When cash is tight and pressure is building, one of the first questions that usually comes up is simple: if the company closes, who actually gets paid, and who loses out?
The good news is that there is a clear legal order of payment in liquidation. It is not about who shouts loudest or who sends the most threatening letters. In this guide, we explain who gets paid first in liquidation, what that means for different creditors, and where you sit as a director, so you can make calm, informed decisions.
Anderson Brookes can help you to navigate financial difficulties and the process of liquidation with confidential, regulated advice.
Why the Order of Payment in Liquidation Matters
Liquidation is a formal process where a licensed insolvency practitioner takes control of the company, sells its assets, and distributes the money to creditors in a set order. If you are already behind with payments, you may be thinking about company liquidation as a way to deal with unmanageable debts in a clean, structured way.
Once a company is insolvent, directors have a legal duty to put creditors’ interests first. That means you should not pick and choose who to pay based on who is shouting the loudest, who you like most, or who you have personally guaranteed. Getting timely, regulated liquidation advice helps you avoid innocent mistakes that might later be challenged.
There are several broad creditor groups in a liquidation:
- Secured creditors with fixed charges
- Secured creditors with floating charges
- Preferential creditors such as some employee claims
- HMRC for certain taxes
- Unsecured creditors such as suppliers and landlords
- Shareholders
Who gets paid first in liquidation depends on which group a creditor falls into, and on how much money can be raised from company assets.
The Legal Priority: Who Gets Paid First in Liquidation?
The order of payment in liquidation is set by UK insolvency legislation and detailed rules. It is not decided by the liquidator’s personal preference. The Insolvency (England and Wales) Rules 2016 and related guidance set out how the money is shared between different classes of creditor.
In a typical insolvent creditors’ voluntary liquidation (CVL) or compulsory liquidation, money realised from company assets is applied roughly in this order:
- Fixed charge secured creditors
For example, a bank with a legal charge over a property or a lender with security over specific machinery. They are paid from the proceeds of the asset that secures their lending. - Costs and expenses of the liquidation
This includes the liquidator’s fees and properly incurred expenses of preserving and realising assets. These are paid in a specific sub-order set out in the Rules. - Preferential creditors (mainly certain employee claims)
Some employee wages, holiday pay, and certain pension contributions are treated as preferential, up to statutory limits. - Secondary preferential creditors, including some HMRC debts
For insolvency procedures starting on or after 1 December 2020, certain taxes collected by the company on behalf of HMRC, such as VAT and PAYE, rank as secondary preferential debts, ahead of floating charge holders and other unsecured creditors. - The “prescribed part” for unsecured creditors
A ring-fenced portion of floating-charge realisations is set aside for unsecured creditors, up to a cap. This prevents floating charge holders taking everything where there is a wide pool of unsecured creditors. - Secured creditors with floating charges
These creditors hold security over shifting pools of assets such as stock and other moveable items rather than specific assets. - Unsecured creditors
This group includes suppliers, landlords, some tax liabilities, and unsecured lenders. They share whatever is left, usually on a “pence in the pound” basis. - Shareholders
If, after all creditors are paid in full, there is still money left, the balance goes to shareholders. In an insolvent liquidation this is rare.
If there is not enough money to pay a particular group in full, that group is usually paid proportionally, and lower-ranking groups may receive nothing.
Understanding Each Group of Creditor
Fixed charge secured lenders
A fixed charge is security over a specific asset. Common examples are:
A bank’s mortgage over a company property
Finance secured over a particular vehicle or piece of equipment
When that asset is sold, the fixed charge holder is usually paid first from the sale proceeds, after costs directly linked to selling the asset. If the sale does not raise enough to cover the whole debt, any shortfall normally becomes an unsecured claim in the liquidation.
The costs of the liquidation and professional fees
Liquidation costs and the liquidator’s fees are not an extra bill on top of the company’s debts. They are paid from the assets realised in the liquidation, in a carefully prescribed order.
These costs cover:
Identifying and securing assets
Realising those assets for fair value
Handling employee claims and statutory paperwork
Distributions to creditors and statutory reporting
In many cases there is no separate payment from you personally for these costs, provided there has been no personal misconduct. We always explain likely costs of going into liquidation clearly at the outset, so you know what to expect.
Employees as preferential creditors
Employees often worry they will be last in line. In fact, certain employee claims rank as preferential and are higher up the order of payment in liquidation than unsecured suppliers.
