{"id":173993,"date":"2022-08-09T03:28:12","date_gmt":"2022-08-09T02:28:12","guid":{"rendered":"https:\/\/legalvision.co.uk\/?p=173993"},"modified":"2026-04-23T02:03:58","modified_gmt":"2026-04-23T01:03:58","slug":"priority-debt-insolvency","status":"publish","type":"post","link":"https:\/\/legalvision.co.uk\/startups\/priority-debt-insolvency\/","title":{"rendered":"What Does Priority Mean in Debt or Insolvency?"},"content":{"rendered":"\n<p>When a company cannot pay its debts, the law determines which creditors get paid first. This ranking system, known as the &#8220;order of priority&#8221; or &#8220;waterfall&#8221;, governs how a company&#8217;s remaining assets are distributed among creditors during insolvency. This article will explain the lawful order of priority under insolvency law and provide an overview of some key concepts and their commercial implications.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Order of Creditors and Insolvency Law<\/h2>\n\n\n\n<p>When Party A owes Parties B, C, and D money, the law says Party A owes the others a debt obligation. Ideally, Party A repays each creditor according to the terms of their debt agreement, and neither party gives the agreement much thought.&nbsp;However, problems arise when a borrower runs into financial difficulties and <a href=\"https:\/\/legalvision.co.uk\/disputes-litigation\/my-business-cannot-pay-its-debts-what-are-my-options\/\">cannot honour the debt obligation<\/a>. Furthermore, if a company does not have enough money to repay one creditor, it will not have enough money to repay all the creditors together.&nbsp;<\/p>\n\n\n\n<p>When a company cannot pay its debts (i.e. insolvent) and cannot agree with its creditors on how to restructure the debt, the outcome is <a href=\"https:\/\/legalvision.co.uk\/disputes-litigation\/receivership-and-liquidation\/\">liquidation<\/a>. Liquidation is where a court-appointed professional sells off the company\u2019s assets to repay the creditors according to the order of priority.&nbsp;<\/p>\n\n\n\n<p>Insolvency law addresses what happens when there is not enough money to repay each creditor. Specifically, it deals with insolvent liquidation.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">The Order of Priority<\/h3>\n\n\n\n<p>One of the most fundamental areas of insolvency law is the order that the law entitles creditors to receive payment in the event of insolvency. This list is known as the order of priority.&nbsp;Overall, the law recognises different classes of creditors depending on the type of interest they have in the company\u2019s property. <\/p>\n\n\n\n<div  class=\"box box--icon box--info\">\n    <!-- wp:paragraph -->\n<p>In summary, the order of repayment in insolvency is:<\/p>\n<!-- \/wp:paragraph --> <!-- wp:list -->\n<ul>\n<li>secured creditors (fixed charges and mortgages);<\/li>\n<li>costs to <a href=\"https:\/\/legalvision.co.uk\/corporations\/winding-up\/\">wind up the company<\/a>;<\/li>\n<li>preferential creditors;<\/li>\n<li>floating charge holders (except for ring-fenced money);<\/li>\n<li>unsecured creditors on a <em>pari passu <\/em>basis; and<\/li>\n<li>shareholders.<\/li>\n<\/ul>\n<\/div>\n\n\n\n<h3 class=\"wp-block-heading\">Secured Creditors&nbsp;<\/h3>\n\n\n\n<p>A secured creditor is a creditor that has a security interest in the debtor company\u2019s property. There are various types of secured creditors, and each type depends on the security interest they have in the company\u2019s property. <\/p>\n\n\n\n<p>For example, secured creditors with fixed charges (fixed charge holders) or mortgages (mortgagees) over the company\u2019s property have the strongest security interest. Accordingly, they have the right to take possession of certain property as set out under the terms of the loan agreement. These rights arise under specified conditions, such as an event of default. The most common secured creditor is a bank that has loaned a company a business loan. Thus, most loan agreements grant the bank a fixed charge over all the company\u2019s property.