Updated: 03 April 2026
Preferential creditors have priority for payment when a company goes into liquidation. Under UK insolvency law, they are paid after secured creditors with fixed charges but before floating charge holders and unsecured creditors.
When a company is insolvent, its assets must be distributed in a strict legal order. Understanding this creditor hierarchy is important for Directors, employees, and creditors who want to know who gets paid first.
This guide explains the order of payment in liquidation and who counts as a preferential creditor.
What is a creditor?
A creditor is any individual or organisation that a company owes money to. This could be due to unpaid invoices, loans, wages, rent, or taxes owed to HMRC.
Common types of company creditors include:
- Suppliers and trade creditors
- Banks and lenders
- Landlords
- Employees
- HMRC
- Customers owed refunds
- Directors who have loaned money to the company.
When a company becomes insolvent, it may not have enough money to repay everyone in full. In these cases, creditors must be paid in accordance with the legal priority order.
What happens to creditors during liquidation?
During liquidation, a licensed Insolvency Practitioner is appointed to act as the Liquidator. Their role is to close the company, sell its assets, and distribute the available funds to creditors.
The Liquidator must distribute the available funds in accordance with the creditor hierarchy. This hierarchy sets the order in which claims are paid once the company’s assets have been realised.
The most common form of an insolvent liquidation is called a Creditors’ Voluntary Liquidation (CVL). In a CVL, the Liquidator must follow the legal order of payment when distributing funds to creditors.
Order of priority when a company goes into liquidation
When a company goes into liquidation, the proceeds from the sale of its assets must be distributed in a strict legal order. This order of payment determines which creditors are paid first and which may receive little or nothing.
Liquidation order of priority (highest to lowest):
Secured creditors (fixed charge): Creditors with security over specific assets, such as property, vehicles, or machinery.
Liquidation costs and expenses: Fees for the Insolvency Practitioner, legal costs, and expenses involved in closing the company.
Preferential creditors: Employees owed wages, holiday pay, and certain pension contributions. Claims for unpaid wages are subject to statutory limits; amounts exceeding these limits are treated as unsecured debts.
Secondary preferential creditors: Certain HMRC debts, including VAT, PAYE, and National Insurance contributions.
Secured creditors (floating charge): Creditors secured against changing assets such as stock or cash, subject to the prescribed part.
The prescribed part: A portion of floating-charge assets set aside by law to be shared among unsecured creditors.
Unsecured creditors: Suppliers, customers, contractors, lenders without security, and other ordinary creditors.
Shareholders or members: Paid last, and only if all creditors have been repaid in full.
This hierarchy determines how the available funds are shared once the company’s assets have been realised.
Related: What Happens to Shareholders When a Company Is Liquidated?
What are preferential creditors?
Preferential creditors are given priority when a company goes into liquidation. Their status is set by insolvency law, mainly under the Insolvency Act 1986.
They are paid after secured creditors with fixed charges and the costs of the insolvency process, but before floating charge holders and unsecured creditors. This priority exists to protect certain groups, including employees and HMRC, where money has been earned, deducted, or collected but not yet paid.
In UK insolvency, preferential creditors generally fall into two main categories: employees and HM Revenue & Customs (HMRC).
Employees (primary preferential creditors)
Employees are given priority to make sure they are paid for work carried out before the company becomes insolvent. Preferential claims may include:
- Unpaid wages (up to the legal limit)
- Accrued but untaken holiday pay
- Certain occupational pension contributions.
If employees are paid through the Redundancy Payments Service, the government may claim as a preferential creditor instead.
HMRC (secondary preferential creditor)
Since 1 December 2020, HMRC has had secondary preferential creditor status for certain taxes collected on behalf of others by a company.
These include:
- VAT
- PAYE Income Tax
- Employee National Insurance contributions
- Student loan deductions
- Construction Industry Scheme (CIS) deductions.
HMRC is only preferential for these taxes. Other debts, such as Corporation Tax or employer National Insurance, are treated as unsecured claims.
What is a secondary preferential creditor?
The law also recognises secondary preferential creditors. This status was introduced by the Finance Act 2020, which changed the priority order for certain tax debts owed to HMRC.
Secondary preferential creditors rank after ordinary preferential creditors but before floating charge holders and unsecured creditors.
What is the prescribed part?
The prescribed part is a portion of money taken from floating-charge assets to ensure that unsecured creditors receive at least some payment.
This rule applies to most floating charges created after September 2003. The amount set aside depends on the value realised from the company’s assets and is capped by law.
Because of the prescribed part, floating charge holders may not receive the full amount they are owed.
What happens if there is not enough money to pay everyone?
In many liquidations, there are not enough funds to repay all creditors in full. When this happens, the available money must still be distributed according to the creditor hierarchy set out in insolvency law.
Where funds are limited:
- Each class of creditor must be paid in the correct order of priority before the next group receives anything.
- Creditors within the same class are usually paid proportionately (known as pari passu), meaning they share the available funds equally according to what they are owed.
- Unsecured creditors often receive only a small dividend, and in many cases, nothing at all.
- Shareholders are paid last and rarely receive any return in an insolvent liquidation.
Clarke Bell can help
If your company is facing insolvency, it is important to understand how the creditor hierarchy works before making any decisions.
At Clarke Bell, our licensed Insolvency Practitioners have decades of experience helping Directors deal with liquidation, creditor pressure, and financial difficulties. We can explain your options clearly, ensure your legal obligations are met, and guide you through the process from start to finish.
If you need advice about liquidation or creditor priority, contact our team today for confidential support.
Frequently asked questions
Do preferential creditors always get paid in full?
Not always. Preferential creditors are paid before floating charge holders and unsecured creditors, but they may still receive less than they are owed if there are insufficient assets in the liquidation. If funds are limited, preferential creditors share the available funds on a proportional basis.
Are Directors treated as preferential creditors if the company owes them money?
No. Directors are not preferential creditors if they have loaned money to the company. In most cases, Director loans are treated as unsecured debts and are only repaid after secured, preferential, and floating charge creditors have been paid.
Does HMRC get paid before employees in liquidation?
No. Employees are classed as primary preferential creditors and are paid before HMRC. HMRC is a secondary preferential creditor for certain taxes, meaning it ranks after employee claims but before floating charge holders and unsecured creditors.
What happens to floating charge creditors after the 2020 rule change?
From December 2020, certain HMRC debts are paid before floating charge holders. This means that lenders with a floating charge may recover less money than they would have before the rule change, as part of the available funds must be used to pay preferential creditors first.
Can preferential creditors force a company into liquidation?
Yes. Preferential creditors, including employees and HMRC, can take legal action to recover unpaid debts. If the debt is not resolved, they may issue a winding-up petition, which can result in compulsory liquidation ordered by the court.
Can Directors be personally liable if preferential creditors are not paid?
Directors are not usually personally liable for company debts. However, if they continue trading while the company is insolvent, or fail to act in the interests of creditors, they may face claims for wrongful trading, misfeasance, or breach of duty. In some cases, this can lead to personal liability or Director disqualification.
