The liquidator’s notice of appointment lands on your desk. You are listed in the Statement of Affairs as an unsecured creditor for £23,000.
Above you in the document sit the bank, HMRC, six employees owed wages, and a fixed-charge lender you have never heard of. You assumed your invoice would be paid from whatever the liquidator realised. You were wrong about the order.
UK corporate insolvency runs on a waterfall fixed by the Insolvency Act 1986, principally section 175 and Schedule 6.
Where your claim sits in that waterfall decides what you will actually receive, and in our files the difference between ranks is not 10% and 20%. It is often full recovery versus zero.
In our caseload, most suppliers underestimate how far down the ranking they sit, and most directors underestimate how little of the pot is left by the time ordinary unsecured creditors are reached.
This guide sets out the full order, what each tier actually contains, the specific fixes introduced by the Finance Act 2020, and where personal guarantees sit outside the statute altogether.
The Preferential Creditor Waterfall in UK Insolvency
Section 175 of the Insolvency Act 1986 and Schedule 6 set out a fixed order of priority.
The liquidator realises the company’s assets (sells the vans, collects the debtor book, exits the lease), pays the statutory tiers in order, and stops when the money runs out. Your position in the list is set by statute, not negotiation.
When we act on a creditor file, the first thing we do is map the Statement of Affairs onto this waterfall, tier by tier.
The order runs as follows. Fixed-charge creditors are paid from their specific asset. The expenses of liquidation (the office-holder’s fees and litigation costs) come next.
Ordinary preferential creditors (Category 1, mainly employees up to £800) follow.
Secondary preferential creditors (Category 2, HMRC on VAT/PAYE/NIC/CIS since 1 December 2020) rank next. Then the prescribed part for unsecured creditors, a ring-fenced slice of floating-charge realisations.
Then floating-charge creditors, usually the bank. Then ordinary unsecured creditors (trade suppliers, landlords, Corporation Tax, employer NIC). And, if anything remains, shareholders.
You can work through this in one pass, but the tiers do the real work. Every tier is paid in full before the next tier sees any money. If the pot runs out mid-tier, creditors within that tier share pro rata; creditors in later tiers get nothing.
Fixed-Charge Creditors: Paid First Against Specific Assets
Fixed-charge creditors hold a charge (a registered security) over a specific, identifiable asset.
The bank’s charge over the freehold warehouse; the asset finance lender’s charge over the HGV fleet; the specialist funder’s charge over the book debts.
When that asset is sold, the proceeds go to the fixed-charge holder first, before anything else is distributed.
This is why a company with “£500,000 of assets” can still produce a zero dividend for unsecured creditors.
If a £420,000 building is charged to the bank for £350,000 and the vans are financed, the actual pool of realisations available for the Schedule 6 tiers is the remainder after every fixed charge is redeemed. That remainder is often modest.
You should check Companies House for the debtor’s charges register. Every registered charge appears on MR01 and MR04 filings.
If your debtor has three registered charges to the bank, one to the asset finance company, and one to a specialist invoice financier, you are below all of them.
Expenses of the Preferential Process Rank Next
Section 176ZA IA 1986 and rule 7.108 of the Insolvency (England and Wales) Rules 2016 give the office-holder’s expenses priority over floating-charge realisations.
That includes the liquidator’s own fees, statutory disbursements, legal costs of pursuing directors, and the costs of storing and selling assets.
This is the tier that most surprises creditors. The liquidator’s fees are not paid last; they are paid after fixed-charge holders but before everyone else.
In a small liquidation with £80,000 of realisations and £35,000 of expenses, more than 40% of the pot is gone before ordinary preferential creditors receive a penny.
We see this play out in published receipts and payments accounts when the final report is filed at Companies House.
Ordinary Preferential Creditors: Employees and the £800 Cap
Category 1 preferential debts under Schedule 6 IA 1986 are ordinary preferential creditors. These are the debts the statute prioritises because they sit on workers rather than institutions.
The main categories are arrears of wages and salary, capped at £800 per employee for the 4 months before the relevant date; accrued holiday pay (no cap); employer pension contributions;
and statutory payments made by the Secretary of State (the Redundancy Payments Service) that are then subrogated to the preferential rank.
