When a business becomes insolvent and enters liquidation, payments must be made in a strict order of priority. The insolvency practitioner will identify and sell the company’s assets and then distribute the proceeds according to the hierarchy set out in the Insolvency Act 1986.
Understanding how this order works will help you see which debts are most likely to be repaid and what each creditor can expect.
Summary
This blog covers:
- Why Does the Order of Priority Matter?
- The UK Insolvency Order of Priority
- Examples of How the Order Works in Practice
- Order of Priority in Different Insolvency Procedures
- Dealing with a Debtor’s Insolvency as a Business
- Contact Our Insolvency and Debt Recovery Solicitors
- FAQ
Why Does the Order of Priority Matter?
Insolvent companies rarely have enough money to repay all creditors in full. While the insolvency practitioner must achieve the best return possible, many creditors, particularly those lower in the order, may only receive part of what they are owed or, in some cases, nothing at all.
The statutory hierarchy ensures fairness and certainty. Each category must be paid in full before funds can move to the next group down the list.
The UK Insolvency Order of Priority
The insolvency practitioner will follow the order below when distributing the company’s available funds:
- Secured creditors with a fixed charge
- Insolvency costs, including the insolvency practitioner’s fees
- Preferential creditors (mainly employees)
- Secondary preferential creditors (HMRC)
- Secured creditors with a floating charge
- Unsecured creditors
- Interest on unsecured debts
- Shareholders
Below is a breakdown of each category and what it includes.
1. Secured Creditors with a Fixed Charge
Fixed charge creditors have security over specific company assets, such as property, machinery or vehicles. When the insolvency practitioner sells these assets, they deduct reasonable costs, with the remaining proceeds passing to the fixed charge holder.
Where multiple fixed charges exist, they are paid in order of creation, the oldest charge is paid first. Banks often fall into this category.
2. Insolvency Costs, Including Practitioner Fees
The next priority is the costs of administering the insolvency. The insolvency practitioner’s fees, legal costs and other administrative expenses are deducted before any remaining money can be passed on to other creditors. Without this guarantee, the process could not function.
3. Preferential Creditors (Employees)
Preferential creditors are given special protection under UK insolvency law.
Employees
Employees can claim the following as preferential debts:
- Wages owed for the four months before insolvency (up to £800)
- Up to six weeks of holiday pay
- Pension contributions due to state or occupational pension schemes
This helps ensure staff receive some of what they are owed, even where funds are limited.
4. Secondary Preferential Creditors (HMRC)
Since the Finance Act 2020, HMRC now has “secondary preferential” status for certain debts, meaning they are paid ahead of floating charge holders and unsecured creditors for:
- VAT
- PAYE and income tax
- Employee National Insurance contributions
- Student loan repayments
- Construction Industry Scheme (CIS) deductions
HMRC’s elevated position can significantly reduce what is left for banks with floating charges and unsecured creditors.
5. Secured Creditors with a Floating Charge
Floating charges typically cover assets that change over time, such as stock, materials, work-in-progress and fixtures.
However, before floating charge holders are paid, the insolvency practitioner must set aside the prescribed part.
The Prescribed Part
Created to give unsecured creditors a better chance of recovering something, the prescribed part applies to floating charges created on or after 15 September 2003.
It allocates:
- 50% of the first £10,000, and
- 20% of the remainder,
- up to a maximum of £800,000
This amount is ring-fenced for unsecured creditors and cannot be claimed by floating charge holders.
6. Unsecured Creditors
Unsecured creditors are those without any form of security. They include:
- Suppliers and trade creditors
- Landlords
- Customers owed refunds
- Unsecured bank loans
- Directors who have lent money to the business
They may receive a distribution from the prescribed part or from any surplus once higher-ranking creditors are paid, although in many cases the return is small.
7. Interest on Unsecured Debts
If all unsecured debts are paid in full and funds remain, statutory interest becomes payable.
This is set at the Bank of England base rate plus 8%.
8. Shareholders
Shareholders are last in line. As investors, they accept the risk that their investment may be lost. They will only receive a return if every other creditor category receives full payment, including statutory interest.
Examples of How the Order Works in Practice
To illustrate how distributions work, consider the following example:
Example: Assets of £1 million Available
After selling assets and deducting costs, the company has £1 million to distribute.
- Fixed charge creditor: Paid £300,000 in full
Remaining: £700,000 - Insolvency costs: £100,000
Remaining: £600,000 - Preferential creditors (employees): £50,000
Remaining: £550,000 - Secondary preferential creditor (HMRC): £200,000
Remaining: £350,000 - Floating charge creditor: Before payment, the prescribed part is set aside
- Prescribed part: £800,000 cap does not apply here - approx £70,000 ring-fenced
Floating charge creditors receive the remainder (£280,000)
- Prescribed part: £800,000 cap does not apply here - approx £70,000 ring-fenced
- Unsecured creditors: Share £70,000 (the prescribed part)
- Shareholders: Receive nothing
This is typical of many liquidations: secured and preferential creditors receive the majority, while unsecured creditors often receive only a small portion.
Order of Priority in Different Insolvency Procedures
Creditors’ Voluntary Liquidation (CVL)
The priority rules described above apply exactly.
Compulsory Liquidation
The same hierarchy applies, although the Official Receiver may initially handle the process before passing it to an insolvency practitioner.
Administration
The order is slightly different because the administrator’s primary duty is to rescue the business where possible.
However, when assets are distributed, secured creditors with fixed charges still take priority, and preferential creditors must be paid before floating charge distributions.
Dealing with a Debtor’s Insolvency as a Business
Understanding the priority order is essential when deciding whether to extend credit or offer terms to another business. If you are concerned about a company’s solvency, you may want to consider requiring security or a personal guarantee.
If you believe you are owed money by a company that may be insolvent, there is a formal process to follow, starting with a written demand for payment. In some cases, a creditors’ agreement or negotiation may resolve matters without the need for a winding-up petition.
Speaking to a specialist insolvency and debt recovery solicitor will give you clear advice on your options and the best route to recover what you are owed.
Contact Our Insolvency and Debt Recovery Solicitors
If you need advice on insolvency, creditor priority or recovering debts from an insolvent company, we will be happy to help.
For more information on our services, see our insolvency solicitors page.
To speak to one of our expert insolvency and debt recovery solicitors, call 0330 173 3980, email info@witansolicitors.co.uk, or fill in our contact form, and we will discuss how we can assist.
FAQ
Who gets paid first in insolvency in the UK?
Secured creditors with fixed charges are paid first, followed by insolvency costs and preferential creditors.
Are employees preferential creditors?
Yes, employees can claim certain arrears of wages, holiday pay and pension contributions as preferential debts.
Does HMRC get paid before other creditors?
Yes, HMRC has secondary preferential status for certain tax debts, meaning it ranks above floating charge holders and unsecured creditors.
What happens to unsecured creditors?
They are paid after the prescribed part is set aside from floating charge realisations. Many receive only a small proportion of what they are owed.
Do shareholders receive anything in insolvency?
Only if all creditors, including interest, have been paid in full, which is rare.
