When a UK company enters administration or liquidation, every pound it can realise is paid out in a fixed order set by statute. The order is: the insolvency practitioner's costs, then fixed-charge holders, then ordinary preferential creditors (mainly employees), then secondary preferential creditors (HMRC for PAYE, NICs, VAT and CIS), then a carve-out for unsecured creditors called the prescribed part, then floating-charge holders, then the general unsecured tier, and finally shareholders. Each rank must be paid in full before the next is paid anything.
The statutory basis is section 175 and Schedule 6 of the Insolvency Act 1986, amended by the Finance Act 2020 to reinstate HMRC's secondary preferential status from 1 December 2020. The prescribed part is in section 176A and the Insolvency Act 1986 (Prescribed Part) Order 2003. Below: each rank in detail, what typically sits in each tier, and the cumulative effect on what reaches an unsecured trade creditor.
Section 175 of the Insolvency Act 1986 is the master provision for the order of payment in a winding up. It says that the company's preferential debts (defined in section 386 and listed in Schedule 6) "shall be paid in priority to all other debts" and rank equally among themselves. The same priority is applied in administrations by paragraph 65 of Schedule B1 to the same Act.
Schedule 6 categorises the preferential debts. Categories 1 to 3 (old taxes, betting duties, social security contributions) were abolished by the Enterprise Act 2002. Categories 4 (pension contributions), 5 (remuneration of employees), 5A (accrued holiday pay) and 6 (levies on coal and steel) are the surviving ordinary preferential debts. Category 7 is the secondary preferential rank introduced by section 98 of the Finance Act 2020 and given effect by the Finance Act 2020, Schedule 8: HMRC's claim for "deemed-collected" taxes.
The prescribed part sits in section 176A of the same Act, inserted by section 252 of the Enterprise Act 2002 and given effect by the Insolvency Act 1986 (Prescribed Part) Order 2003 (SI 2003/2097, as amended by SI 2020/211). It only exists where the company has granted a floating charge; without one, there is nothing to carve out from.
Before any creditor sees anything, the insolvency itself is paid for. The administrator's or liquidator's fees, the legal costs of the proceedings, the cost of preserving assets, the cost of investigations into directors' conduct, and any expenses of trading the business in administration all come out of the pot before any tier of creditor is paid. In an administration, the expenses regime is in paragraph 99 of Schedule B1 and rule 3.51 of the Insolvency (England and Wales) Rules 2016; in a liquidation, in section 115 (voluntary) and section 156 (compulsory) of the 1986 Act.
In small insolvencies, the practitioner's costs can absorb most or all of the available realisations. This is a major reason that ordinary unsecured creditors often recover nothing. The Statement of Affairs filed at Companies House sets out the practitioner's estimate of the recoverable pot before costs; the final outcome appears in the practitioner's progress reports filed during the case and the final account at closure.
A fixed charge is security over a specific, identified asset: a freehold property, a named piece of plant, a particular receivable. The chargeholder's right is to be paid out of the proceeds of that asset before anyone else has a claim on those proceeds. The asset is effectively ring-fenced from the rest of the insolvent estate.
The distinction between a fixed and a floating charge matters because the two rank in completely different places in the waterfall. The leading authority on the test is the House of Lords decision in National Westminster Bank plc v Spectrum Plus Ltd [2005] UKHL 41: a charge is fixed only if the chargeholder exercises real control over the asset, not merely a label in the document. A "fixed" charge over book debts that the company can collect and use freely is in substance floating, regardless of what the debenture calls it.
A typical UK lending debenture will contain both: fixed charges over property, plant and equipment, and a floating charge over the rest (inventory, raw materials, future book debts). The lender will be a fixed-charge holder for the former and a floating-charge holder for the latter.
