A liquidator pays creditors in a fixed statutory order. Fixed charge holders are paid from the asset they hold security over; everything else goes first to the costs of the liquidation, then to preferential creditors (mainly employees), then to secondary preferential creditors (certain HMRC debts), then to the prescribed part ring fenced for unsecured creditors, then to floating charge holders, then to ordinary unsecured creditors, and only then to shareholders. Each class is paid in full before the next receives anything, and creditors within a class share proportionately.

What is the full order of payment?

HMRC’s policy paper on its preferential status summarises the broad order in which realisations are paid in a formal insolvency starting after 1 December 2020:

  1. secured creditors with a fixed charge, after the costs of realising their asset;
  2. insolvency practitioners’ fees and expenses;
  3. preferential creditors;
  4. secondary preferential creditors;
  5. prescribed part creditors (unsecured creditors sharing a ring fenced fund);
  6. secured creditors with a floating charge;
  7. non preferential creditors;
  8. shareholders.

Two further layers sit inside that list. If there is money left after every proved debt has been paid in full, statutory interest is paid on those debts before shareholders receive anything (section 189 of the Insolvency Act 1986). Some claims are postponed by statute until everyone else, including interest, has been paid. The list is a summary; the detail comes from sections 175, 176A, 176ZA and 189 of the Insolvency Act 1986, Schedule 6 to that Act and rule 7.108 of the Insolvency (England and Wales) Rules 2016.

Why does the liquidator keep separate pots of money?

The order is applied to different pools of assets. Assets under a fixed charge pay the fixed charge holder (after the cost of selling them), and only any surplus joins the general estate. If the sale does not clear the debt, the shortfall is claimed against the other assets like any other debt, usually under a floating charge if the lender also has one, or as an unsecured claim.

Floating charge assets, such as stock and book debts, are where the statutory order really bites. Section 176ZA says that the expenses of a winding up in England and Wales take priority over floating charge claims so far as the free assets cannot meet them. Section 175(2)(b) does the same for preferential debts. Section 176A then requires the liquidator to set aside the prescribed part of what would otherwise go to the floating charge holder. The Official Receiver’s technical guidance describes keeping separate accounts for the floating charge assets, the prescribed part and the general estate for exactly this reason. For more on the two types of security, see fixed and floating charges.

What counts as an expense of the liquidation, and in what order?

Rule 7.108 treats all fees, costs, charges and other expenses incurred in the course of the winding up as expenses, and sets an internal order for them. In outline, the costs of preserving, realising and getting in assets (including litigation brought by the liquidator) come first, followed by the official receiver’s fees and expenses, the petitioner’s costs in a compulsory winding up, necessary disbursements, the liquidator’s remuneration up to the Schedule 11 scale, corporation tax on chargeable gains arising when company assets are sold, any balance of the liquidator’s remuneration, and finally other proper expenses. Expenses of distributing the prescribed part are paid out of the prescribed part itself (rule 7.108(3)). How fees are set and challenged is covered in how much liquidation costs.

One rule can push certain debts above even the liquidator’s expenses. Under section 174A, if winding up proceedings begin within 12 weeks after a Part A1 moratorium ends, the official receiver’s prescribed fees and then moratorium debts and priority pre moratorium debts (such as the monitor’s remuneration, goods and services supplied during the moratorium, rent for that period and wages) are paid in preference to all other claims.

Who are the preferential creditors?

Preferential debts are listed in Schedule 6. The ordinary preferential debts that come up in most company liquidations are:

  • contributions owed to occupational pension schemes and state scheme premiums (category 4);
  • employees’ remuneration for the four months before the relevant date, up to the prescribed limit, which the Official Receiver’s guidance gives as £800 under the Insolvency Proceedings (Monetary Limits) Order 1986;
  • accrued holiday remuneration owed to employees whose employment has ended;
  • money lent to the company and used to pay wages or holiday pay that would otherwise have been preferential (paragraph 11).

Ordinary preferential debts rank equally among themselves and, if there is not enough to pay them all, they abate in equal proportions (section 175(1A)). Any part of an employee’s claim above the cap ranks as an ordinary unsecured debt. Where the Redundancy Payments Service pays employees, section 189 of the Employment Rights Act 1996 transfers the employee’s rights to the Secretary of State, so the government then claims in the liquidation, including preferentially where the debt was preferential.

