Are you a Secured, Preferential or Unsecured Creditor?

If a business you’ve supplied collapses and owes you money, your first question is likely:

“Where do I stand in the creditor hierarchy?”

When a company enters insolvency, creditors can’t simply demand repayment. Instead, funds are distributed according to a strict legal order set out in UK insolvency law. Knowing whether you are a secured, preferential, or unsecured creditor is essential. This status determines if, and when, you might recover any money owed to you.

In many cases, suppliers and small businesses unfortunately fall into the unsecured creditor category, which sits near the bottom of the repayment order. Here’s how the creditor hierarchy works in 2026.

What Happens When a Company Becomes Insolvent?

When a company enters insolvency (such as liquidation or administration), an appointed Insolvency Practitioner (IP) takes control.
Their responsibilities include:

• Identifying and valuing company assets
• Selling those assets
• Distributing available funds to creditors

The order of payment is set by UK insolvency law, mainly the Insolvency Act 1986, as well as subsequent reforms such as the Enterprise Act 2002 and the Finance Act 2020. This order is called the “creditor hierarchy.”

Secured Creditors with a Fixed Charge

Secured creditors with a fixed charge over specific assets are paid first.
These are usually:

• Banks
• Asset finance companies
• Commercial lenders

A fixed charge gives the lender security over a particular company asset, such as:

• Property
• Machinery
• Vehicles
• Land

If the company becomes insolvent, these creditors can usually seize the secured asset and sell it to recover their money.
Because of this legal protection, fixed charge holders usually recover debts before anyone else.

Preferential Creditors

Next in line are preferential creditors. The Finance Act 2020 restored HMRC’s preferential status for certain tax debts. This remains the case in 2026.

Employees are considered preferential creditors for certain debts, including:

• Unpaid wages
• Holiday pay
• Certain pension contributions

This ensures employees are partially protected if their employer becomes insolvent.

HMRC now holds secondary preferential creditor status for specific taxes collected by a business on behalf of the government, including:

• VAT
• PAYE income tax
• Employee National Insurance Contributions
• Construction Industry Scheme (CIS) deductions

These taxes are treated differently because the company effectively collected them on behalf of HMRC. However, not all HMRC debts qualify for preferential status. Corporation tax and employer NICs are generally unsecured.

Secured Creditors with a Floating Charge

After preferential creditors, secured creditors with a floating charge are paid.

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

• Stock
• Raw materials
• Inventory
• Work in progress

Unlike fixed charges, these assets change frequently as the business trades. When floating charge assets are sold, part of the proceeds may be set aside as the “prescribed part.” This ring-fenced fund is reserved specifically to provide a limited return to unsecured creditors.

Unsecured Creditors: Where Most Businesses Stand

The majority of businesses and suppliers are unsecured creditors.

Unsecured creditors include:

• Suppliers
• Contractors
• Service providers
• Landlords
• Some HMRC debts (such as corporation tax)
• Customers owed refunds

Unsecured creditors lack security over company assets, so they are paid only after secured and preferential creditors have been satisfied. Often, by the time assets are sold and other claims are paid, little or nothing remains for unsecured creditors. That is why acting fast when payments are overdue is critical.

Shareholders

Shareholders are at the very bottom of the repayment hierarchy.

They only receive funds if all creditors are paid in full, in most insolvencies, shareholders receive nothing.

What To Do If You’re an Unsecured Creditor

If your customer enters insolvency and you are an unsecured creditor, there are still important steps you should take:

• Submit proof of debt to the insolvency practitioner
• Review creditor reports and updates
• Attend creditor meetings if applicable
• Consider joining a creditors’ committee
• Understand any proposals put forward by the administrator or liquidator

Understanding your rights and the insolvency process helps you recover any available dividend.

Prevention Is Better Than Cure

Insolvency procedures may allow some recovery, but unsecured creditors usually receive very little.

That’s why proactive debt management is essential.

If you notice warning signs that a customer is struggling financially, including persistent late payments, broken payment promises, and reduced communication, it is important to act quickly before the situation escalates into insolvency.

How My Debt Recovery Can Help

At My Debt Recovery, we help businesses recover outstanding debts before they become part of the insolvency process.

Taking early action can:

• Improve recovery chances
• Protect your cashflow
• Lower your risk of becoming an unsecured creditor in insolvency

If a customer is showing signs of financial difficulty, our specialist team can support you in taking the right steps at the right time.