Preferential claims can include:
Arrears of wages, up to a capped amount per employee
Accrued but unpaid holiday pay
Certain unpaid pension contributions
Where the company cannot pay these amounts in full, eligible employees can claim statutory redundancy and certain other payments from the Redundancy Payments Service (RPS), with the government taking over the company’s liability.
We explain the impact of liquidation on employees in detail, including what staff can claim and what you need to do as director.
HMRC as a secondary preferential creditor
From December 2020, HMRC moved up the creditor hierarchy for some taxes. For insolvency procedures that start after this date, VAT, PAYE income tax, employee National Insurance contributions and some other “trust” taxes are treated as secondary preferential debts.
This means:
These HMRC debts are paid after ordinary preferential claims, but before floating charge holders and unsecured creditors
Corporation Tax and some other taxes usually remain unsecured and are paid alongside other unsecured creditors if funds allow
Understanding which HMRC balances sit where can be complicated. We go through your tax position in detail as part of any advice on closing the company.
Floating charge holders and the prescribed part
A floating charge is security over a pool of changing assets, such as:
Stock
Work in progress
Certain fixtures and fittings
Some book debts
When these assets are sold, the money goes into a pot that is used to pay, in order:
The “prescribed part” for unsecured creditors
The floating charge holders
The prescribed part is a statutory slice of floating-charge realisations reserved for unsecured creditors. It is calculated using a formula and capped at a maximum amount.
Unsecured creditors and shareholders
Unsecured creditors are everyone else who is owed money without security or preferential status. This typically includes:
Trade suppliers and subcontractors
Landlords for rent arrears
Some HMRC liabilities
Unsecured business loans
Some connected-party and director loans
Unsecured creditors are usually paid last, before shareholders, and often receive only a small proportion of what they are owed. Payments are made on a pro-rata basis, so each unsecured creditor receives the same pence in the pound.
Shareholders only receive money if all creditors are paid in full. In an insolvent liquidation, that is very uncommon.
Need support with company closure? As licensed insolvency practitioners, we’re here to help. Contact Anderson Brookes by visiting our contact form or by calling 0800 1804 935.
Where Do You Fit In as Director?
A key concern is often “will I be personally liable”. Company debts legally belong to the company, not to you personally. However there are important exceptions, including:
Personal guarantees: If you have guaranteed a loan or lease, the lender can still pursue you personally for any unpaid balance after the company is liquidated.
Overdrawn director’s loan account: If you owe money back to the company, the liquidator is required to look at recovering this.
Wrongful or fraudulent trading: If the company continued to trade while insolvent and this increased losses to creditors, the liquidator may consider claims against directors.
The liquidator’s job is not to punish honest directors who have tried their best in difficult circumstances. Early, open engagement and timely advice make a major difference. Our guide on what happens to the director in liquidation explains this in more depth.
We always talk you through your personal position, including guarantees, loan accounts and any risk areas, before you commit to a course of action.
How Your Company’s Assets Are Used to Pay Creditors
In liquidation, the insolvency practitioner takes control of the business and identifies company assets during liquidation. These can include:
Cash at bank and in hand
Stock and work in progress
Plant, vehicles and equipment
Property and long-term leases
Debts owed to the company
Assets are valued and sold to raise cash. The liquidator must act in the interests of creditors as a whole, so assets are not sold at “knock-down” prices without justification. The money realised is then distributed according to the order of payment in liquidation, not on a first-come, first-served basis.
A Simple Example: Splitting the Pot Between Creditors
To see who gets paid first in liquidation, it helps to use a simple example.
Imagine a company with:
£200,000 owed to a bank, secured by a fixed charge over a property
£20,000 owed in wages and holiday pay to employees that qualify as preferential
£60,000 owed to HMRC made up of VAT and PAYE that rank as secondary preferential and £20,000 of Corporation Tax as unsecured
£100,000 owed to various suppliers and the landlord as unsecured
An overdrawn director’s loan account of £30,000
The liquidator sells the property for £220,000 and realises another £60,000 from other assets, giving £280,000 in total.
The money is likely to be applied roughly as follows, in simplified form:
Costs of sale and part of the liquidator’s fees are paid from the property proceeds.
The bank as fixed charge holder is paid from the property sale, up to the amount it is owed, say £200,000.
Remaining funds are used to pay the costs and expenses of the liquidation.
Preferential employee claims are paid, up to the statutory limits.
