Who gets paid first when a company goes into liquidation?

It depends on the asset. Proceeds of an asset held under fixed or mortgage security go first to the costs of selling it and then to that lender. Elsewhere, the insolvency practitioner's costs come first, then employees' priority claims, then in New Zealand and the United Kingdom certain tax claims, then any security over working assets, then unsecured creditors in proportion, and shareholders last. Goods that were not the company's, such as stock under a valid retention of title clause, leave before any of this.

Can a secured lender claim its shortfall from the unsecured pool?

Yes. A secured lender whose security falls short can prove in the liquidation for the balance and share with ordinary unsecured creditors. The dividend is often small. In England and Wales, a lender cannot take part in the prescribed part for the shortfall, which is reserved for unsecured creditors. In Australia a liquidator's unfair-preference recoveries were traditionally kept from a lender's charge, leaving it a share for its shortfall, though Federal Court decisions have let a lender whose collateral paid employees recoup from them.

Where do shareholders rank in the recovery waterfall?

Last. Shareholders receive only what remains after all creditors, including interest where it is payable, have been paid. In an insolvent liquidation that is usually nothing. A shareholder who also lent money to the company ranks as a creditor for the loan, subject to any subordination it has signed, and some statutes treat claims from related parties less favourably. A lender reading a group should keep the shareholder's loan and shareholding apart.

Does the waterfall change between receivership and liquidation?

The ranking on circulating assets is largely the same, but the route differs. A receiver acts for the secured lender and deals only with the charged assets, paying its own costs and the priority claims from those assets. A liquidator acts for creditors generally and distributes what is left. The two can run at once. Details differ by market; in the United Kingdom, a floating charge created since September 2003 generally leads to administration rather than administrative receivership.

// WORKED EXAMPLETHE ARITHMETIC A DECISION RESTS ON

Recovery Waterfall: a Worked Example

Work from the top, and stop when the money does.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-09 · 7 MIN READ

// THE SHORT ANSWER

A lender runs a recovery waterfall to find out what its loan would return if the borrower failed, before it needs to know. The money is not one pool. Each class of asset is sold and paid out separately, and the claims that come ahead of the lender differ by class and by country. An Australian spray-equipment maker owing US$11.0m may return about US$6.4m, most of it from the factory; a weaker debtor book removes the working-capital layer altogether. The output is a loss estimate, and it shows which line of the file actually protects the bank.

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.

// MAKE THE CALL

Issue 03 — Kauri Dairy Holdings. The patriarch is retiring. The bank hears about the succession plan from the accountant first. Your call first, then the senior banker's.

Read the file →

PART OF What Your Bank Holds as Security

// 01 — WHY A LENDER RUNS IT BEFORE IT LENDS

A security schedule lists assets at a value. A waterfall asks a harder question: of the cash those assets produce on the day, how much reaches this lender after everyone entitled to be paid first? The answer decides whether the facility is adequately secured, how much of the exposure is really unsecured, and what a loss would look like. It feeds the estimate of loss given default and it shapes the terms, because a lender can often change its place in the sum before signing and rarely afterwards.

// 02 — HOW THE ORDER IS BUILT

First, remove what is not the company's: goods under valid retention of title, trust money.

Land, plant and other non-circulating assets:

sale proceeds − costs of sale → holder of security over that asset

Stock, receivables and other circulating assets:

proceeds − costs → priority claims → holder of security

Anything uncharged, and any surplus:

costs of the liquidation → priority claims → unsecured creditors, pro rata → shareholders

A secured lender's unpaid balance joins the bottom tier as an unsecured claim. The tier that varies by market is the priority claims on circulating assets. In Australia they are employee entitlements, ranked wages and superannuation, then leave, then retrenchment pay, and the tax office has no general priority. In New Zealand, employee claims come first and Inland Revenue's preferential claims for GST and PAYE follow, reaching accounts receivable and inventory ahead of a general security. The United Kingdom adds two further layers: HMRC as secondary preferential creditor for VAT and deductions from pay, and the prescribed part set aside for unsecured creditors from floating-charge realisations. There the dividing line is between fixed and floating charges, not between kinds of asset, so plant under a floating charge falls in the second group.

