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

Understanding who gets paid first during a company liquidation is crucial for UK directors and business owners. When a company faces insolvency, the order in which creditors are paid can significantly impact the financial outcomes for everyone involved.

This guide will help you navigate the complex hierarchy of creditor priority, ensuring you understand how payments are ranked by law. By grasping these rules, you can manage your responsibilities effectively, protect your interests, and minimise potential liabilities during the liquidation process.

Understanding the Basics of UK Liquidation Priority

At the top are the liquidation expenses: essentially, the costs of running the process itself. These have to be paid before anyone else sees a penny.

Next come preferential debts. These include things like employee wages and certain HMRC claims, which the law prioritises to protect staff and public funds. After that, secured creditors with fixed charges are paid, since their loans are tied to specific assets. Floating charge holders follow, but their claims come after preferential debts and after a portion has been set aside for unsecured creditors.

If you’re a director or business owner, understanding this hierarchy is essential. It helps you stay compliant, reduce the risk of personal liability, and handle insolvency situations responsibly.

The Liquidation Waterfall

In the UK, the liquidation waterfall sets out the strict order in which creditors are paid when a company is wound up.

At the very top are the costs of the liquidation itself, including the liquidator’s fees and expenses involved in converting company assets into cash. These must be paid first so the process can actually proceed.

Once those are covered, ordinary preferential debts are next. These usually include employee wages, holiday pay, and pension contributions, reflecting the law’s focus on protecting workers. Following that are secondary preferential debts, which primarily relate to specific HMRC claims, such as VAT and PAYE.

When these debts have been settled, a portion of what’s left is set aside for unsecured creditors through the “Prescribed Part.” This ensures that creditors without any security still receive at least something. After the Prescribed Part is taken out, remaining funds go to floating charge holders — lenders whose security is over classes of assets rather than specific items, although their entitlement is reduced by the statutory deductions already made.

If anything is left after all of that, it is shared among unsecured creditors on a pari passu (equal ranking) basis, followed by any statutory interest that may be due. Only once all creditors have been satisfied do any leftover funds go to shareholders.

For directors, understanding this hierarchy is essential. It helps ensure the company handles insolvency lawfully, treats creditors fairly, and reduces the risk of personal liability during what is often a difficult period.

Liquidation Expenses: The First Priority

When a company goes into liquidation, the very first payments that must be made are the costs of running the liquidation itself. This includes the liquidator’s fees and any expenses involved in safeguarding, selling, and managing the company’s assets.

These costs are placed at the top of the priority list for a simple reason: without guaranteeing that liquidators will be paid, the process couldn’t function. Insolvency practitioners wouldn’t be able to take appointments if there was a risk they wouldn’t recover their costs, and the whole system would break down.

By settling these expenses first, the liquidation process stays workable and fair. It ensures the liquidator can do their job properly and that whatever money remains can be shared among creditors in a structured, lawful way. This step is essential to maintaining the integrity of the insolvency framework and achieving its core aim — an orderly and equitable distribution of a company’s remaining assets.

Preferential Debts: Employees and HMRC

In the UK liquidation process, preferential debts are split into two types: ordinary preferential debts and secondary preferential debts.

Ordinary preferential debts mainly relate to employees. They cover things like unpaid wages, holiday pay, and pension contributions. These debts are given priority because the law aims to protect workers and make sure they receive what they’re owed when a company fails. Importantly, these claims are subject to statutory caps, which help keep the system balanced and fair.

Secondary preferential debts, by contrast, relate to certain taxes owed to HMRC. Since December 2020, HMRC has been granted secondary preferential status for specific taxes, including VAT, PAYE Income Tax, and employee National Insurance contributions. Unlike ordinary preferential debts, these claims are not capped. The priority here is based on the type of tax owed, not the size of the debt.

Fixed Charges vs. Floating Charges

Understanding the difference between fixed and floating charges is crucial for UK business owners facing liquidation.

A fixed charge is tied to specific assets—such as buildings, vehicles, or equipment. Because the lender has security over these exact items, the company can’t sell or replace them without permission. In liquidation, fixed charge holders are paid first from the sale of those assets, which gives them a strong level of protection.

A floating charge, on the other hand, covers groups of assets that change regularly, like stock, raw materials, or work-in-progress. Businesses are free to use and trade these assets day-to-day. When the company enters liquidation, the floating charge “crystallises,” meaning it locks onto whatever assets are left in that category at the time. But floating charge holders don’t get paid straightaway—they sit behind several statutory deductions. Before they receive anything, the liquidator must first cover the costs of the liquidation, pay preferential debts (such as employee wages and certain HMRC claims), and allocate the Prescribed Part to unsecured creditors.

