Who Gets Paid First In A UK Liquidation?

If a customer, supplier or even your own company faces liquidation, the first question most small business owners ask is simple: who gets paid first in liquidation?

Knowing the order of priority under UK insolvency law helps you make quick, informed decisions-whether that’s tightening credit terms, lodging a timely claim, or negotiating security before things go south.

In this guide, we break down the payment waterfall in plain English, explain where small business creditors sit in the queue, and share practical steps to improve your chances of recovery. We also cover what to expect if your own company is heading towards liquidation, so you can stay compliant and protect yourself as a director.

What “Liquidation” Means For Your Business

Liquidation is the formal process of winding up a company and distributing its assets to creditors. It’s governed primarily by the Insolvency Act 1986 and the Insolvency (England and Wales) Rules 2016. An insolvency practitioner (IP) is appointed as liquidator to gather in assets, deal with claims and make distributions in a strict order set by law.

For trade suppliers and other unsecured creditors, liquidation usually means the business you’re dealing with has stopped trading and you’ll need to file a proof of debt with the liquidator. From that point, there’s a legal “pecking order” that decides who gets paid first and who, unfortunately, may not get paid at all.

If you see warning signs that a customer is struggling (late payments, credit limit breaches, requests to extend terms), it’s smart to tighten your credit controls, consider a chasing overdue payments process, and-where appropriate-issue a firm but fair letter before action.

The UK Order Of Payment: Who Gets Paid First In Liquidation?

UK law sets out a strict priority order for payments in liquidation. Here’s the hierarchy in plain terms.

1) Insolvency Practitioner’s Fees And Expenses

The liquidator’s costs and expenses are paid first out of the assets they realise. This covers the work needed to collect assets, investigate the company’s affairs and make distributions. Without this, there’s no orderly process for anyone to be paid.

2) Fixed Charge Holders

Secured creditors with a fixed charge over specific assets-like a lender with a legal charge over a property or a finance company with title to specific equipment-are paid from the proceeds of those assets. These assets are ring-fenced for the fixed charge holder and don’t fall into the general pot.

3) Preferential Creditors (Including Certain Employee Claims And HMRC)

Preferential debts are next. They include:

• Eligible employees’ arrears of wages (capped) and accrued holiday pay.
• Certain pension contributions.
• HMRC’s “secondary preferential” claims for certain taxes collected from others but unpaid-such as VAT, PAYE, employee NICs (a status HMRC regained in 2020).

These claims rank ahead of floating charge holders and unsecured creditors.

4) Prescribed Part For Unsecured Creditors

Before paying floating charge holders, the liquidator must carve out a “prescribed part” from the net assets subject to floating charges for unsecured creditors. The prescribed part is a statutory amount calculated by formula and capped. It’s intended to give unsecured creditors at least some return where there’s a floating charge in place.

5) Floating Charge Holders

Secured creditors with floating charges (for example, a debenture over the company’s circulating assets like stock and receivables) are paid next, but only after the prescribed part is set aside for unsecured creditors.

6) Unsecured Creditors

Most trade suppliers, landlords (for pre-liquidation arrears), customers with deposits, and contractors fall into this category. Unsecured creditors share in any remaining pot on a pari passu (rateable) basis, proportionate to the size of their debts. Unfortunately, returns here are often low.

7) Interest On Unsecured Debts

If-rarely-there’s still money left after paying principal amounts to unsecured creditors, statutory interest may be paid on those debts for the period between liquidation and distribution.

8) Shareholders (Members)

Shareholders get paid last. In an insolvent liquidation, there’s usually nothing left for them.

Where Do Small Business Creditors Fit In?

Most small business creditors are unsecured-unless you’ve taken security, retained title to the goods, or have a valid trust arrangement. Here’s where you might sit in the queue and the key nuances you should know.

Trade Suppliers And Service Providers

By default, you’re an unsecured creditor. If you’ve supplied goods, check your contract for a retention of title (ROT) clause. A well-drafted clause in your Sale of Goods Terms or Terms of Trade may let you reclaim identifiable goods that haven’t been paid for and are still in the insolvent company’s possession. Timing and evidence are critical-contact the liquidator promptly with proof of delivery, unpaid invoices and ROT terms.

