UK Insolvency Order Of Priority: Who Gets Paid First?

If a customer, supplier, or partner business goes insolvent, one of the first questions you’ll ask is: will we get paid, and when?

Unfortunately, the answer often depends less on how “fair” it feels and more on a strict legal ranking known as the insolvency order of priority.

This guide breaks down the UK insolvency order of priority in plain English, explains who gets paid first, and (most importantly) what you can do as a small business to reduce your risk if an insolvency happens anywhere in your supply chain.

What Is The Insolvency Order Of Priority?

The insolvency order of priority is the legal “queue” that decides who gets paid first when a company can’t pay all its debts.

When a company becomes insolvent, it usually means there isn’t enough money (or realisable assets) to pay everyone. UK insolvency law then sets out a pecking order for how available funds are distributed.

You’ll come across the insolvency order of priority in several formal insolvency processes, including:

• Liquidation (the company is wound up and its assets are sold)
• Administration (an insolvency practitioner takes control to rescue the business or achieve a better outcome for creditors than liquidation)
• Company Voluntary Arrangements (CVAs) (a deal with creditors to pay some or all debts over time)
• Receivership (typically involving a secured creditor enforcing their security)

Even though the process differs, the central idea is the same: the law decides the order of payment.

In the UK, the priority rules largely come from the Insolvency Act 1986, with important changes over time (including changes affecting HMRC).

Why The Insolvency Order Of Priority Matters To Small Businesses

If you run a small business, insolvency usually hits you in one of two ways:

• You’re owed money (for example, you supplied goods or services and the customer goes under before paying).
• You owe money (your business can’t meet its liabilities and you’re trying to navigate your options).

In both scenarios, understanding the insolvency order of priority helps you make better decisions before things go wrong.

If You’re A Creditor (You’re Owed Money)

If your customer goes insolvent, you might assume you’ll be paid because you delivered the work or the stock.

But in many cases, small businesses are unsecured creditors - which often means you’re near the back of the queue. In real terms, that can mean:

• you get paid late, after other creditor categories
• you get paid only a percentage of what you’re owed
• you get paid nothing (which is common in some liquidations)

This is why strong payment terms, credit control, and well-drafted contracts aren’t just “nice to have” - they’re core risk management.

If You’re The Business Facing Insolvency

If your business is the one in trouble, the insolvency order of priority affects:

• what pressure different creditors can apply
• what options you realistically have to restructure or exit
• your director duties and the decisions you need to take early

It’s also closely linked to what happens in administration (and the practical consequences of that), including how assets are dealt with and who controls the process. If this is the situation you’re facing, it’s worth reading about administration in plain English so you know what to expect.

The Insolvency Order Of Priority In The UK (Who Gets Paid First?)

While there are nuances and exceptions, the insolvency order of priority in the UK typically looks like this (from highest priority to lowest).

Keep in mind: some assets might be “ring-fenced” (for example, held on trust) or subject to security interests, so not all money is available for distribution to all creditors.

1. Secured Creditors With Fixed Charges

Fixed charge security usually attaches to specific assets, such as:

• property (e.g. a commercial building)
• machinery or high-value equipment
• sometimes specific book debts (depending on drafting and control)

If a lender has a fixed charge, they generally get paid first from the proceeds of that charged asset. However, certain insolvency costs and realisation expenses may still be paid out of (or deducted from) those proceeds before the secured lender receives its full recovery.

What this means for you: if you’re an ordinary trade supplier without security, you’re not competing on a level playing field with fixed charge holders.

2. Costs And Expenses Of The Insolvency Process

Before most creditors see a penny, there are costs involved in running the insolvency process, including:

• the insolvency practitioner’s fees
• legal costs
• asset realisation costs (for example, valuers, auctioneers)

These can be paid ahead of many creditor claims - and in some cases can also be taken from specific asset realisations - which is one reason distributions can be lower than creditors expect.

