Corporate and Business Law (Global) · Insolvency and administration

Order of Payment of Creditors in Liquidation for ACCA

Updated 11 October 2026 · Fact-checked

When a company is wound up, the fixed charge holder is paid from the proceeds of the charged asset. The remaining floating charge and free assets then pay liquidation costs, then preferential creditors, then floating charge holders. Unsecured creditors share what is left equally, and members come last, only if all creditors are paid in full.

Understand Order of Payment of Creditors in Liquidation

A company in liquidation has limited assets and usually more debts than it can pay. The law therefore sets an order of payment. Without it, creditors would race to grab assets and the result would be unfair and chaotic.

The order follows the type of right each creditor holds. A fixed charge gives the lender a right over a specific asset, such as land. The lender is paid from the proceeds of that asset first, ahead of everyone else. A floating charge covers a changing pool of assets, such as stock or receivables. It ranks lower because it does not attach firmly to any specific asset until something like liquidation happens (it crystallises). By statute, it also ranks below preferential creditors.

The order used for the exam is: fixed charge holders, liquidation costs, preferential creditors, floating charge holders, unsecured creditors, then members. If a question sets out its own order, follow the question.

The fixed charge holder is paid from the proceeds of the charged asset. The costs of the liquidation, including the liquidator's fees and expenses, are then paid from the remaining assets. Next come preferential creditors, such as certain employee claims for unpaid wages and accrued holiday pay. The exact list of preferential debts depends on the jurisdiction, so in the exam use the categories the question gives you.

Liquidation costs and preferential debts are paid out of the floating charge assets and any other free assets. Any surplus left from a fixed charge asset after the fixed charge holder is repaid is a free asset. It is added to those assets, and the floating charge does not claim it unless the question says so.

Then the floating charge holders are paid from what remains of the floating charge assets. Unsecured creditors, such as trade suppliers, share what is left equally and in proportion to their debts (pari passu). If they are not paid in full, they all receive the same percentage. Last come the members (shareholders). They are paid only if every creditor has been paid in full, which is rare in an insolvent company.

A useful point: a fixed charge holder who is not fully repaid from the asset becomes an unsecured creditor for the shortfall. Likewise, a floating charge holder not fully repaid ranks as unsecured for the balance.

Key formulas to remember

Order of payment: 1. Fixed charge holders (from the charged asset) → 2. Liquidation costs → 3. Preferential creditors → 4. Floating charge holders → 5. Unsecured creditors → 6. Members; This is the order used for the exam in ACCA LW. If a question gives its own order, follow the question. The fixed charge holder is paid from the proceeds of the charged asset. Steps 2 to 4 are paid from the remaining floating charge and free assets, and each class is paid in full before the next receives anything from those assets.
Fixed charge shortfall: Shortfall = Debt − Proceeds of the charged asset; A positive shortfall is claimed as an unsecured debt. If proceeds exceed the debt, the surplus goes into the general pool.
Unsecured creditors' dividend: Dividend per ₹1 owed = Funds available to unsecured creditors ÷ Total unsecured debts; Pari passu rule: all unsecured creditors receive the same proportion of what they are owed.
Pari passu share: Creditor's payment = Creditor's debt × Dividend per ₹1; Use this to find what one unsecured creditor receives.

How to solve Order of Payment of Creditors in Liquidation questions

Use the same routine for any question on who gets paid and how much. Work down the order and stop when the money runs out.

1List every creditor and classify each as fixed charge, floating charge, preferential, unsecured or member.
2Match each fixed charge to its specific asset. Pay the holder from that asset's proceeds only.
3Record any shortfall on the fixed charge as an unsecured claim. Add any surplus to the floating charge assets and other free assets.
4Take the floating charge assets and other free assets, including any fixed charge surplus, and deduct the liquidation costs first.
5Pay preferential creditors from what is left, in full if possible.
6Pay floating charge holders next from the remaining floating charge assets and funds, then record any shortfall as unsecured.
7Share what remains among unsecured creditors in proportion to their debts, including any shortfalls.
8Pay members only if all creditors are paid in full. Check that your total payments equal total funds.

Quickest way: Rank, then pour

When to use it: Use this for multiple-choice questions asking who is paid first or how much a given creditor receives. Use the exam order below unless the question gives its own order.

Write the six ranks in a column: fixed, costs, preferential, floating, unsecured, members.
Put each creditor from the question next to its rank.
Pour the money down the column, subtracting each class in turn.
Stop when the money hits zero. Anyone below that point gets nothing.
For unsecured creditors, divide the remaining money by total unsecured debts to get the proportion.

