AnswersWhen a client goes under
Who gets paid first when a company can't pay its debts?
The short answer
Suppliers come near last. Once a liquidator or administrator takes over, the law fixes the order2: a lender with a charge over one asset is paid from it, then the liquidator's costs, staff, and HMRC's VAT and PAYE, which in insolvencies from 1 December 2020 rank ahead of the bank's floating charge1. Where a bank holds that charge, a slice is set aside for unsecured creditors like you5 before the bank is paid.
England and Wales only. WolfX is software, not a law firm.
The numbers
Where a supplier stands in the queue.
What you can add
Where a £6,000 invoice sits in the queue
Say a company in liquidation owes you £6,000: £5,000 for the work plus £1,000 VAT. The figures below are made up to show the order. They are not a real company. Selling everything raises £120,000. The liquidator's costs are £30,000, staff are owed £12,000 and HMRC £18,000. A bank holds a floating charge and is owed more than it will get. No lender has a charge over one asset. Unsecured creditors, you included, are owed £300,000 in all.
- Liquidator's costs, paid first4£30,000.00
- Staff: recent wages, holiday pay and pension contributions3£12,000.00
- HMRC: VAT, PAYE and similar deductions1£18,000.00
- Your £6,000 invoice, at 5p in the pound6£300.00
- Other unsecured creditors: £294,000 at 5p in the pound6£14,700.00
- The bank's floating charge: the rest of the £60,0005£45,000.00
- Raised by selling the company's assets£120,000.00
The £60,000 left after costs, staff and HMRC is the net property. The prescribed part is 50% of the first £10,000 plus 20% of the other £50,0006: £5,000 + £10,000 = £15,000. Across £300,000 of claims that is 5p in the pound, so £300.00 on your £6,000, with £50.00 of it VAT that goes back to HMRC if you have claimed it. Real companies are usually poorer. An Insolvency Service study9 of 2,717 creditors' voluntary liquidations from 2017 found the middle one raised £5,798, and unsecured creditors got nothing in 90% of cases. Where paid, the middle return was 9p in the pound: £540.00 on £6,000.
The road ahead
Seven steps. All free.
Step 2: Read the order from the top
Step 3: Add HMRC, for some taxes only
Next comes HMRC, for VAT and the tax the company held for others: PAYE, employee National Insurance, student loan and Construction Industry Scheme deductions. It ranks this way when the insolvency began on or after 1 December 20201, ahead of the bank's floating charge.
Corporation Tax, employer National Insurance, penalties and interest1 are not on that list. They rank with suppliers.
Step 4: Find the slice set aside for unsecured creditors
Where a bank holds a floating charge (a charge over assets that change, such as stock), part of what would go to the bank must be set aside for unsecured creditors5, which is where suppliers sit. The law calls it the prescribed part.
The slice is 50% of the first £10,000 left, plus 20% of the rest6, capped at £800,000, or £600,000 for some charges made before 6 April 20207. Left means after the costs, staff and HMRC.
No floating charge, no slice5: suppliers share what is left. With under £10,000 left, the liquidator can skip the slice5 if sharing it would cost too much. The bank takes the rest. Suppliers share the slice, plus anything left once the bank is paid in full. Shareholders come last.
Step 5: See what the company says it has
In a creditors' voluntary liquidation, the directors' statement of affairs must estimate8 the assets by type of charge, the prescribed part and the shortfall for unsecured creditors.
In a liquidation ordered by a court, you get a report with estimates of the assets and liabilities12.
The charges list at Companies House11 shows who holds a charge. A fixed charge means that asset is spoken for. A floating charge means a slice may exist.
Step 6: Send your proof of debt
Send a proof of debt before a dividend (a payment to creditors) is declared, or you may lose your right to share in it12.
Once the liquidator has it, they add you to the list of creditors. How to claim from a company in liquidation has the letter and the steps.
Step 7: Claim the VAT back from HMRC
If you paid HMRC the VAT on the invoice and have written the debt off in your accounts, you can claim it back in box 4 of your VAT Return six months after the later of the due date and the supply date10. It does not wait for the liquidator. The VAT page has the sum.
If a dividend comes later, repay HMRC the VAT part of it10 in box 1 of the return for the period you were paid.
The letter
This page ranks the queue and has nothing to send. The letter that puts you in it, the proof of debt, is on the page about claiming from a company in liquidation.
When not to bother
When it isn't worth it
- Nobody has been appointed yet. The order needs someone in charge1. Until then, the road is a court claim.
- The company has been dissolved. No queue is left to join. A dissolved company has its own road.
- You are counting on the director paying. Usually the debt is the company's alone, unless a director signed a personal guarantee: check for one.
- You hope to move up the queue. The law fixes the order2, so a recovery firm's fee or a louder letter will not change your place.
- The company is registered in Scotland or Northern Ireland. This page covers England and Wales. The other parts of the UK have their own insolvency rules.
The Wolf's note
The queue was set by Parliament, so there is nothing in it to argue with. What you control is smaller and surer: a proof of debt in before any dividend is declared, and the VAT back from HMRC. Count the rest when it arrives.
Mr. Wolf · the AI inside WolfX
What comes next
Your next move
A company that owes me money has gone into liquidation. What happens to my invoice?
Your invoice joins a queue behind lenders, the costs, wages and some HMRC debts, so suppliers usually get little.
7 min read · Letter included
How do I claim money from a company in liquidation?
Send the liquidator a proof of debt before their last date: a letter or form with the amount owed including VAT, how it arose and your invoices.
7 min read · Letter included
If they still won't pay
Can I claim from a director personally for a company's unpaid invoice?
Usually not: a limited company's debts are its own.
7 min read · Letter included
Don't want to do this yourself?
The Wolf does every step for you. He works out the sums, writes the letters and keeps track of every date. Nothing goes without your yes.