This can be frustrating as a creditor, but it’s part of the system - someone has to administer the wind-down or restructure.

3. Preferential Creditors

Preferential creditors are given priority by law. In practice, this commonly includes:

• certain employee claims (e.g. some unpaid wages and holiday pay, subject to limits)
• some pension-related contributions

What this means for you: if you’re a supplier or consultant owed money, you’re usually not preferential (unless there’s a specific legal reason you fall into that category).

4. HMRC As A Secondary Preferential Creditor (In Some Cases)

This is a big one for small businesses to understand.

HMRC has a form of preferential status (often called “secondary preferential”) for certain taxes that businesses collect on behalf of others. This includes amounts due in relation to:

• VAT
• PAYE income tax
• employee National Insurance contributions

This status (reintroduced for many insolvencies from December 2020) can reduce what is available to floating charge holders and unsecured creditors, depending on the company’s tax position and the nature of the assets realised.

What this means for you: even if you think there should be funds left for other creditors, HMRC’s priority for these specific taxes may reduce what’s left for everyone else.

5. Floating Charge Holders (Subject To The “Prescribed Part”)

A floating charge is usually security over a changing pool of assets, such as:

• stock
• work in progress
• receivables
• general business assets

Floating charge holders generally get paid after preferential creditors, but before unsecured creditors.

However, UK insolvency law can carve out a portion of floating charge realisations for unsecured creditors. This is commonly referred to as the prescribed part.

What this means for you: if you’re unsecured, the prescribed part might be one of the only reasons you receive anything at all - but it depends on the facts, and it’s often not enough to cover all unsecured debts.

6. Unsecured Creditors

This category usually includes most small businesses who are owed money, such as:

• trade suppliers
• contractors and freelancers
• landlords (for some amounts)
• customers owed refunds
• many service providers

Unsecured creditors typically get paid pro rata (a percentage of what they’re owed), if there’s anything left after higher-priority creditors are paid.

In many insolvencies, unsecured creditors receive a very low dividend - or none at all.

7. Shareholders / Members

Shareholders are at the bottom of the queue. In an insolvency, shareholders usually receive money only if:

• all creditors have been paid in full (including interest where applicable), and
• there are still assets left over

That scenario is uncommon in insolvent liquidations.

Common Business Scenarios Where Priority Really Matters

The insolvency order of priority isn’t just theory. It shapes what you should do in day-to-day commercial decisions - especially around payment risk.

You Supplied Goods And The Customer Hasn’t Paid

If you’ve delivered stock and the customer becomes insolvent, the key question is whether you have any legal right to recover the goods or “jump the queue”.

Sometimes, businesses rely on:

• retention of title (ROT) clauses (trying to keep ownership until payment is made)
• personal guarantees (director guarantees can shift the risk away from the company)
• deposit or milestone payments (so you’re not funding the entire job upfront)

These mechanisms can be powerful, but they need to be drafted and used properly. A vague clause in a template might not do what you think it does when it’s tested in an insolvency.

It’s also why having clear Terms and Conditions (that match how you actually operate) matters so much.

You’re Trying To Recover An Overdue Invoice

When a customer is sliding into insolvency, time matters. The earlier you spot the warning signs and act, the more options you tend to have.

Practical steps often include:

• tightening payment terms for future work
• stopping supply (where your contract allows it)
• moving to payment upfront
• sending a formal escalation notice

At a certain point, a well-written final demand letter can help you draw a clear line and create a paper trail (which may matter later if the debt is disputed or escalated).

If the customer is disputing the invoice, you’ll want to handle that carefully - pushing too hard without addressing the dispute can backfire. A sensible process for disputed invoices can protect your position while keeping the door open for payment.

You’re Thinking About Selling The Debt

Sometimes, the commercial reality is that chasing a debt will cost you more time and money than it’s worth - especially if insolvency looks likely.

