A guide, not advice. This explains how things generally work. A licensed insolvency practitioner will tell you what applies to your company or to you.
What Creditors Are Paid First in Liquidation?
When a company goes into liquidation, its assets are realised and the proceeds distributed to creditors in a strict, legally defined order. Not all creditors are equal - the order of payment determines who is likely to recover their money and who may receive nothing.
The Order of Payment
1. The Costs of the Liquidation
The liquidator's fees and the costs of realising assets are paid first. These include the practitioner's time, disbursements, and the expenses of the process.
2. Preferential Creditors
Certain employee claims are treated as preferential - paid ahead of most other creditors. These include:
- Unpaid wages (up to a limit)
- Holiday pay (up to a limit)
- Certain pension contributions
3. Secured Creditors
Creditors with a charge over specific assets - typically a bank with a debenture - are paid from the proceeds of those assets. They are paid in full before unsecured creditors receive anything.
4. Unsecured Creditors
This is the largest group: suppliers, HMRC (for most tax debts), trade creditors, and others with no security. They share in whatever is left after the above have been paid. In many insolvent liquidations, they receive little or nothing.
5. Shareholders
Shareholders are paid last. In an insolvent liquidation, they almost always receive nothing.
Floating Charge Holders
Where a creditor holds a floating charge over the company's general assets, a portion (the "prescribed part") may be set aside for unsecured creditors, even though the charge holder is otherwise entitled to the proceeds.
Why This Matters
Understanding the order of payment helps directors and creditors set realistic expectations. It also explains why HMRC, suppliers, and shareholders often recover little in an insolvent liquidation - they are lower in the order.
Speak to a Licensed IP
If you want to understand what creditors will be paid in your company's liquidation, our Manchester-based practitioners will explain the order clearly and honestly.