Common mistakes in Order of Payment of Creditors in Liquidation

Paying floating charge holders before preferential creditors.
Students think any secured lender must outrank employees and other preferential creditors.
Fix: Remember that a floating charge ranks below preferential creditors by statute. Only a fixed charge holder is paid from its charged asset ahead of them.
Forgetting the liquidation costs.
The costs are not a creditor in the question, so they are easy to overlook.
Fix: Always deduct the liquidator's fees and expenses from the floating charge and free assets before paying preferential creditors. If the question sets out a different order for costs, follow the question.
Ignoring the shortfall on a secured debt.
Students assume a charge holder is paid in full or not at all.
Fix: If the charged asset or pool does not cover the debt, treat the shortfall as an unsecured claim and include it in the unsecured total.
Paying unsecured creditors in the order the debts arose.
Students confuse liquidation with first come, first served.
Fix: Unsecured creditors rank equally. Pay each the same percentage of its debt.
Letting members share in the funds while creditors are unpaid.
Students think shareholders hold a claim on the company's assets like creditors.
Fix: Members come last. Their capital is returned only after every creditor is paid in full.

Worked examples

Example 1

Zeta Ltd is in liquidation. A bank holds a fixed charge over a building sold for ₹40,00,000; the debt is ₹40,00,000. A floating charge covers the company's other assets, which realise ₹20,00,000. Liquidation costs are ₹4,00,000. Preferential creditors are owed ₹3,00,000. The floating charge holder is owed ₹5,00,000. Unsecured creditors are owed ₹16,00,000. How much do the unsecured creditors receive in total, and what percentage of their debt is that?

Show the solution

Fixed charge: the bank is repaid ₹40,00,000 in full from the building. There is no surplus and no shortfall.
Floating charge assets available: ₹20,00,000.
Deduct liquidation costs: ₹20,00,000 − ₹4,00,000 = ₹16,00,000.
Pay preferential creditors: ₹16,00,000 − ₹3,00,000 = ₹13,00,000.
Pay the floating charge holder: ₹13,00,000 − ₹5,00,000 = ₹8,00,000.
Unsecured creditors are owed ₹16,00,000 and receive ₹8,00,000.
Proportion: ₹8,00,000 ÷ ₹16,00,000 = 0.50, which is 50%.

Answer: Unsecured creditors receive ₹8,00,000 in total, which is 50% of what they are owed (50 paise per rupee). Members receive nothing.

Example 2

Delta Ltd is in liquidation. A lender holds a fixed charge over machinery that sells for ₹8,00,000; the debt is ₹10,00,000. Other assets realise ₹12,00,000. Liquidation costs are ₹2,00,000. Preferential creditors are owed ₹1,00,000. Unsecured trade creditors are owed ₹18,00,000. There is no floating charge. How much does the lender receive in total?

Show the solution

Fixed charge: the lender receives ₹8,00,000 from the machinery.
Shortfall: ₹10,00,000 − ₹8,00,000 = ₹2,00,000, which becomes an unsecured claim.
Funds from other assets: ₹12,00,000. Deduct costs: ₹12,00,000 − ₹2,00,000 = ₹10,00,000.
Pay preferential creditors: ₹10,00,000 − ₹1,00,000 = ₹9,00,000.
No floating charge, so ₹9,00,000 is available to unsecured creditors, including the lender's shortfall claim.
Unsecured debts: ₹18,00,000 + ₹2,00,000 = ₹20,00,000.
Proportion: ₹9,00,000 ÷ ₹20,00,000 = 0.45.
Lender's dividend on shortfall: ₹2,00,000 × 0.45 = ₹90,000.
Total received by the lender: ₹8,00,000 + ₹90,000 = ₹8,90,000.

Answer: The lender receives ₹8,90,000 in total: ₹8,00,000 from the machinery and ₹90,000 as an unsecured creditor for the shortfall.

Exam tips

Memorise the six-step order as a single line and write it on your rough sheet at the start of every question.
In objective questions, look for the trap word: a charge described as floating ranks below preferential creditors, while one described as fixed ranks above them.
For calculations, check the final totals: payments to all classes should equal the funds you started with.
In constructed-response answers, name each class, state its rank and then apply the figures. Examiners reward this clear layout.
Use only the categories of preferential debt the question gives you. Do not add your own.

Practice questions from Insolvency and administration

Order of Payment of Creditors in Liquidation: frequently asked questions

What is the order of priority of creditors in liquidation?

Fixed charge holders are paid from their charged assets first. Liquidation costs, preferential creditors and floating charge holders are then paid, in that order, from the remaining floating charge and free assets. Unsecured creditors come next and members last. Each class must be paid in full before the next receives anything from those assets.

Why does a fixed charge rank above a floating charge?

A fixed charge attaches to a specific asset from the start, so the lender has a firm right over it. A floating charge covers a changing pool of assets and only becomes fixed on crystallisation. By statute, a floating charge ranks below preferential creditors. In the exam, use the order of payment given in this guide, unless the question sets out a different one.

Who are preferential creditors?

They are creditors given priority by law over floating charge holders and unsecured creditors. Examples include certain employee claims for unpaid wages and holiday pay. The exact list depends on the jurisdiction, so use what the question states.

What happens if a secured creditor is not paid in full?

The unpaid balance is treated as an unsecured debt. The creditor then shares with other unsecured creditors in proportion to what each is owed.