In some situations, you may consider assigning the debt (selling it) to a third party. This isn’t always straightforward, and you’ll want to do it in a way that’s legally effective and doesn’t create extra risk. The rules around debt assignment are worth understanding before you go down that path.

You’re A Director And The Business Is Under Pressure

If you’re a director, insolvency risk isn’t only financial - it can be personal.

When a company is insolvent (or bordering on insolvency), directors need to be especially careful about decisions that could worsen creditor outcomes. That can include things like continuing to trade without a realistic plan, or paying some creditors while ignoring others without good reason.

Also, many small businesses operate with directors putting money into the company informally, or taking loans out in the other direction. Those arrangements can become a major issue in insolvency if they’re not documented properly. If your business uses director funding, it’s worth understanding how shareholder and director loans are treated legally.

How Can You Protect Your Business If A Customer Or Supplier Becomes Insolvent?

You can’t fully “insure” yourself against insolvency risk (unless you literally buy insurance), but you can build stronger legal foundations so you’re not always stuck at the back of the queue.

Here are practical steps that often make the biggest difference for small businesses.

1. Get Your Contracts And Payment Terms Working For You

A surprising amount of insolvency pain comes from weak or unclear paperwork - especially where the relationship is “friendly” until it suddenly isn’t.

Strong contracts and terms can help you:

• set clear payment deadlines and interest rights
• pause or terminate services for non-payment
• limit the scope of disputes about what was delivered
• support retention of title (where relevant)

This is also where it’s helpful to think about risk allocation. For example, sensible limitation of liability clauses can reduce the chance that one bad counterparty event becomes an existential threat to your business.

2. Don’t Let Credit Control Be An Afterthought

Credit control isn’t just an accounts function - it’s a core part of running a sustainable business.

Simple habits help, like:

• checking new customers (especially for larger orders)
• setting credit limits that match your cash flow
• invoicing promptly and consistently
• following up early on late payments (not months later)

If you spot warning signs (slow payment, excuses, sudden changes in ordering patterns), it’s often a signal to tighten terms quickly.

3. Consider Whether You Can Take Security Or A Guarantee

Not every small business can negotiate security, but where you can, it’s worth considering options like:

• a director personal guarantee
• a deposit or staged payment plan
• security over specific assets (rare for smaller supply contracts, but possible in some commercial arrangements)

The reason this matters is simple: security can move you up the insolvency order of priority, while being unsecured usually keeps you near the back.

4. Structure Your Business So One Insolvency Doesn’t Sink The Whole Ship

If you’re growing, it can be tempting to rely heavily on one major customer or one key supplier. But concentration risk is real.

From a practical point of view, you can reduce exposure by:

• diversifying customers (so one insolvency doesn’t wipe out cash flow)
• reviewing supplier terms (so you’re not left liable if they can’t deliver)
• documenting key relationships clearly (so you can enforce rights quickly)

This isn’t about being pessimistic - it’s about running a resilient business that can handle bumps without falling over.

Key Takeaways

• The insolvency order of priority is the legal ranking that determines who gets paid first when a company can’t pay all its debts.
• In many UK insolvencies, secured creditors (fixed charges) are paid first, while unsecured creditors (often small business suppliers) are closer to the back of the queue.
• Preferential creditors (including certain employee claims) and HMRC (for certain taxes) can be paid ahead of floating charge holders and unsecured creditors.
• If you’re owed money, acting early with credit control and strong paperwork can increase your options before a customer formally enters insolvency.
• Well-drafted terms, payment protections (like deposits), and sensible risk clauses can reduce the chance you’re left with a total loss.
• If you’re a director and insolvency is on the horizon, getting advice early is crucial - both for the business outcome and to protect you personally.

Note: This article is general information only and not legal, tax or financial advice. Insolvency outcomes are fact-specific, and HMRC priority can depend on the type of tax and the timing of the insolvency.

If you’d like help reviewing your contracts, tightening your payment protections, or getting advice on insolvency risk in your commercial relationships, you can reach us at 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.