Growing and managing a business is full of unknowns. There will be all sorts of challenges to navigate along the way. Realising your company is insolvent is no different. You’re more than likely entering into an unfamiliar situation, unsure of what to do next.

When a company becomes insolvent, one of the most immediate concerns for directors (and those owed money) is the same:

“Who gets paid first?”

UK insolvency law sets out a specific hierarchy for how funds are distributed during an insolvency process. It’s designed to ensure fairness. Of course, everyone wants to be paid what they are owed. Unfortunately, this cannot be guaranteed.

Why order of payment matters.

Once a business enters a formal insolvency process, its assets are sold and the proceeds are used to pay off debts. But not everyone is treated equally — and some creditors have legal priority over others.

That’s why understanding the order of payments is crucial, especially for directors who’ve personally guaranteed loans or taken drawings from the company.

The order of priority in insolvency.

After the insolvency practitioner fees and expenses are covered, money is typically distributed in the following order:

1. Secured Creditors with a Fixed Charge

These are lenders (often banks) who hold a legal charge over specific assets like property, vehicles, or equipment. They are entitled to be paid from the proceeds of selling those secured assets.

2. Preferential Creditors

This group includes certain employee claims — particularly unpaid wages (up to a limit) and  holiday pay. HMRC is also classed as a preferential creditor for unpaid taxes such as VAT, PAYE and NIC.

3. Secured Creditors with a Floating Charge

These lenders have a charge over more general assets (like stock or receivables). They are next in line, but only after the previous categories have been settled. A portion of these funds may also be diverted to unsecured creditors through a mechanism called the prescribed part.

4. Unsecured Creditors

This group includes most suppliers, contractors, landlords, and customers who’ve paid deposits. The size of the asset pool will determine how much of what they are owed (if any) is repaid.

5. Shareholders

If there is any money left at this point, the shareholders may receive a distribution. In most insolvency cases, this is rare.

What about directors?

If you’re a company director, you might find yourself on this list in more than one way:

• If you’re owed expenses or unpaid salary, you may qualify as an unsecured or preferential creditor.
• If you’ve taken out a director’s loan, that money might need to be repaid to the company.
• If you’ve signed a personal guarantee on any loans, you could be personally liable if the company can’t repay them.

This is why early advice is vital — to avoid unintended consequences and protect your position wherever possible.

Need to talk through your situation in confidence?

We’re here to help you and your client understand the risks — and the options. Call 0808 196 8676 or email help@trusolv.co.uk.