The ordinary preferential rank is dominated by claims arising from the employment relationship. Schedule 6 categories 4, 5 and 5A list them:
In practice, the Government's Redundancy Payments Service pays employees their statutory entitlement (notice pay, statutory redundancy, arrears of wages and holiday pay up to statutory caps) from the National Insurance Fund. The Service then subrogates into the employee's preferential claim, which is why a Statement of Affairs often shows the Secretary of State as the largest single preferential creditor.
From 1 December 2020, HMRC is a secondary preferential creditor for taxes that the insolvent company has collected from someone else and held on trust pending payment to HMRC. The reinstatement was made by section 98 of the Finance Act 2020, with the technical detail in Schedule 8. The taxes covered are:
HMRC is not a preferential creditor for taxes that are the company's own liability rather than someone else's tax collected by the company. Corporation tax, employer NICs, business rates and other own-account taxes remain unsecured. There is no time limit on HMRC's secondary preferential claim: unlike the four-month look-back on employee wages, all unpaid PAYE, NICs, VAT and CIS rank preferentially regardless of how far back the arrears go.
The policy effect of the 2020 reinstatement is that floating-charge lenders and the prescribed part both shrunk, because HMRC now extracts its share of "trust" taxes from the pot before either is paid. The change was controversial when introduced and remains a material factor in lender pricing of revolving credit and asset-based facilities.
The prescribed part is the legislature's compromise for the abolition of Crown preference in 2002: floating-charge holders moved up the order at the expense of unsecured creditors, so a slice was carved back out for unsecured creditors before floating-charge holders are paid. It is created by section 176A of the Insolvency Act 1986.
The formula in the Insolvency Act 1986 (Prescribed Part) Order 2003 (SI 2003/2097), as amended by SI 2020/211 with effect from 6 April 2020:
"Net property available to floating-charge holders" is what is left after paying the costs of the insolvency, the fixed-charge holders out of their security, and both preferential ranks. So the prescribed part is calculated on a pot that has already been depleted by everyone above it in the waterfall.
The prescribed part only exists where the company has granted a floating charge. In a company without a debenture, there is nothing to carve out from, and the unsecured creditors look only to whatever is left in the general estate after preferential creditors.
The floating-charge holder is typically the same lender that took the fixed charges above, but exercising rights against the changing asset base: inventory, raw materials, work in progress, future book debts, intellectual property used in the business. The charge "floats" until it crystallises (on insolvency, demand, or breach of covenant), at which point it fixes onto whatever assets are within its scope at that moment.
The floating-charge holder is paid out of the realisations from those assets, but only after: insolvency costs (rank 1), both preferential ranks (ranks 3 and 4), and the prescribed part (rank 5). In practice this means that in many smaller insolvencies, the floating-charge holder recovers little or nothing, because preferential and prescribed-part deductions exhaust the floating-charge pot.
The general unsecured tier is the rank that absorbs almost every creditor without statutory priority or contractual security. Typical members:
Unsecured creditors are paid pari passu, which is to say in proportion to the size of their admitted claim. There is no further ranking within this tier; a £1m supplier ranks alongside a £100 supplier on a pence-in-the-pound basis. The pot they share is whatever survives after every prior rank has been paid in full, plus the prescribed-part slice carved out from the floating-charge realisations.
The recovery rate to this tier is typically between 1p and 3p in the pound across UK administrations and liquidations, with a long tail of cases that pay nothing and a small minority that pay in full. The Statement of Affairs filed at Companies House (form AM02 in administrations) gives the practitioner's contemporary estimate.
The cumulative effect of the ranking is that the assets visible in the company's accounts often look much larger than what reaches the unsecured tier. Consider a stylised mid-sized administration with £5m of asset realisations and £15m of liabilities:
The £5m of realisations has produced a 3p recovery for unsecured creditors. This is broadly representative of UK outcomes. The Statement of Affairs filed at Companies House for any given case shows the practitioner's contemporary estimate of the pot at each rank; the final outcome is in the progress reports and the closing account.
The Statement of Affairs (form AM02) is the practitioner's sworn estimate of what each rank of creditor is expected to recover. We parse and publish them on the per-company pages of every administration on the register.