Landlords

For pre-liquidation rent, landlords are typically unsecured for the arrears. However, certain remedies (like forfeiture or CRAR) may be available pre-liquidation; once liquidation begins, enforcement options are restricted without the court’s or liquidator’s consent. Post-liquidation “use and occupation” charges may be treated differently and can rank as an expense of the liquidation in some cases.

Customers And Deposits

Customers who paid deposits to the insolvent company are generally unsecured. Unless the money was held in a designated trust account or protected by another mechanism, it falls into the general estate. If you’re a B2B customer, consider negotiating security or guarantees for significant prepayments.

Lenders And Asset Financiers

If you’ve taken valid security (e.g., a fixed charge over specific assets, or a properly documented floating charge) you’ll rank as a secured creditor. In practice, many small suppliers don’t hold security-so thinking proactively about risk, guarantees and security is valuable if you offer substantial credit.

How To Improve Your Chances Of Getting Paid

You can’t control a debtor’s finances, but you can significantly improve your recovery prospects with the right steps and documents in place from day one. Here are practical, legally sound tactics to consider.

1) Strengthen Your Contract And Credit Terms

Robust, tailored terms make all the difference when a customer fails. Consider including:

• Clear payment terms, credit limits and default interest.
• Well-drafted retention of title clauses (including all-monies clauses where appropriate) for goods supply.
• Set-off and suspension rights if invoices go unpaid.
• Personal guarantees for higher-risk accounts or group buyers.

It’s wise to have a lawyer draft or review your Terms of Trade or Sale of Goods Terms, and where appropriate take a Deed of Guarantee from directors or parent companies for major accounts.

2) Improve Credit Control And Early Action

Act early on warning signs. Tighten credit limits, require deposits, or move to pro forma if needed. If an account turns delinquent, follow a clear escalation process-polite reminders, a final demand, then a letter before action. Good records (purchase orders, delivery notes, and email confirmations) are essential.

For routine recoveries, align your process with invoice law basics and keep an audit trail. If you ultimately decide to outsource, you can also sell a debt to a collection agency in some situations-just be sure the documentation is clean and the assignment is done properly.

3) Consider Security Or Collateral For Larger Exposures

For higher-risk or higher-value accounts, think about taking security. In the UK, this could be a fixed charge over specific assets, or a debenture containing a floating charge over circulating assets (often used by lenders). If you extend loans to counterparties, build in clear events of default and enforcement rights, and consider whether a guarantee is appropriate.

4) Use Set-Off Where Available

Insolvency set-off can work in your favour if you owe the insolvent company money too (for example, under a reciprocal supply arrangement). Under the Insolvency Rules, mutual dealings are netted off automatically in insolvency, which can reduce your exposure. Keep ledgers up to date so you can evidence mutual claims quickly.

5) Move Fast On Retention Of Title And Repossessions

If you have a valid ROT clause and your goods are identifiable and unpaid, notify the liquidator immediately with evidence and request consent to collect them. The longer you wait, the harder it gets to trace and separate stock.

6) Understand Practical Limits

Even with the best preparation, recoveries from liquidation can be low-especially for unsecured creditors. Prioritise prevention (tight contracts and credit controls) over cure.

If Your Own Company Is Facing Liquidation

If your business is in financial distress, understanding the order of payment can help you plan responsibly and meet your directors’ duties. The key points:

Directors’ Duties Shift When Insolvency Looms

When insolvency is probable, your duties shift towards protecting creditors’ interests. Avoid wrongful trading and misfeasance. Don’t prefer one creditor over another or sell assets at an undervalue. Speak to an insolvency professional early-timely advice can preserve options.

What Gets Paid First From Your Company’s Assets

Expect the liquidator’s costs and secured creditors to be paid first, followed by preferential creditors (including certain employee and HMRC claims), then unsecured creditors. If you’re a director who has put money into the company, director loans are typically treated as unsecured and rank alongside other unsecured creditors (unless separately secured).