Which HMRC debts are secondary preferential?

Since 1 December 2020, paragraph 15D of Schedule 6 has made certain HMRC debts secondary preferential: VAT, and amounts the company deducted from other people’s pay or payments, namely PAYE income tax, employee National Insurance contributions, student loan deductions and Construction Industry Scheme deductions. HMRC’s policy paper confirms that corporation tax, employer National Insurance, penalties and interest stay non preferential. Secondary preferential debts are paid only after ordinary preferential debts are paid in full, and abate equally among themselves if funds run short (section 175(1B)). The detail is on HMRC as a secondary preferential creditor.

Where do the prescribed part and the floating charge holder fit?

Once expenses and preferential debts have been met from floating charge assets, what remains is the company’s net property. Section 176A requires the liquidator to make a prescribed part of it available to unsecured creditors. Under article 3 of the Insolvency Act 1986 (Prescribed Part) Order 2003, the prescribed part is 50% of the first £10,000 of net property plus 20% of the rest. The cap is £800,000, raised from £600,000 by an order in force from 6 April 2020; the old £600,000 cap still applies where the net property goes to a floating charge created before that date with no later charge ranking equally or ahead.

The floating charge holder takes the balance. It cannot use any shortfall on its secured debt to share in the prescribed part unless the unsecured debts are paid in full, a point the Official Receiver’s guidance makes when explaining the prescribed part account. The liquidator can skip the prescribed part only if net property is below the prescribed minimum and a distribution would cost more than it is worth, or if the court so orders. See the prescribed part for the calculation in detail.

How are unsecured creditors and shareholders paid?

Ordinary unsecured creditors, such as trade suppliers, landlords for past rent, HMRC for corporation tax, and directors who lent money to the company, share what is left pari passu. Section 107 applies this to voluntary liquidations, and rule 14.12 applies it in a winding up by the court: debts other than preferential debts rank equally and abate in equal proportions if the assets are insufficient.

If every proved debt is paid in full, section 189 requires any surplus to be used to pay interest from the date the company went into liquidation, at the greater of the Judgments Act 1838 rate on that date and the rate that applied to the debt anyway. All such interest ranks equally, whatever the rank of the underlying debt. Postponed claims come next. Only then is anything left distributed to members according to their rights. Sums owed to a member in their capacity as a member, such as declared but unpaid dividends, do not compete with outside creditors (section 74(2)(f)).

How does the order work with numbers?

Illustration only. A company enters creditors’ voluntary liquidation. Its bank is owed £260,000, secured by a fixed charge on the building and a floating charge over everything else, created after April 2020.

Step Amount
Building sold, net of selling costs, all paid to bank under fixed charge £200,000
Bank shortfall carried to floating charge £60,000
Stock and debtors realised (floating charge assets) £120,000
Less liquidation expenses (£25,000)
Less ordinary preferential employee claims (£8,000)
Less secondary preferential HMRC claims (VAT and PAYE) (£30,000)
Net property £57,000
Prescribed part: 50% of £10,000 plus 20% of £47,000 £14,400
Paid to bank under floating charge £42,600

The bank ends £17,400 short and cannot claim against the prescribed part for it. Unsecured creditors owed £110,000 (suppliers plus HMRC’s corporation tax) share the £14,400, about 13p in the pound, before any costs of distributing it. Shareholders receive nothing.

What mistakes come up?

  • Assuming every HMRC debt is preferential. Only VAT and the deducted taxes listed in paragraph 15D are. Corporation tax and penalties rank with trade creditors.
  • Treating the lender as first in line for everything. A floating charge holder ranks behind expenses, both tiers of preferential creditor and the prescribed part.
  • Expecting a director’s loan account to be repaid early. Money a director lent the company is normally an ordinary unsecured debt, and repaying it shortly before liquidation can be challenged as a preference.
  • Overstating employees’ preferential claims. Wages are preferential only for the four month window and up to the cap; the balance is unsecured.
  • Forgetting the moratorium overlay. If a liquidation follows soon after a Part A1 moratorium, section 174A changes the top of the order.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.