,000, there is £3,000 left for all preferential and unsecured creditors combined.

Preferential Creditors: Paid Third in the Liquidation Priority Order

Preferential creditors rank after the liquidation costs but ahead of floating charge holders and unsecured creditors. There are two sub-categories.

Employee claims (primary preferential):

• Up to 4 months’ unpaid wages, capped at £800 per employee. Our guide on employee rights in liquidation covers these entitlements in full.
• Accrued but untaken holiday pay (no cap).

HMRC secondary preferential claims (since 1 December 2020):

• PAYE income tax deducted from employees’ wages.
• Employee National Insurance contributions.
• VAT.
• Construction Industry Scheme deductions.
• Student loan repayments collected through payroll.

We find that most directors do not understand the distinction. These HMRC claims are for taxes you collected on behalf of HMRC from employees and customers. They are not the company’s own tax liabilities. Corporation Tax and employer NICs remain unsecured.

The Finance Act 2020 restored HMRC’s preferential status for these collected taxes, and it has significantly reduced the recoveries available to floating charge holders and unsecured creditors in many liquidations. Our guide to HMRC’s preferential creditor status explains how this ranking works in practice.

The Prescribed Part: Position Four in the Creditor Priority Order

Section 176A of the Insolvency Act 1986 requires the liquidator to set aside a portion of floating charge realisations for unsecured creditors. This is called the prescribed part. The calculation is: 50% of the first £10,000 of floating charge realisations, plus 20% of anything above £10,000, capped at £800,000.

The prescribed part exists because floating charges typically cover all of the company’s assets that are not subject to a fixed charge (stock, debtors, cash, equipment). Without the prescribed part, the floating charge holder would take everything after preferential creditors, leaving nothing for unsecured creditors.

We explain this to creditors who ask why unsecured claims sometimes receive a small dividend even when there is a floating charge over all assets.

Floating Charge Holders: Paid Fifth in the Liquidation Priority Order

Floating charge holders are paid after preferential creditors and the prescribed part. A floating charge covers a class of assets (typically “all assets” or “all assets not subject to a fixed charge”) rather than specific identified assets.

The charge “floats” over the assets while the company trades, crystallising into a fixed charge when a trigger event occurs (usually insolvency or a breach of the lending terms).

In practice, floating charge holders are usually the same banks that hold fixed charges, but their floating charge recovery comes after everyone ranked above them. We see floating charge holders recover significantly less than they expected, particularly since HMRC’s secondary preferential status was restored.

Unsecured Creditors: Paid Sixth in the Liquidation Priority Order

Unsecured creditors are paid last (before shareholders). This category includes trade suppliers, HMRC for Corporation Tax and employer NICs, unsecured loans, and the shortfall on any secured debt where the asset did not cover the full amount owed.

We are honest about the reality: in most insolvent liquidations, unsecured creditors receive between 0p and 5p in the pound, and many receive nothing at all. The assets are consumed by fixed charge holders, liquidation costs, and preferential claims before unsecured creditors see any distribution.

If you are an unsecured creditor in a liquidation, adjust your expectations to the realistic range and submit your proof of debt early to ensure you participate in any dividend that is declared. Our guide on proving a debt in liquidation walks through what to include and the deadlines that apply.

Shareholders: Paid Last in the Creditor Priority Order

Shareholders are at the bottom. They receive a distribution only after every creditor above them has been paid in full, including interest. In an insolvent liquidation, shareholders receive nothing.

In a solvent MVL, shareholders receive the surplus after all debts are paid, which is the entire point of the process.

What the Creditor Priority Order Means for Directors

Understanding the priority order matters for your personal position because of section 239 of the Insolvency Act (preferences). If you paid a creditor ahead of their statutory rank in the six months before liquidation (or two years for connected parties), the liquidator can claw that payment back.

We see directors who paid their landlord (unsecured) ahead of HMRC (preferential) because the landlord was threatening eviction. We see directors who repaid their own director’s loan (connected party, unsecured) ahead of trade creditors. We see directors who paid staff bonuses ahead of HMRC. Every one of these creates a potential preference claim.

The rule is simple: once the company is insolvent, do not choose who gets paid. Let the liquidator handle it. The statutory waterfall exists to prevent exactly the kind of selective payment that directors under pressure are most tempted to make.

Selective payments made when the company is insolvent can be clawed back under section 239 of the Insolvency Act 1986. The look-back window is six months for ordinary creditors and two years for connected parties (directors, family members).

Payments that disturb the statutory priority order are presumed to be preferences for connected parties, with the burden on you to disprove intent. Personal liability follows.

What to Do Next on Creditor Priority in Liquidation

If you are a director approaching liquidation, stop making selective payments and speak to a licensed insolvency practitioner who can advise on which payments are defensible and which are not. Most insolvent companies close through a Creditors’ Voluntary Liquidation, which hands the priority decisions to the liquidator and removes them from your hands.

If you are a creditor, submit your proof of debt as early as possible and understand your realistic position in the waterfall before making decisions about further enforcement action.

Company Debt connects directors and creditors with licensed insolvency practitioners who can explain exactly where you stand in the priority order and what your options are. Free liquidation advice will give you clarity before the distribution decisions are made.

FAQs on Creditor Priority in UK Liquidation