The short answer
In a liquidation, the liquidator takes control of all company assets, sells (“realises”) them, and distributes the proceeds in a fixed legal order of priority. The order runs: fixed-charge creditors, then liquidation costs, preferential creditors, the prescribed part for unsecured creditors, floating-charge creditors, remaining unsecured creditors, and finally shareholders — though there is rarely anything left for the last group.
Once a company enters liquidation, its assets stop being the directors’ to deal with. The liquidator’s job is to gather in and sell those assets, then pay out the proceeds in the order Parliament has set. Understanding that order explains why some creditors are paid in full while others receive little or nothing. This guide walks through both the realisation of assets and the statutory waterfall.
Asset distribution at a glance
- Who takes control The liquidator
- What they do Realise (sell) the assets
- Distribution In a fixed legal order of priority
- First paid Fixed-charge creditors
- Last in line Shareholders
- Set by The Insolvency Act 1986
Realising the assets
On liquidation, control of the company passes to the liquidator, a licensed insolvency practitioner. Their first task is to identify and secure everything the company owns — cash, stock, equipment, vehicles, property, intellectual property, book debts and any money owed to the company. They then realise those assets, usually by sale, at the best price reasonably obtainable, often using agents or auctioneers to value and market them. The directors lose the power to deal with company property from the moment liquidation begins; selling or giving away assets after that point is not theirs to do.
Realisation is not limited to physical things. The liquidator also investigates the directors’ conduct and can pursue claims that are themselves valuable assets of the estate — for example, recovering an overdrawn director’s loan account, unwinding a transaction at undervalue or a preference made to favour one creditor shortly before insolvency, or bringing a wrongful-trading claim. Money recovered through these actions goes into the same pot for distribution. Assets subject to valid retention-of-title clauses or third-party ownership (such as goods on hire-purchase) are generally not the company’s to sell and are returned or dealt with separately.
The order of priority
The proceeds are not shared equally. The Insolvency Act 1986 sets a strict waterfall — each tier must be paid in full before the next receives anything:
| Order | Who gets paid | Example |
|---|---|---|
| 1 | Fixed-charge creditors | A lender with a mortgage over property |
| 2 | Liquidation costs and the liquidator’s fees | The expenses of the winding-up |
| 3 | Preferential creditors | Employee wages and certain HMRC taxes |
| 4 | Prescribed part | A ring-fenced slice for unsecured creditors |
| 5 | Floating-charge creditors | A lender with a floating charge over assets |
| 6 | Unsecured creditors | Suppliers, trade creditors |
| 7 | Shareholders | Only if a surplus remains |
Preferential creditors and HMRC
Preferential creditors include employees, for unpaid wages (up to a cap) and holiday pay. Since 1 December 2020, HMRC is also a secondary preferential creditor for certain taxes the company collects on the Crown’s behalf — VAT, PAYE, employee National Insurance contributions and CIS deductions. This does not apply to corporation tax, which remains an unsecured debt. The change moved these “collected” taxes ahead of floating-charge and unsecured creditors.
The prescribed part
- The prescribed part is a portion of floating-charge realisations ring-fenced for unsecured creditors.
- It is calculated as a percentage of net floating-charge property, subject to a statutory cap.
- It applies to floating charges created on or after 15 September 2003, when the regime was introduced.
- It exists so unsecured creditors receive something even where a floating charge would otherwise sweep up the assets.
Without the prescribed part, a lender holding a floating charge over substantially all the company’s assets could absorb almost everything, leaving suppliers and trade creditors with nothing. The prescribed part is Parliament’s way of reserving a slice for the general body of unsecured creditors as the price of the floating-charge holder’s wide-ranging security.
How creditors prove their claims
Before anyone is paid, creditors must submit ("prove") their claims to the liquidator, who checks them and agrees the amounts. Only agreed claims share in a distribution, and they share within their tier on a pari passu (equal-footing) basis — so if there is not enough to pay a whole tier, each creditor in it receives the same proportion, expressed as pence in the pound. This is why two unsecured suppliers owed different amounts receive the same dividend rate, not different ones. The liquidator gives notice of an intended dividend and a final date for proving, then calculates and pays it.
Why the order matters to directors
The priority order also explains why directors who have given personal guarantees can still face a claim: if there are not enough assets to repay a guaranteed debt, the lender pursues the guarantor personally — see director personal liability. It also explains why the liquidator’s recovery actions matter so much to creditors: every pound clawed back from an overdrawn loan account or a reversed preference is a pound added near the top of the waterfall, lifting the dividend for everyone below. To compare how assets are dealt with across procedures, see liquidation vs administration vs CVA.
Worried about what will happen to your company’s assets?
A licensed insolvency practitioner can explain how the order of priority applies to your specific creditors. A short, confidential call gives you clarity.
Frequently asked questions
Who gets paid first in a liquidation?
Fixed-charge creditors — such as a lender holding a mortgage over property — are paid first from the relevant asset, followed by the costs of the liquidation, then preferential creditors.
Where does HMRC rank?
Since December 2020 HMRC is a secondary preferential creditor for VAT, PAYE, employee NICs and CIS deductions. Corporation tax is not preferential and ranks as an ordinary unsecured debt.
What is the prescribed part?
The prescribed part is a ring-fenced slice of floating-charge realisations set aside for unsecured creditors, calculated as a capped percentage so they receive something even where a floating charge applies.
Do shareholders get anything back?
Only if every creditor is paid in full and a surplus remains. In an insolvent liquidation the assets are exhausted long before that point, so shareholders usually receive nothing.
Sources & further reading
- Insolvency Act 1986 — order of priority of payments
- GOV.UK — Liquidate your limited company
- The Insolvency Service — guidance for company directors
- HMRC — protecting HMRC in insolvency (secondary preferential status)
This guide is general information, not formal insolvency advice. Your situation must be assessed by a licensed insolvency practitioner before you act.