Our caseload shows a consistent pattern here. Where a company has employees, this tier is where the pot quietly drains.
The £800 cap is narrow. Six months of wages arrears at £3,000/month would leave £17,200 per employee in the unsecured pool. This is why employee creditors cluster at two different levels of the waterfall: preferential for the capped element, unsecured for everything above it.
The Redundancy Payments Service usually steps in for the statutory portion, and its subrogated claim then takes the preferential rank.
Secondary Preferential Creditors: HMRC After the Finance Act 2020
From 1 December 2020, the Finance Act 2020 reinstated HMRC’s preferential status, but only for taxes the company collected from third parties.
HMRC now ranks as a secondary preferential creditor under Schedule 6 for: VAT; PAYE income tax; employee National Insurance Contributions; Construction Industry Scheme deductions; and student loan deductions.
There is no cap on the HMRC secondary preferential claim, and no time limit. If the debtor owes £140,000 of unpaid VAT across six quarters, every penny of it ranks ahead of floating-charge realisations and ahead of unsecured creditors.
Crucially, HMRC’s own taxes (Corporation Tax and employer National Insurance Contributions) are not reinstated. Those remain ordinary unsecured debts.
The statute draws a line between “trust taxes” collected on behalf of others (secondary preferential) and HMRC’s own revenue claims (unsecured).
If you are a supplier worried about HMRC swallowing the pot, check the Statement of Affairs to see how much of the HMRC claim is VAT/PAYE (secondary preferential) versus Corporation Tax (unsecured). The split matters to your recovery.
The Prescribed Part: A Carve-Out for Unsecured Creditors
Section 176A IA 1986 (and the Insolvency Act 1986 (Prescribed Part) Order 2003, as amended by the 2020 Order) carves out a ring-fenced slice of floating-charge realisations for ordinary unsecured creditors. This is the prescribed part.
The calculation is: 50% of the first £10,000 of net floating-charge realisations, plus 20% of the excess above £10,000, up to a cap of £800,000 for floating charges created on or after 6 April 2020 (£600,000 for older charges).
The prescribed part is not paid to preferential creditors or secured creditors. It is paid pro rata to unsecured creditors only.
For a liquidation with £250,000 of net floating-charge realisations, the prescribed part is £5,000 + (£240,000 × 20%) = £53,000.
That sum is split pro rata across all unsecured creditors, including trade suppliers, unsecured lenders, HMRC for Corporation Tax, and landlords.
For a £23,000 unsecured claim in a £1.2m total unsecured pool, the prescribed part might produce around £1,000. Not zero, but not what you hoped for either.
Non-Preferential Creditors: Where Most Suppliers Sit
Non-preferential creditors, also called ordinary unsecured creditors, are where most trade suppliers, landlords (for post-insolvency rent arrears), Corporation Tax, employer NIC, and unsecured lenders actually sit.
This is the tier funded by the prescribed part and, where floating-charge realisations exceed the secured bank’s claim, by any residual floating-charge surplus.
In practice, unsecured recoveries cluster in a narrow band. In our caseload, typical unsecured dividends sit between 0 and 12 pence in the pound, with the median closer to 2p.
The distribution is heavily skewed. Roughly one in ten liquidations returns a meaningful dividend, one in ten returns a nominal dividend, and the rest return nothing. This is the arithmetic of the waterfall, not a liquidator’s failing.
If you supplied goods on retention of title, or if the debtor holds your deposit in a separate client account, your claim may not be unsecured at all. ROT and trust property sit outside the insolvent estate.
Shareholders, the final tier, rank last and usually receive nothing.
Where Personal Guarantees Sit Outside the Preferential Waterfall
The waterfall governs recoveries against the company. It does not govern your claim against a director who signed a personal guarantee.
A PG is a separate contract, enforceable against the guarantor directly, independent of the company’s insolvency.
If a director guaranteed your supply account for £15,000, and the company pays you a 2p dividend (£300), your £14,700 shortfall is still enforceable against the director.
You pursue it in the County Court, or by statutory demand and bankruptcy petition (£680 total via the adjudicator route). The waterfall is irrelevant; the PG is a direct personal claim.
