Insolvency Waterfall: How Creditors Are Paid

When a company enters administration or liquidation, the insolvency practitioner takes control of its assets and distributes them to creditors. This process follows a strict legal framework known as the insolvency hierarchy, which determines the order in which creditors are paid.

by Mark Hollinshead
Experienced Managing Director leading financial services with strategic vision, regulatory expertise, client focus, and proven growth leadership.

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60-second explainer

Order of Priority in Insolvency

Understanding the insolvency waterfall helps creditors assess likely recoveries and guides directors in planning company closure.

An official ‘hierarchy’ laid down by the Insolvency Act, 1986.

Each class of creditor must be paid in full before the liquidator can distribute funds to the next group.

It’s important to maximise the interests of creditors once you enter insolvency, otherwise you may be open to accusations of wrongful or unlawful trading.

Shareholders sit at the bottom of the hierarchy and only receive payment if all other debts are cleared—which is rare in insolvency.

Priority Level	Who Gets Paid	Examples / Notes
1	Fixed Charge Creditors	Secured lenders with fixed charges — property, machinery, vehicles. Costs of sale deducted first.
2	Priority Pre-Moratorium & Moratorium Debts	Debts incurred during or linked to moratorium — rent due, goods/services supplied. “Super priority” status.
3	Insolvency Expenses	Costs of running the insolvency — practitioner’s fees, legal costs, business management expenses.
4	Preferential Creditors	Unsecured debts with legal priority — employee wages (up to £800 for 4 months), pension, some HMRC debts.
5	Prescribed Part	Carve-out from floating charge assets — 50% of first £10k, 20% thereafter, capped at £600k–£800k.
6	Floating Charge Creditors	A floating charge is secured over a class of fluctuating assets, such as inventory or accounts receivable, that the company can use and trade in the normal course of business. In an insolvency, the charge “crystallizes,” and the charge holder is paid from the sale of those assets
7	Unsecured Creditors	Suppliers, contractors, customers — paid pro rata (pari passu) based on size of debt.
8	Statutory Interest	Interest on provable debts — 8% + Bank of England base rate, if funds remain.
9	Shareholders	Shareholders are the company’s owners, and they sit at the very bottom of the insolvency waterfall. As they have invested their capital with the highest risk, they will only receive a distribution if all other creditor groups have been paid in full—a rare occurrence in insolvent liquidations.

Key Takeaways

In insolvency, creditors are paid in strict order, with fixed charge holders and moratorium debts first, followed by insolvency costs and preferential claims. Floating charge and unsecured creditors come later, while shareholders are last and rarely receive anything. This hierarchy underscores directors’ duty to protect creditor interests once insolvency is suspected.