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Wind Up Costs&nbsp;<\/h3>\n\n\n\n<p>The company\u2019s liquidator\/administrator and financial and legal advisors will receive priority before every other creditor other than the secured creditors.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Preferential Creditors&nbsp;<\/h3>\n\n\n\n<p>The law protects preferential debts. Some common examples are:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>salaries the company owes employees (up to four months before insolvency limited to \u00a3800 per employee);<\/li>\n\n\n\n<li>unpaid obligatory payments towards employee pension schemes; and<\/li>\n\n\n\n<li>tax money owed to <a href=\"https:\/\/www.gov.uk\/government\/organisations\/hm-revenue-customs\">HMRC<\/a>.<\/li>\n<\/ul>\n\n\n\n<h3 class=\"wp-block-heading\">Floating Charge Holders<\/h3>\n\n\n\n<p>Floating charges provide secured creditors with less protection than fixed charges or mortgages.&nbsp;<\/p>\n\n\n\n<p>However, before paying floating charge holders, a portion of the company\u2019s remaining assets are ring-fenced out of this total amount and held on reserve for the unsecured creditors.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Unsecured Creditors and <em>Pari Passu&nbsp;<\/em><\/h3>\n\n\n\n<p>Unsecured creditors will receive any remaining amount left over, up to the total value of their debt. Generally, this will often be a very small amount.<\/p>\n\n\n\n<div  class=\"box box--icon box--info\">\n    <p><em>Pari Passu <\/em>is the principle that unsecured creditors should be treated equally and receive a portion of the company\u2019s remaining assets corresponding to the value of their debt relative to the other unsecured creditors.<\/p>\n<\/div>\n\n\n\n<p>Common unsecured creditors are trade creditors such as suppliers and customers.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Shareholders&nbsp;<\/h3>\n\n\n\n<p>Shareholders receive a portion of the remaining assets. However, this will often be a very small sum of money. <\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Case Study&nbsp;<\/h3>\n\n\n\n<p>For example, suppose you are a trade supplier to BadCo Ltd, which has recently entered insolvent liquidation.&nbsp;BadCo Ltd has no secured debt, and the total value of its assets is \u00a3100 000.&nbsp;BadCo\u2019s creditors and the amounts it owes them consist of:<\/p>\n\n\n\n<figure class=\"wp-block-table is-style-stripes\"><table><tbody><tr><td>HMRC<\/td><td>\u00a340,000<\/td><\/tr><tr><td>Liqudiation costs&nbsp;<\/td><td>\u00a310,000<\/td><\/tr><tr><td>Preferential creditors<\/td><td>\u00a320,000<\/td><\/tr><tr><td>Business creditors&nbsp;<\/td><td>\u00a3100,000<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p>The calculations showing how BadCo\u2019s assets are to be paid out are:<\/p>\n\n\n\n<figure class=\"wp-block-table is-style-stripes\"><table><tbody><tr><td>Amount available to the liquidator<\/td><td>\u00a3100,000<\/td><\/tr><tr><td>Less cost of the liquidation (paid in full)<\/td><td>(\u00a310,000)<\/td><\/tr><tr><td>Less preferential creditors including HMRC (paid in full)&nbsp;<\/td><td>(\u00a360,000)<\/td><\/tr><tr><td>Amount remaining for unsecured creditors<\/td><td>\u00a340,000<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p>The principle of <em>pari passu <\/em>means that the unsecured creditors will be paid \u00a30.40 per \u00a31 owed (\u00a340,000\/\u00a3100,000).&nbsp;Therefore, if BadCo owes you \u00a310,000 for the cost of goods you supplied it, this means you will receive \u00a34,000 as an unsecured creditor.