This is why PGs matter more than ranking for many trade creditors. A small supplier with a £10,000 PG is frequently better protected than a larger supplier with no PG, regardless of what the waterfall produces.
If you extend credit, always ask whether a director will stand behind it. If you are already in a dispute, always check whether a PG survives the liquidation, because it does.
The waterfall is fixed; your position in it is not. There are two practical conclusions for a creditor.
First, if you are an unsecured supplier in an ordinary liquidation, your expected recovery is low, and the cost of chasing for more is usually higher than the return.
File a clean Proof of Debt, note any retention of title, claim VAT bad debt relief under section 36 VATA 1994, and close the file.
Second, if you have a PG from a director, a retention of title clause over identifiable stock, or evidence of preferential payments in the last six months, you sit outside the ordinary unsecured tier.
PGs are enforceable directly; ROT pulls your goods out of the estate; preferences, if pursued by the liquidator, enlarge the unsecured pot. These routes have real recovery value, and the legal work is targeted rather than speculative.
The split matters. We help creditors on both sides. For a 45-minute free review of where your claim sits in a specific insolvency, call 0800 074 6757.
We will pull the Statement of Affairs, map the fixed charges, calculate the prescribed part, and tell you within a call whether this is a write-off or a claim worth running.
No. Since 1 December 2020, HMRC is a secondary preferential creditor only for taxes collected from third parties (VAT, PAYE, employee NIC, CIS, student loan deductions). Corporation Tax and employer NIC remain unsecured. Before 2003, HMRC held broader preferential status, which the Enterprise Act 2002 removed, and the Finance Act 2020 partially restored.
What is the prescribed part and how much does it actually pay?
The prescribed part is a ring-fenced portion of floating-charge realisations reserved for unsecured creditors: 50% of the first £10,000 plus 20% of the excess, capped at £800,000 on post-6 April 2020 floating charges. In a typical trade liquidation, it produces single-digit pence per pound of unsecured debt, shared pro rata across the unsecured pool.
How much wages arrears rank as preferential?
Up to £800 per employee, covering the four months before the relevant date. Holiday pay and employer pension contributions also qualify, on terms set out in Schedule 6. Any wages arrears above £800 sit in the ordinary unsecured pool.
Where does a personal guarantee fit in the waterfall?
It does not. A PG is enforceable against the guarantor (usually a director) directly, independent of the company’s liquidation. The waterfall applies only to recoveries from the company’s estate. Your PG claim runs in parallel, in the County Court or by bankruptcy petition.
What is the difference between ordinary and secondary preferential?
Ordinary preferential (Category 1) covers employee-related claims with statutory caps. Secondary preferential (Category 2) covers HMRC’s claims for VAT, PAYE, employee NIC, CIS, and student loan deductions, with no cap. Category 1 is paid before Category 2.
Can a fixed-charge holder take more than the asset is worth?
No. The fixed charge attaches to a specific asset and is redeemed only to the extent of that asset’s realisation. Any shortfall on a fixed charge becomes unsecured for the residual sum and ranks with ordinary unsecured creditors. Surplus on a fixed charge flows back down the waterfall.
How do I find out where I rank in a specific liquidation?
Check the Statement of Affairs filed with the liquidator’s appointment (usually at Companies House within a few weeks). It lists assets, secured charges, preferential claims, and the estimated unsecured pool. The liquidator’s subsequent progress reports show actual realisations and expenses, which tell you whether a dividend is likely.
Methodology & Disclosure
This guide was prepared by our editorial team and reviewed by a licensed insolvency practitioner within Company Debt’s creditor services practice.
It applies sections 175, 176A, 176ZA and Schedule 6 of the Insolvency Act 1986, rule 7.108 of the Insolvency (England and Wales) Rules 2016, and the Crown preference reinstatement in the Finance Act 2020.
Prescribed-part figures reflect the 2020 Order raising the cap to £800,000 for floating charges from 6 April 2020.
Company Debt is a UK insolvency and business rescue firm. We advise creditors independently of the appointed office-holder.
Our guidance on expected dividend ranges is drawn from published receipts and payments accounts in our casework, not from advertised recovery promises. We do not guarantee outcomes.