HMRC secondary preferential debts (VAT and PAYE) are paid next from remaining assets.
If there is a floating charge, a prescribed part is set aside for unsecured creditors and the floating charge holder is paid.
Remaining funds go to unsecured creditors such as suppliers, landlords and the unsecured Corporation Tax.
If there is not enough to pay unsecured creditors in full, they all share the balance in proportion to what they are owed. The overdrawn director’s loan account is an asset of the company, so the liquidator normally seeks recovery of that money, which then increases the pot available for creditors.
This is only an illustration. In real life, each case has its own mix of assets, securities and debts. We walk through the numbers with you so you understand likely outcomes before deciding what to do.
Common Worries and Questions About Who Gets Paid First
Can you choose which creditors to pay first before liquidation?
If the company is already insolvent, paying one creditor in preference to others can cause problems, especially if that payment puts the favoured creditor in a better position than they would have been in liquidation. This is sometimes called a preference and can be challenged by a liquidator.
It is understandable to want to pay staff or keep a particular supplier on side. However, once you know the company cannot avoid insolvent liquidation, targeted payments can increase risk. Speaking to us before making further payments helps you avoid decisions that may later be unwound.
Do staff always get paid before HMRC and suppliers?
Certain employee claims have preferential status and rank above unsecured trade creditors. HMRC has secondary preferential status for specific taxes that have been collected from others, such as VAT and PAYE. (GOV.UK)
In practice, employee preferential claims and HMRC secondary preferential claims are often paid in full before money flows down to floating-charge holders and unsecured creditors. However, every case depends on asset values and the total claims in each group.
Do you get paid anything as director?
Unpaid salary owed to you as a director is usually an unsecured claim. Dividends and shareholder loans normally sit behind other creditors and may receive nothing. If you have personally guaranteed any borrowing, the lender can pursue you directly for the shortfall after liquidation if the company’s assets do not clear the debt.
Part of our role is to help you understand what you may realistically recover, what you could personally owe, and how to manage that position.
What happens if there is not enough to go round?
In many insolvent liquidations, there is not enough money to pay everyone. Within each creditor group, payments are made on a pro-rata basis. For example, if unsecured creditors receive 10 pence in the pound, a supplier owed £10,000 would get £1,000 and a landlord owed £50,000 would get £5,000.
This can feel harsh, particularly where you have long-standing relationships. Remember that you are not expected to fix the shortfall out of your own pocket in normal circumstances. Your responsibility is to take proper advice and follow the legal framework.
What about Bounce Back Loans and personally guaranteed borrowing?
Bounce Back Loans are company debts. They are included in the liquidation like other unsecured borrowing. If you have given a personal guarantee for any facilities, the lender can still pursue you after the company closes.
We will always review your guarantees and explain where you stand before any liquidation goes ahead, including realistic options for dealing with personal exposure.
Why Early Liquidation Advice Protects You and Your Creditors
You are not alone in facing these decisions. According to the latest Insolvency Service company insolvency statistics, around one in 191 companies on the effective Companies House register entered insolvency in 2024.
In other words, thousands of directors each year are dealing with the same worries about who gets paid first in liquidation and what happens next.
Early, regulated advice can:
Prevent well-intentioned but risky payments
Reduce the chance of personal criticism or claims
Give employees clearer, faster information about their rights
Make sure HMRC and other key creditors are handled correctly
Help you step away from day-to-day pressure and see the bigger picture
At Anderson Brookes, we are licensed insolvency practitioners. We provide clear, practical liquidation advice based on your company’s actual creditor mix, assets and contracts, not theory.
Taking the Next Step
You do not have to work out the order of payment in liquidation on your own or guess from internet forums. UK law sets a strict hierarchy, the liquidator must follow that hierarchy, and there are proven routes to close a company in an orderly, compliant way.
The three main points to remember are:
- The answer to who gets paid first in liquidation is set by law, not by individual creditors.
- Employees and HMRC often sit ahead of many trade creditors and unsecured lenders.
- Your own position depends on guarantees, loan accounts and conduct, which can be managed if you act early and get advice.
If you are already missing payments or receiving demands, it is usually better to talk things through before moving money around or signing anything new. We can review your creditors, explain how the order of payment in liquidation would work in your case, and help you choose the right next step.
You can call us on 0800 1804 935 for a confidential conversation, or use our simple enquiry form for a call-back at a time that suits you. A short discussion now may prevent far more difficult conversations later, both for you and for the people your company owes.