<\/p>\n\n\n    <div class=\"my-7 lg:my-10 border-y-2 border-gray-100 py-7 lg:py-10 flex flex-col sm:flex-row items-start gap-10\">\n                    <img decoding=\"async\" class=\"w-52 mx-auto my-0! rounded\" src=\"https:\/\/img.legalvision.com.au\/wp-content\/uploads\/sites\/4\/2023\/01\/13013547\/buying-a-business-560x792-1.jpg\" alt=\"Front page of publication\"\n                 loading=\"lazy\" width=\"208\" height=\"298\">\n                <section>\n            <div class=\"text-2xl font-bold\">Buying a Business: Guide to Negotiating Terms<\/div>\n            <div class=\"body-text\">\n                <p>Buying a business? Download this free guide to help you negotiate key terms like price, stock, and employee entitlements.<\/p>\n            <\/div>\n            \n\n<a href=\"https:\/\/go.legalvision.co.uk\/buying-business-guide.html\" class=\" block px-5 py-3.5 max-w-fit bg-orange button__hover transition rounded text-white font-bold text-lg no-underline uppercase leading-tight text-center\" target=\"\" rel=\"\">Download Now<\/a>        <\/section>\n    <\/div>\n\n\n\n\n<h2 class=\"wp-block-heading\">Commercial Considerations<\/h2>\n\n\n\n<p>Strictly speaking, the order of priority only has a legal effect when a company is in liquidation. In practice, many insolvency proceedings do not reach this final stage because it is not to any party\u2019s advantage. Only secured creditors are guaranteed any sum of money. Even so, depending on the company\u2019s asset value, the amount of money for distribution may be minimal. Instead, the various creditors usually strike a deal amongst themselves and the company, sometimes using the court for help.&nbsp;<\/p>\n\n\n\n<p>Nevertheless, the order of priority exists as the worst-case scenario if the parties cannot agree. For this reason, appreciating your order as a creditor (or the order of your fellow creditors) will help you determine your negotiating position and leverage. For instance, as a trade creditor, you may require your customer to agree to a retention of title clause to avoid being a mere unsecured creditor.&nbsp;<\/p>\n\n\n\n<div  class=\"box box--icon box--info\">\n    <p dir=\"auto\"><strong>Key Statistics:<\/strong><\/p>\n<ul dir=\"auto\">\n<li><strong>90%:<\/strong> In 90% of creditors\u2019 voluntary liquidations, unsecured creditors recover 0% of their debts due to priority rules.<\/li>\n<li><strong>85%:<\/strong> Creditors\u2019 voluntary liquidations accounted for 85% of all UK corporate insolvencies in the last three years to Q4 2023.<\/li>\n<li><strong>74%:<\/strong> Over the last 10 years, creditors\u2019 voluntary liquidations have averaged 74% of all UK corporate insolvencies.<\/li>\n<\/ul>\n<p dir=\"auto\"><strong>Sources:<\/strong><\/p>\n<ol>\n<li>Insolvency Service, CVL research report (December 2024)\u00a0&lt;\/li&gt;<\/li>\n<li>Insolvency Service, CVL research report (December 2024)<\/li>\n<li>Insolvency Service, CVL research report (December 2024)<\/li>\n<\/ol>\n<\/div>\n\n\n\n\n<a href=\"#content-next\"\n   class=\"block p-4 mt-10 text-xl font-bold text-center text-white no-underline bg-gray-800 rounded-t-xl\">\n    Continue reading this article below the form\n    <i class=\"text-xl fa-regular fa-arrow-down\"><\/i>\n<\/a>\n<div class=\"px-6 pt-10 pb-12 mb-10 text-center bg-gray-100 rounded-b-xl sm:px-12 test\">\n    <div class=\"mb-8 text-2xl font-bold text-orange\">\n        Need legal advice?\n        <br>\n        <span class=\"text-lg not-prose\">\n                            Call <a href=\"tel:+448081968584\" class=\"not-prose\">0808 196 8584<\/a> for urgent assistance.\n                <br>\n                Otherwise, complete this form, and we will contact you within one business day.