Employee Claims And Redundancies

Employees may be able to claim certain arrears and holiday pay as preferential creditors and may access the National Insurance Fund for some entitlements. From the employer’s side, plan redundancies lawfully and document communications clearly. For a broader overview of the employer perspective when a business closes, see employee rights when a company closes.

Protect Yourself With Clean Documentation

Keep board minutes, up-to-date accounts and proper contract files. If you’ve given personal guarantees, understand the exposure and start discussions with the relevant lenders or suppliers. Where you are the creditor in your own group, ensure any intra-group loans are documented and that security positions (if any) are clear.

Be Realistic About Outcomes

Once liquidation starts, the payment order is rigid. Focus on cooperating with the liquidator, preserving records, and prioritising stakeholders fairly. If there’s a viable business to save, consider earlier options like a company voluntary arrangement (CVA) or pre-pack administration-specialist advice is crucial.

Frequently Asked Questions

Does HMRC Get Paid Before Everyone Else?

HMRC is a “secondary preferential” creditor for certain taxes (like VAT, PAYE and employee NICs), so those claims rank above floating charge holders and unsecured creditors-but after fixed charge holders and the liquidator’s costs. Other taxes (like corporation tax) are not preferential and rank as unsecured.

Are Directors Personally Liable For Company Debts?

Generally no, if you traded through a limited company and complied with your duties. However, directors may be personally liable if they gave personal guarantees, engaged in wrongful trading or misfeasance, or if there are overdrawn director loan accounts that must be repaid.

Do Customers Who Paid Deposits Get Anything Back?

Customers are usually unsecured creditors unless their money was held on trust or otherwise protected. They may receive a small dividend if there’s a surplus after higher-priority claims, but often recoveries are limited.

What Is The “Prescribed Part”?

It’s a statutory carve-out from floating charge realisations reserved for unsecured creditors, calculated by formula and capped. It ensures unsecured creditors share something where floating charges exist.

Can I Reclaim My Goods If I Haven’t Been Paid?

Possibly-if you have a properly drafted retention of title clause and the goods are identifiable, undelivered onward, and still in the liquidator’s control. Move quickly and provide evidence.

Step-By-Step: What To Do When A Customer Goes Into Liquidation

1) Get The Facts

• Confirm the type of insolvency process and the liquidator’s details.
• Stop supplying on credit; consider suspending performance if your contract allows.

2) Check Your Contract

• Look for retention of title, termination, set-off and suspension clauses.
• Gather your delivery notes, statements and unpaid invoices.

3) File Your Claim Promptly

• Submit a proof of debt with supporting evidence as requested by the liquidator.
• If you have ROT rights, assert them immediately in writing.

4) Consider Your Options For Residual Debt

• Assess cost/benefit for any further action, especially if asset levels look thin.
• Where appropriate, you might sell a debt to a collection agency to crystallise value quickly.

5) Strengthen Your Position For Next Time

• Update your Terms of Trade or Sale of Goods Terms to include stronger security and enforcement clauses.
• For key accounts, consider guarantees via a Deed of Guarantee.
• Tighten your credit control workflow-templates, reminders, and a disciplined path to a letter before action when needed.

Key Takeaways

• The order of payment in liquidation is set by law: liquidator costs, fixed charges, preferential creditors (including certain employee and HMRC claims), prescribed part for unsecured creditors, floating charges, then unsecured creditors, interest, and finally shareholders.
• Most small business creditors are unsecured by default-returns are often low. Improve your prospects by using strong contracts, retention of title, set-off rights and, where appropriate, personal guarantees.
• Move fast when a customer collapses: stop further credit, check your contract, file a proof of debt, and assert any ROT rights immediately.
• Good credit control-accurate records, clear terms, and a staged recovery process from reminders to a formal letter before action-significantly improves outcomes.
• If your own company is in distress, get advice early. Directors’ duties shift towards creditors, and steps like wrongful trading or preferences can create personal exposure.
• Set yourself up for next time: review your Terms of Trade, consider a Deed of Guarantee for key accounts, and make sure loan and security documents include clear events of default.

If you’d like tailored help tightening your contracts, strengthening security or navigating a customer insolvency, you can reach us at 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.