Ranking of creditor claims in UK insolvency
This is the UK creditor claim ranking — the statutory waterfall — that governs who is paid, in what order, from an insolvent company's assets. It is built from the Insolvency Act 1986 (Sch 6, ss.175, 176A, 176ZA), the Insolvency Rules 2016 and the Finance Act 2020's HMRC preferential reforms. The order applies identically in administration and liquidation. Worked example below. Author: Chris at Sell Ltd.
The full waterfall
Direct costs of realising the charged asset (agent fees, marketing, legal). Paid out of the fixed-charge fund first.
Paid from the proceeds of their specific charged assets. Any shortfall drops down as an unsecured claim.
Office-holder fees, legal costs, trading costs. Rank ahead of the floating charge under s.176ZA IA 1986.
Wage arrears (capped at £800), holiday pay, pension contributions (up to £5,000). Sch 6 IA 1986.
VAT, PAYE, employee NIC, CIS deductions. Finance Act 2020, effective 1 December 2020.
Ring-fenced slice of floating-charge property for unsecured creditors. 50% of first £10k + 20% of excess, capped at £800k. s.176A IA 1986.
Paid from the remainder of the floating-charge fund after prescribed part.
Ordinary trade creditors, landlords for post-appointment rent (unless expense), unsecured director loans. Pro-rata by claim value.
8% or contractual rate under rule 14.23 IR 2016. Only paid if unsecured pool has been paid in full.
Any surplus goes to shareholders per the articles. In insolvent processes this almost never exists.
Worked £ example — Meridian Foods Ltd
Assumed realisations: property (fixed charge) £1.6m; other assets (floating charge) £900k; trading costs incurred by administrator £250k; admin fees £180k; employee preferentials £120k (28 staff); HMRC secondary preferentials £480k; bank floating debt £1.2m; unsecured trade debt £2.4m.
| Tier | Claim | Payable | Running balance |
|---|---|---|---|
| 1 | Bank (fixed on property) | £1,400,000 | £1,100,000 (from £2.5m total) |
| 2 | Admin expenses + fees | £430,000 | £670,000 |
| 3 | Employee preferentials | £120,000 | £550,000 |
| 4 | HMRC secondary preferentials | £480,000 | £70,000 |
| 5 | Prescribed part (from £70k) | £17,000 | £53,000 |
| 6 | Bank (floating, £1.2m claim) | £53,000 | £0 |
| 7 | Unsecured (£2.4m claim) | £17,000 (~0.7p/£) | £0 |
Numbers are illustrative and simplified. Prescribed part shown as 20% of £70k excess-over-£10k for headline clarity. Actual calculations follow s.176A IA 1986 exactly.
Related
Frequently asked questions
What is the UK creditor ranking (the waterfall)?
The statutory order in which the proceeds of an insolvent company's assets are paid out. It is set out across the Insolvency Act 1986 (particularly Sch 6 and s.176ZA/176A) and the Insolvency Rules 2016. The order runs: fixed-charge realisation costs; fixed-charge creditors; expenses of the process; preferential creditors (Tier 1 employees, Tier 2 HMRC); prescribed part; floating-charge holders; unsecured creditors; statutory interest; shareholders.
Where do employees fit in the waterfall?
Employees are Tier 1 preferential creditors under Sch 6 IA 1986 for wage arrears (capped at £800 per employee), unpaid holiday pay and unpaid pension contributions (up to £5,000). Amounts above the caps drop to the unsecured tier. Statutory redundancy, notice and holiday claims are paid separately by the Redundancy Payments Service — see our sibling on employees in administration.
Where does HMRC sit?
Since 1 December 2020, HMRC is a Tier 2 secondary preferential creditor for VAT, PAYE, employee NIC and CIS deductions — the taxes HMRC calls 'temporarily held' by the company. Corporation tax, employer NIC and interest/penalties remain unsecured. This change (in the Finance Act 2020) elevated HMRC above floating-charge holders and materially reduced bank recoveries.
What is the prescribed part again?
The prescribed part is a statutory ring-fence under s.176A IA 1986 taken from floating-charge realisations for the benefit of unsecured creditors. Since 6 April 2020: 50% of the first £10,000 plus 20% of the excess, capped at £800,000. It exists so unsecured creditors are not entirely wiped out by an all-assets floating charge.
Do administration expenses always come before secured creditors?
It depends on which security. Fixed-charge realisation costs come out of the fixed-charge fund first, then the fixed-charge creditor is paid, and only then do administration expenses claim from the remainder. In relation to floating-charge assets, administration expenses (including SIP 9 remuneration) rank ahead of the floating charge under s.176ZA IA 1986.
What is statutory interest and when is it paid?
Statutory interest under rule 14.23 of the Insolvency Rules 2016 is payable at 8% (or the contractual rate if higher) on unsecured debts from the date of appointment. It is only paid after all preferential and unsecured debts are paid in full — rare in an insolvent administration, so statutory interest is theoretical in most cases.
Are directors' loan accounts unsecured claims?
Yes, unless the director took security (a debenture) validly registered at Companies House before the relevant time. Directors' loans repayable to the company are the reverse — a debt owing to the estate — and the administrator will pursue overdrawn balances personally. Set-off under rule 14.24 nets these where mutual.
What ranks worse than shareholders?
Nothing legally. Shareholders receive any surplus after all creditors, statutory interest and other claims are paid in full. In an insolvent administration that surplus almost never exists. Deferred and preference shareholders (rare in private companies) may rank above ordinary shareholders under the articles, but only in the residual pool.
Does the waterfall vary between administration and liquidation?
The order is the same across administration and liquidation. What differs is realisation approach: administrators typically maximise value via going-concern sales; liquidators via asset break-up. Both apply Sch 6 preferentials, s.176A prescribed part, and s.176ZA expense priority in identical order.
How much do unsecured creditors typically recover?
Insolvency Service data shows dispersion is huge. Median unsecured recoveries in administrations run 4–10p in the pound; a well-structured going-concern sale with strong preferential and floating-charge headroom can lift that materially, while heavy-secured cases can leave unsecured at zero apart from the prescribed part. Set-off, ROT and cross-claims materially move individual outcomes.
Chris at Sell Ltd tracks live UK administrations and can flag when a customer or supplier enters the process — before you find out from the Gazette.