Recovery waterfall

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-01

// THE SHORT ANSWER

A recovery waterfall is the order in which the money realised from a failed business is paid out: the costs of realising it, then each secured creditor from the assets its security covers — with preferential claims ahead of security over circulating assets where the law says so — and whatever is left shared among unsecured creditors in proportion to what they are owed. A secured lender whose security falls short ranks alongside the unsecured creditors for the shortfall. It is a sum, not a principle: the same loan can recover nearly everything or a fraction, depending on what sits above it.

BASIS  Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.