The main distinction comes down to priority and security: fixed charges provide certainty and higher repayment priority, while floating charges offer flexibility but come with more carve-outs in liquidation. Knowing how both work helps you manage creditor relationships and stay compliant during the insolvency process.

The Prescribed Part for Unsecured Creditors

The Prescribed Part is an important feature of UK insolvency law, designed to ensure that unsecured creditors receive at least some payment during a liquidation. It works by ring-fencing a portion of the money realised from assets subject to a floating charge and setting it aside specifically for unsecured creditors.

This mechanism exists because, in most insolvencies, secured creditors—especially those with fixed or floating charges—tend to be paid first. Without the Prescribed Part, unsecured creditors could easily end up with nothing. By carving out a dedicated share of the proceeds, the law helps level the playing field and prevents unsecured creditors from being completely pushed aside.

The amount allocated to the Prescribed Part is calculated from the net property remaining after liquidation costs and preferential debts have been paid. While the calculation involves defined percentages and a statutory cap, the core purpose is simple: to guarantee unsecured creditors at least a minimum return.

Ultimately, the Prescribed Part promotes fairness and protects smaller or non-secured creditors. It reflects a deliberate policy choice to make the distribution of a company’s remaining assets more equitable, even when secured debts dominate the balance sheet.

Distribution to Unsecured Creditors, Interest, and Shareholders

Once all higher-priority claims have been settled in a liquidation, any remaining funds are distributed among the unsecured creditors. These creditors are paid on a pari passu basis, meaning everyone receives an equal, proportional share based on the size of their claim. This group typically includes trade creditors, suppliers, and any portion of secured debts that was not fully covered by the value of the secured assets.

After unsecured creditors have been paid their principal amounts, the next step, if funds allow, is the payment of statutory interest. This interest runs from the date the liquidation begins until the date of payment, and it’s only payable if there’s money left over after all unsecured claims have been settled. The interest rate used is usually the higher of the rate set under Section 17 of the Judgments Act 1838 or the contractual rate linked to the specific debt.

If, after all creditor claims and statutory interest have been satisfied, there is still a surplus, it is returned to the shareholders. These distributions are made in accordance with the rights outlined in the company’s articles of association. In practice, though, this final stage is uncommon—most liquidations do not leave enough funds once all creditors have been paid.

Property Outside the Estate (Trusts, Retention of Title, Set-off)

Some assets and claims fall outside the main insolvency estate and are treated differently during liquidation.

Assets held in trust are a key example. Because the company never had beneficial ownership of these assets, they don’t form part of the pool available to creditors. They must be returned to the rightful beneficiaries.

The same idea applies to goods covered by a valid Retention of Title (ROT) clause. Until the goods are fully paid for, ownership remains with the supplier. If the company becomes insolvent, the supplier can usually reclaim those items rather than having to stand in line as an unsecured creditor.

Another important mechanism is insolvency set-off. This automatically offsets mutual debts between the company and a creditor, so rather than both parties paying what they owe separately, only the net balance is settled. This prevents situations where a creditor would otherwise have to pay their full debt while receiving only a small dividend on what they’re owed.

Together, these exclusions and adjustments help maintain fairness and provide extra protection for certain stakeholders within the liquidation process.

Jurisdictional Variations Within the UK

Although the core principles of liquidation are broadly consistent across the UK, there are some important procedural differences in Scotland and Northern Ireland.

In Scotland, the rules around floating charges work differently. Unlike in England and Wales, a floating charge in Scotland cannot crystallise simply because the contract says so. Instead, crystallisation only happens when specific statutory events occur. This creates a more rigid and strictly regulated process for converting a floating charge into a fixed one.

Northern Ireland, meanwhile, follows the same overall framework as England and Wales, but with its own administrative procedures and statutory instruments. The underlying principles are similar, but the legislation and filings involved may differ.

These variations underscore the importance of understanding local rules when dealing with insolvency across different parts of the UK. Even small procedural differences can affect how a liquidation is handled in practice.

Practical Steps and Professional Guidance

Seeking advice from a licensed insolvency practitioner is crucial when navigating the complexities of liquidation. These professionals offer expert guidance, ensuring you understand your legal obligations and creditor priorities under the Insolvency Act 1986. Their expertise can prevent costly mistakes and protect you from personal liability.

If you’re facing insolvency, consider these action points:

1/ Engage Early: Consult with an insolvency practitioner as soon as financial difficulties arise to explore all available options.  

2/ Understand Creditor Hierarchy: Familiarise yourself with the statutory priority of creditors to ensure compliance with legal requirements.  

3/ Document Everything: Keep detailed records of financial transactions and communications with creditors to support transparency and accountability.  

4/ Communicate Clearly: Maintain open lines of communication with creditors and employees to manage expectations and reduce uncertainty.  

These steps can help you manage the liquidation process effectively, safeguarding your business interests and personal reputation.

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