When a company enters liquidation, the order that creditors are paid in is set by law, not by negotiation. The liquidation regulations (including the Insolvency Act and Insolvency Rules) set a strict order that every liquidator must follow. This protects creditors, removes any guesswork and makes sure the process is handled fairly.
Understanding this order gives you clarity on what happens to your creditors, what the liquidator prioritises and what it means for you as a director.
How creditor priority works
Liquidation begins with the liquidator identifying, valuing and selling the company’s assets. These assets include anything the company owns that can be turned into money, such as equipment, vehicles, stock, cash and money owed to the business.
Once assets are realised, payments follow this legal order:
- Fixed-charge secured creditors
- Costs and expenses of the liquidation
- Preferential creditors
- The prescribed part
- Floating-charge secured creditors
- Unsecured creditors
- Shareholders
This statutory payment order applies to every type of liquidation, because it comes from the Insolvency Act 1986. But the way it works in practice depends on whether the company is insolvent or solvent.
Creditors’ Voluntary Liquidation (CVL)
A Creditors’ Voluntary Liquidation is an insolvent liquidation. The company cannot pay its debts in full, so the priority order matters. Funds are distributed in strict sequence starting with fixed-charge creditors, then liquidation costs, then preferential creditors and so on.
Most CVLs have limited asset value, which means:
Floating-charge and unsecured creditors receive less, often only a small dividend or nothing
Compulsory Liquidation
Compulsory Liquidation is also an insolvent liquidation. The process is handled first by the Official Receiver and sometimes passed to a private insolvency practitioner but the priority order remains exactly the same as in a CVL.
The key difference is that directors lose control of timing and the choice of liquidator. But the way creditors are paid does not change.
Members’ Voluntary Liquidation (MVL)
A Members’ Voluntary Liquidation is a solvent liquidation. By law, directors must swear a statutory declaration confirming the company can pay every creditor in full, with statutory interest, within 12 months.
Because all creditors receive 100% of what they are owed, the priority order rarely affects the process. Creditors do not compete for limited funds, and distributions to shareholders only begin once all debts have been settled.
Fixed-charge secured creditors
A fixed charge attaches to specific assets such as a building, vehicle or piece of machinery. When those assets are sold, the money goes directly to the fixed-charge lender. This is why they sit at the top of the payment order: their security is tied to identifiable property.
Costs and expenses of the liquidation
Before any creditor receives funds, the costs of running the liquidation are paid. These include the liquidator’s fees, statutory filings, legal costs and the costs of securing and selling assets.
Liquidation is a regulated process and must be carried out by a licensed insolvency practitioner, which is why costs are unavoidable.
Preferential creditors
Preferential creditors come next because their claims relate to:
Employee claims, such as:
- Wage arrears (up to the statutory cap)
- Holiday pay
- Certain pension contributions
HMRC doesn’t sit at the very top of the creditors list, but for some claims, HMRC is a secondary preferential creditor, including:
- VAT
- PAYE and NIC
- CIS deductions
- Student loan deductions
The prescribed part
Before floating-charge lenders are paid, a portion of the assets caught by the floating charge is set aside for unsecured creditors. This is known as the prescribed part. It ensures unsecured creditors receive something, even when asset values are low.
Floating-charge secured creditors
Floating charges apply to assets that fluctuate, such as stock, work-in-progress and general business assets. Floating-charge lenders are paid after the prescribed part is allocated and after all preferential creditors have been settled.
Unsecured creditors
Unsecured creditors are those with no security. They include suppliers, landlords, utilities, HMRC for non-preferential taxes such as Corporation Tax, customers with deposits and an unpaid Bounce Back Loan where there is no evidence of misuse.
Unsecured creditors are paid on a proportional basis if money remains. Many insolvent companies do not produce enough to repay unsecured creditors in full, which aligns with how unsecured claims are treated in CVLs.
Shareholders
Shareholders are last in the order. They only receive a distribution if all creditor claims have been settled in full, which is extremely rare in insolvent liquidations.
Why the order exists
This priority system ensures creditors are treated evenly and directors cannot influence who gets paid first. It protects employee claims, gives HMRC appropriate standing, preserves the rights of secured lenders and ensures unsecured creditors receive a fair share via the prescribed part.
It also removes any risk that directors try to repay favoured creditors before insolvency, actions that could later be reversed by the liquidator.
Key Takeaways for Which creditors are paid first in a liquidation?
- The payment order in liquidation is set by law so creditors are treated fairly.
- Once appointed, the liquidator follows this structure step by step and removes creditor pressure from your shoulders.
- Understanding where each creditor sits helps you make informed decisions and reduces the risk of accidental preferential payments.
- Taking advice early gives you more control and protects your position as a director.
Get advice on creditor payments in liquidation
If you’re unsure how your creditors would be treated or you think the company may be insolvent, getting early advice will give you clarity quickly. A qualified insolvency practitioner can confirm your position, explain your duties and outline the safest route forward.
You don’t need to wait for HMRC, lenders or suppliers to escalate matters. A short conversation can clarify whether the business can be rescued or whether a voluntary liquidation would protect you and bring matters to an orderly close.
Get in touch for free, confidential guidance and take control of your next step.