\n                    <\/span>\n    <\/div>\n\n    \n\n<div class=\"not-prose flex justify-center text-left gform_input_bg_white    \">\n    <script>\nvar 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Secured creditors (with fixed charges and mortgages) receive payment first, followed by the liquidators, preferential creditors, floating charge holders, unsecured creditors and then shareholders last (provided there is anything left). <\/p>\n\n\n\n<p>LegalVision provides ongoing legal support for businesses through our fixed-fee legal membership. Our experienced <strong><a href=\"https:\/\/legalvision.co.uk\/startup-lawyers-lp\/\">startup lawyers<\/a><\/strong> help businesses manage contracts, employment law, disputes, intellectual property, and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision\u2019s legal membership, call <a href=\"tel:+448081968584\" class=\"AVANSERnumber dynamic-number\">0808 196 8584<\/a> or <a href=\"https:\/\/legalvision.co.uk\/membership\/\" target=\"_blank\" rel=\"noreferrer noopener\">visit our membership page<\/a>.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Frequently Asked Questions&nbsp;<\/h2>\n\n\n\n<div class=\"schema-faq wp-block-yoast-faq-block\"><div class=\"schema-faq-section\" id=\"faq-question-1660010180096\"><strong class=\"schema-faq-question\"><strong>What is the order of priority in the context of a loan or insolvency?<\/strong><\/strong> <p class=\"schema-faq-answer\">You can think of the order of priority as the line all the creditors must get into to be repaid from an insolvent company\u2019s assets. Accordingly, the first creditor in line receives payment first, then the rest according to the insolvent company&#8217;s assets.\u00a0<\/p> <\/div> <div class=\"schema-faq-section\" id=\"faq-question-1660010190539\"><strong class=\"schema-faq-question\"><strong>What is the order under the order of priority?<\/strong><\/strong> <p class=\"schema-faq-answer\">Secured creditors with fixed charges or a mortgage over the company\u2019s property will be paid out before every other creditor. From there, the liquidator is paid next, followed by preferential creditors, unsecured creditors, and finally shareholders.\u00a0<\/p> <\/div> <div class=\"schema-faq-section\" id=\"faq-question-1776905881648\"><strong class=\"schema-faq-question\">Who qualifies as a preferential creditor?<\/strong> <p class=\"schema-faq-answer\">Employees owed wages, pension scheme contributors, and HMRC qualify as preferential creditors.<\/p> <\/div> <div class=\"schema-faq-section\" id=\"faq-question-1776905902114\"><strong class=\"schema-faq-question\">Can creditors avoid liquidation?<\/strong> <p class=\"schema-faq-answer\">Yes, creditors typically negotiate a deal with the company before reaching liquidation, as it rarely benefits any party.<\/p> <\/div> <\/div>\n","protected":false},"excerpt":{"rendered":"<p>When a company cannot pay its debts, the law determines which creditors get paid first. This ranking system, known as the &#8220;order of priority&#8221; or &#8220;waterfall&#8221;, governs how a company&#8217;s remaining assets are distributed among creditors during insolvency. This article will explain the lawful order of priority under insolvency law and provide an overview of<a href=\"https:\/\/legalvision.co.uk\/startups\/priority-debt-insolvency\/\">Continue reading <span class=\"sr-only\">&#8220;What Does Priority Mean in Debt or Insolvency?&#8221;<\/span><\/a><\/p>\n","protected":false},"author":13461,"featured_media":3115,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_relevanssi_hide_post":"","_relevanssi_hide_content":"","_relevanssi_pin_for_all":"","_relevanssi_pin_keywords":"","_relevanssi_unpin_keywords":"","_relevanssi_related_keywords":"","_relevanssi_related_include_ids":"","_relevanssi_related_exclude_ids":"","_relevanssi_related_no_append":"","_relevanssi_related_not_related":"","_relevanssi_related_posts":"1562,2307,2299,2084,2296,1410","_relevanssi_noindex_reason":"","editor_notices":[],"footnotes":""},"categories":[31],"tags":[20,21,73,122,125],"class_list":["post-173993","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-startups","tag-small-business","tag-medium-business","tag-debt-management-plan","tag-liquidation","tag-insolvency"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.5 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>What Does Priority Mean in Debt or Insolvency? 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