A prior security can also take the first slice of a particular asset. A purchase money security interest over a financed machine is the usual example, and in New Zealand and Australia a retention of title clause is a security interest too, which has to be registered to hold. Between lenders, a deed of priority can rearrange the ranking, but it binds only those who sign and cannot reduce what the statute gives employees or the tax authority.

// 03 — THE EXAMPLE

A maker of agricultural spray equipment in Australia, constructed for this page like every figure in it, owes its bank US$11.0m under a mortgage over its factory and a general security agreement. A finance company holds a purchase money security interest over two laser cutters, for US$0.5m. The bank appoints a receiver and the company later goes into liquidation.

Factory sold 5.0

Costs of sale −0.2

To the bank 4.8

Plant and machinery sold 1.4

Finance company, laser cutters −0.5

Costs −0.1

To the bank 0.8

Stock and debtors realised 2.7

Receiver's costs −0.4

Employee priority claims −1.6

To the bank 0.7

Bank recovers from security 6.3

Shortfall, 11.0 − 6.3 4.7

The liquidator recovers US$0.3m from a supplier that was paid unfairly in the run-up to the collapse and, after US$0.1m of costs, has US$0.2m to distribute. Who takes it is not fully settled in Australia. The older rule kept such a recovery from a lender's charge and left it for unsecured creditors, where the bank shares only for its shortfall. Federal Court decisions since 2010 have let a secured lender whose circulating assets paid the employees recover from that money through the employees' priority. The example carries the lower figure.

Unsecured claims: bank 4.7 + trade 3.0 + tax office 1.3 = 9.0

Dividend: 0.2 ÷ 9.0 = 2.2 cents in the dollar

Bank's share: 0.2 × 4.7 ÷ 9.0 = 0.1

Total to the bank: 6.3 + 0.1 = 6.4 of 11.0 = 58%

If the bank took the whole 0.2 instead: 6.5 of 11.0 = 59%

Two changes show how quickly the sum moves. If the debtor book had weakened so that working assets realised US$2.0m, costs and employees would take all of it and the bank would receive nothing from that layer. And on the original figures in New Zealand or the United Kingdom, where certain tax claims rank ahead on working assets, the US$0.7m left after employees would go to the tax authority if at least that much of the tax debt were of the ranking kind. The bank's recovery from security would fall to US$5.6m and its total would finish between that and about US$5.8m, a little over half. That holds the employee line constant, though in the United Kingdom it would usually be lower. The figures belong to the example and are not offered as a typical recovery.

// 04 — HOW IT DIFFERS FROM A CASH WATERFALL

The word is used for two different things. A cash waterfall in a project or structured facility is a contractual order for paying operating cash while the borrower is alive: often operating costs, then senior debt service, then reserve accounts, then distributions, though each deal sets its own sequence. A recovery waterfall comes after failure, and its order is set by insolvency law and the security held, with intercreditor terms arranging only what lenders can arrange among themselves.

Its neighbour on the credit side is liquidation value, which estimates what the assets fetch. The waterfall starts from that figure and asks who gets it. Loss given default then goes further, adding the time taken to recover and the lender's own workout costs. A shortfall debt is what the waterfall leaves behind.

DEFINED IN ONE PARAGRAPH → · LIQUIDATION VALUE → · PROBLEM LOANS AND WORKOUT →

// 05 — WHERE IT DECIDES A FILE

At approval, the waterfall shows which layer is carrying the loan. In the example the factory does most of the work, and the general security adds little once employees are paid. That tells a desk what to protect: the valuation of the property, the state of the register, the insurance, and anything that could rank ahead of the mortgage. It also shows what a stronger package would have to contain, because extra security over assets already consumed by priority claims adds less than it appears to.

