When a company enters liquidation, creditors are not all paid equally.
The liquidator must distribute available funds according to a legal order of priority. This determines which creditors are paid first and which may receive only part of what they are owed — or nothing at all.
In a Creditors’ Voluntary Liquidation, this order becomes particularly important because the company is insolvent and there may not be enough money to repay everyone.
Quick Answer: Fixed-charge creditors are generally paid from the assets over which they hold security. Liquidation costs and expenses are then met, followed by preferential creditors, certain HMRC debts, floating-charge creditors and unsecured creditors. Shareholders are usually paid last.
What is the order of payment in liquidation?
The exact outcome depends on the company’s assets, debts and security arrangements, but the usual order is broadly as follows.
1. Fixed-charge creditors
A creditor with a fixed charge over a particular company asset generally has first claim over the proceeds from that asset.
Examples might include:
- a mortgage over company property
- finance secured against specific machinery
- lending secured against a particular asset
If the asset is sold, the fixed-charge creditor is normally repaid from those proceeds after relevant realisation costs.
If the asset does not raise enough to repay the debt in full, any shortfall may become an unsecured claim.
2. Liquidation costs and expenses
The costs of administering the liquidation must also be paid from company assets.
These can include:
- costs involved in protecting and selling assets
- statutory expenses
- the liquidator’s approved fees and expenses
- other costs required to complete the liquidation
These expenses reduce the amount remaining for creditors.
3. Preferential creditors
Certain debts receive statutory priority over ordinary unsecured debts.
This includes some qualifying employee claims, such as certain unpaid:
- wages
- holiday pay
- pension contributions
Employees may also be able to claim some amounts from the National Insurance Fund where the company cannot pay them directly.
See our guide to what happens to employees when a company goes into liquidation for more information.
4. Certain HMRC debts
HMRC has secondary preferential creditor status for certain taxes collected or deducted by a business on behalf of others.
This can include relevant amounts of:
- VAT
- PAYE Income Tax
- employee National Insurance contributions
- Construction Industry Scheme deductions
These debts rank ahead of floating-charge creditors and ordinary unsecured creditors.
Not every HMRC debt receives preferential treatment. Some tax liabilities can still rank as unsecured claims.
If your company owes tax, see our guide to closing a limited company with HMRC debts.
5. Floating-charge creditors
A floating charge usually applies to a class of company assets that changes during normal trading, such as stock or certain book debts.
Floating-charge creditors rank below preferential and secondary preferential claims.
In some cases, part of the money available under a floating charge must be set aside for unsecured creditors. This is known as the prescribed part.
6. Unsecured creditors
Unsecured creditors do not hold specific security over company assets.
They can include:
- suppliers
- contractors
- landlords
- customers owed refunds
- unsecured lenders
- utility companies
- some HMRC debts
If money remains after higher-ranking claims have been dealt with, unsecured creditors share the available funds.
Where there is not enough to repay them in full, they normally receive a proportion of their admitted debt rather than being paid on a first-come, first-served basis.
In many insolvent liquidations, unsecured creditors receive only a small payment or nothing at all.
7. Shareholders
Shareholders are normally at the bottom of the payment order.
They only receive money after all creditors and company liabilities have been paid in full.
In a CVL this is uncommon because the company is already insolvent.
Shareholders are much more likely to receive a distribution in a solvent Members’ Voluntary Liquidation.
Does HMRC get paid before other creditors?
For certain taxes, yes.
HMRC’s secondary preferential status means qualifying VAT, PAYE, employee National Insurance and certain other taxes can be paid before floating-charge and unsecured creditors.
However, the exact position depends on the type of tax debt involved.
Do unsecured creditors get anything in liquidation?
Sometimes.
Whether unsecured creditors receive a payment depends on factors including:
- the value of company assets
- secured lending
- liquidation costs
- employee preferential claims
- HMRC preferential claims
- the amount owed to other creditors
If there are insufficient funds available, unsecured creditors may receive nothing.
Does the payment order change in CVL and compulsory liquidation?
The statutory creditor hierarchy does not fundamentally change simply because the company entered CVL rather than compulsory liquidation.
The procedures are different, but creditor distributions still need to follow the relevant insolvency rules.
Speak to Business Helpline
If your company cannot pay its debts, understanding how different creditors rank can help you understand what is likely to happen in liquidation.
Our licensed insolvency practitioners can review your company’s:
- assets
- secured lending
- HMRC debts
- employee claims
- unsecured creditors
- available insolvency options
If Creditors’ Voluntary Liquidation is appropriate, we can explain the process and what creditors are likely to receive.
Call Business Helpline on 0800 088 2142 for free, confidential advice.
FAQ
Who gets paid first when a company is liquidated?
Fixed-charge creditors are generally paid from the assets covered by their security. Liquidation expenses and statutory priority claims are then dealt with before lower-ranking creditors.
Who gets paid last in liquidation?
Shareholders are usually last. They only receive money once creditors and other company liabilities have been paid in full.
Are employees preferential creditors?
Certain employee claims have preferential status, including some unpaid wages and holiday pay.
Is HMRC a preferential creditor?
HMRC has secondary preferential status for certain taxes including relevant VAT, PAYE Income Tax and employee National Insurance liabilities.
Do suppliers get paid in liquidation?
Suppliers are normally unsecured creditors unless they hold security. They may receive a proportion of what they are owed if money remains available for unsecured creditors.
