This guide is maintained as a current resource for September 2026 and covers only the laws of England and Wales. Information is for general guidance, not legal advice. Consult a qualified solicitor for advice specific to your situation.
Discover how claims are prioritised in company liquidation proceedings in England and Wales. This detailed guide explains the statutory order of priority from secured creditors and liquidation costs to preferential claims, unsecured debts and shareholders, helping creditors and directors understand how realisations are distributed under UK insolvency law.
When a company enters liquidation because it cannot pay its debts, its assets are collected, sold and converted into cash. These funds are then distributed to creditors and other parties according to a statutory order of priority established under UK insolvency law. This structured hierarchy ensures debts are paid fairly and in a legally prescribed sequence, protecting key creditors such as employees, secured lenders and others with special rights. This article explains how claims are prioritised in liquidation proceedings in England and Wales, why the order matters, and what creditors and directors should understand about their rights and expectations.
Why Priority Matters in Liquidation
In a company liquidation, realised assets are often insufficient to satisfy all claims in full. Without a clear legal priority, creditors could compete chaotically and some stakeholders might be unfairly treated. The Insolvency Act 1986, the Insolvency Rules 2016 and related statutory guidance provide a creditor hierarchy to determine the order in which funds are distributed. This protects creditor rights, gives certainty to the insolvency process, and ensures equitable treatment.
How Liquidation Funds Are Used
Before any creditor receives money, the liquidator must cover the expenses of the liquidation. These include costs incurred in preserving, realising and distributing the company's assets, statutory fees, and the liquidator's own remuneration. Expenses of the liquidation are paid first because they enable the entire process to operate effectively.
Order of Priority for Claims
Below is the statutory hierarchy applied in most company liquidations in England and Wales:
1. Fixed Charge Secured Creditors
Secured creditors with a fixed charge over specific company assets (such as property or machinery) have first priority over the proceeds of those charged assets. They can enforce their security and are entitled to be paid from the sale of the secured asset before other creditors.
2. Liquidation Expenses and Costs
Once fixed‑charge security is satisfied, money available from realisations (including general assets not subject to fixed security) is used to pay:
- Liquidation expenses, including the Official Receiver's fees;
- Liquidator's remuneration and outlays;
- Costs properly incurred in preserving and realising assets.
These costs must be paid before distributions to other creditor classes.
3. Preferential Creditors
After liquidation expenses, preferential creditors are paid. This class has statutory priority over other unsecured claims and typically includes:
- Employees' claims for unpaid wages and holiday pay within defined statutory limits; and
- Certain pension scheme contributions due from the employer.
Preferential debts rank equally among themselves; if assets are insufficient, they share proportionately.
4. Prescribed Part (Floating Charge Pool)
To preserve some recovery for unsecured creditors where floating charges exist, a statutory “prescribed part” is carved out of the net realisation of floating charge assets up to a capped amount. This fund is exclusively for distribution to unsecured creditors and does not reduce the fixed charge holder's entitlement on those assets.
5. Floating Charge Secured Creditors
After the prescribed part is allocated, holders of a floating charge are paid. A floating charge typically covers assets that change in nature (such as stock or receivables) and becomes crystallised on liquidation. Once the prescribed part is set aside, floating charge holders share in the residual realisations.
6. Unsecured Creditors
If funds remain, unsecured creditors are paid next. These are creditors without security, such as trade creditors, suppliers, landlords and non‑preferential tax claims. Their claims are admitted and paid pari passu (on a proportional basis) if there is insufficient money to settle all claims in full.
7. Statutory Interest
Interest on unsecured and preferential debts that has accrued during the liquidation period may be payable after principal claims (in accordance with statutory provisions and at a prescribed rate).
8. Shareholders
Any remainder, after all creditor claims and costs have been satisfied, is distributed to shareholders in accordance with their rights under the company's articles of association. In insolvent liquidations, shareholders seldom receive distributions.
Practical Examples of Priority in Action
Example 1: A company with a fixed charge over a property will pay that secured lender from the sale of the property before liquidation costs or employee claims drawn from the general asset pool.
Example 2: After selling fixed‑charge assets, the liquidator realises general assets. Before unsecured suppliers are paid, the liquidator meets statutory costs and any employees' wage preferences.
Example 3: If a floating charge exists, a portion of those assets' realisations is set aside as the prescribed part to benefit unsecured creditors before the floating charge holder is paid.
These examples illustrate that creditors' expectations must align with the statutory hierarchy, not commercial perceptions.
Common Questions About Priority of Claims
Does HMRC get paid first?
Certain debts owed to HM Revenue and Customs (HMRC) may be treated as preferential (for example, certain payroll deductions), but broad tax liabilities like corporation tax often rank as ordinary unsecured claims unless specific conditions apply.
Can preferential status change?
Yes. Legislation has narrowed categories of preferential claims over time. Current rules focus on employee entitlements and some pension contributions, rather than a broad spectrum of creditor types.
What happens if assets are insufficient?
When available realisations cannot cover a creditor class in full, they are paid proportionally (a dividend in the pound), and the next class receives nothing until the earlier class is satisfied.
Key Takeaways
In liquidation proceedings in England and Wales, the law sets a strict order for distributing the assets of an insolvent company:
- Secured creditors with fixed charges (from charged assets).
- Liquidation costs and liquidator's remuneration.
- Preferential creditors, notably employee entitlements.
- The statutory prescribed part for unsecured creditors.
- Secured creditors with floating charges.
- Unsecured creditors paid pari passu.
- Statutory interest on claims.
- Any surplus to shareholders.
Understanding this priority hierarchy is essential for creditors, directors and advisers to assess recovery prospects and manage expectations in insolvency situations. The statutory order protects creditor rights and ensures an orderly and equitable process for dividing limited assets.