Once a file weakens, the sum is rerun with current numbers. Drawn balances are usually higher than at approval, tax may be in arrears, headcount claims may have grown, and suppliers may have added retention of title. The result drives decisions that have to be made in order: whether a standstill offers more than enforcement, whether new money would rank well enough to be worth lending, and what a settlement with a guarantor is worth. A workout team that has not run the waterfall has no number against which to judge an offer.

PREFERENTIAL CREDITORS → · THE FLOATING CHARGE → · LVR, SECURITY AND COLLATERAL →

// SOURCES

The documents the statements on this page rest on. Each was opened and checked when cited.

Australian Securities and Investments Commission, Receivership: A guide for creditors — Separates non-circulating and circulating assets, with receiver's costs then priority claims including employees ahead of the secured creditor on circulating assets — sections 02 and 03.
New Zealand Insolvency and Trustee Service, The effect of liquidation on a company — Sets the Companies Act order of payment in a New Zealand liquidation, and that a secured creditor can claim any shortfall as an unsecured creditor — section 02.
Insolvency Act 1986 (UK), section 175 — Ordinary then secondary preferential debts are paid ahead of floating charge holders where general assets fall short — section 02.

// QUESTIONS PEOPLE ASK

Who gets paid first when a company goes into liquidation?: It depends on the asset. Proceeds of an asset held under fixed or mortgage security go first to the costs of selling it and then to that lender. Elsewhere, the insolvency practitioner's costs come first, then employees' priority claims, then in New Zealand and the United Kingdom certain tax claims, then any security over working assets, then unsecured creditors in proportion, and shareholders last. Goods that were not the company's, such as stock under a valid retention of title clause, leave before any of this.
Can a secured lender claim its shortfall from the unsecured pool?: Yes. A secured lender whose security falls short can prove in the liquidation for the balance and share with ordinary unsecured creditors. The dividend is often small. In England and Wales, a lender cannot take part in the prescribed part for the shortfall, which is reserved for unsecured creditors. In Australia a liquidator's unfair-preference recoveries were traditionally kept from a lender's charge, leaving it a share for its shortfall, though Federal Court decisions have let a lender whose collateral paid employees recoup from them.
Where do shareholders rank in the recovery waterfall?: Last. Shareholders receive only what remains after all creditors, including interest where it is payable, have been paid. In an insolvent liquidation that is usually nothing. A shareholder who also lent money to the company ranks as a creditor for the loan, subject to any subordination it has signed, and some statutes treat claims from related parties less favourably. A lender reading a group should keep the shareholder's loan and shareholding apart.
Does the waterfall change between receivership and liquidation?: The ranking on circulating assets is largely the same, but the route differs. A receiver acts for the secured lender and deals only with the charged assets, paying its own costs and the priority claims from those assets. A liquidator acts for creditors generally and distributes what is left. The two can run at once. Details differ by market; in the United Kingdom, a floating charge created since September 2003 generally leads to administration rather than administrative receivership.

// NEXT TO IT

// ON WHOSE DESK

The seats that read this term in an ordinary week. Each page says what the seat is for, who arrives in it, and the shape of the round it runs.

Credit sanctionerHolds delegated authority and signs — or declines — the lending the front line brings.
Legal counselAdvises the bank on what it can do, drafts and negotiates what it signs, and manages what goes wrong.
Lending operations officerTurns an approval into a working facility — documentation, security, drawdown, and the register that says what the bank actually holds.

THE IN-TRAY · ONE MINUTE

Make the call on one file.

A short file on the ground this page covers. Every option opens with how far it sits from a senior banker’s read.

THE FIRST QUESTION · THE LOAN · PROTECTION

A food manufacturer's loan is secured by a floating charge over its stock and debtors and a fixed charge over its factory.

Which security can shrink without anyone breaching anything?

7 MORE ON THE LOAN · PROTECTION →WHERE DO YOU READ FROM? THE PLACEMENT →

THE READING ROOMIN ONE PARAGRAPHRecovery waterfall What is a recovery waterfall in an insolvency?