Types of Creditors in the UK #
Not all creditors are treated equally in insolvency. The type of creditor you are determines how likely you are to recover your money.
Creditor Priority in Insolvency #
When a company is liquidated, creditors are paid in the following order:
- Secured Creditors (Fixed Charge) – First priority
- Preferential Creditors – Employees, pension schemes
- Secured Creditors (Floating Charge) – Paid after preferential creditors
- Unsecured Creditors – Trade creditors, suppliers, customers
- Shareholders – Paid last (if anything is left)
Key takeaway: The higher you rank, the better your chances of getting paid.
1. Secured Creditors (Highest Priority) #
Secured creditors have legal rights over the debtor’s assets. There are two types:
Fixed Charge Secured Creditors #
- Hold a fixed charge over specific assets (e.g., property, machinery, vehicles).
- Get paid first when assets are sold.
- Examples: Banks with mortgages, asset finance companies.
Protection tip: If lending money or selling expensive equipment, register a fixed charge at Companies House.
Floating Charge Secured Creditors #
- Hold a floating charge over general assets (e.g., stock, receivables).
- Paid after preferential creditors, making recovery less certain.
- Examples: Lenders with business overdrafts, invoice financing firms.
Protection tip: Floating charges aren’t as strong as fixed charges. Consider additional security (e.g., director guarantees).
2. Preferential Creditors (Second Priority) #
These creditors are paid before floating charge and unsecured creditors.
Who Qualifies? #
- Employees – Unpaid wages (up to £800 per employee).
- Pension contributions – Certain unpaid pension scheme payments.
- The Redundancy Payments Service – If they pay employees on behalf of an insolvent employer.
Protection tip: Preferential creditors are prioritized, but most business creditors do not fall into this category.
3. Unsecured Creditors (Lower Priority) #
Most suppliers, service providers, and lenders fall into this category.
Unsecured Creditors Include: #
- Trade creditors – Suppliers owed money for goods/services.
- Customers – People who paid for goods/services not received.
- Business lenders – If they don’t have security over assets.
Protection tip:
- Unsecured creditors rank low in insolvency – so take action early (e.g., issue a statutory demand).
- Consider using retention of title (ROT) clauses – This allows you to reclaim goods if unpaid.
4. Trade Creditors (Unsecured, but with Extra Rights) #
A trade creditor is a business that supplies goods or services on credit.
- Usually unsecured, but may include:
- Retention of title (ROT) clauses – Allows reclaiming goods if unpaid.
- Personal guarantees – Signed by company directors to guarantee payment.
Protection tip:
- Always check contract terms – Include ROT clauses where possible.
- Consider requesting deposits or staged payments for high-risk customers.
5. Crown Creditors (HMRC & Government Debts) #
Special rules apply to debts owed to HMRC and other government bodies.
- HMRC regained preferential creditor status in 2020 (for VAT, PAYE, NIC).
- Other government fines and penalties remain unsecured.
Protection tip:
- If a company owes tax, HMRC can take swift enforcement action, including:
- Issuing a winding-up petition.
- Seizing assets without a court order (via distraint powers).
- If a debtor prioritizes paying HMRC over you, act quickly to secure payment before their cash runs out.
Which Type of Creditor Are You? #
- Do you have a fixed charge over assets? → Secured creditor (first priority).
- Are you owed wages or pension payments? → Preferential creditor (second priority).
- Do you supply goods/services on credit? → Unsecured or trade creditor (lower priority).
- Are you HMRC? → Crown creditor (special status).
Why this matters: Knowing your creditor type helps you assess your recovery chances and take action early.
How to Improve Your Position as a Creditor #
If you’re not a secured or preferential creditor, use these strategies:
- Use Retention of Title (ROT) Clauses – Keep ownership of goods until fully paid.
- Obtain Personal Guarantees – Get company directors to guarantee the debt.
- Act Quickly on Late Payments – Use statutory demands to force payment.
- Monitor Debtor Finances – Check credit reports to spot risks early.
Taking proactive steps can protect your money and improve recovery chances.