What Are Preferential Creditor Rights In A Liquidation?

people in suits sitting in a circle

When an insolvent company enters liquidation, there is an order of priority in which repayments are made to creditors. The order in which creditors rank in the hierarchy depends on the type of debt that the company owes them. This order is significant as there won’t always be enough money for all creditors to be paid in full. 

The order in which the relevant parties receive repayment will depend on whether they are secured, unsecured or preferential creditors. You can read more about the rights of secured and unsecured creditor rights in our previous article. For now, let’s take a look at the role of preferential creditors in a liquidation, and how they fit into the hierarchy of repayment. 

What Is A Preferential Creditor?

A preferential creditor is an individual or organisation that has priority in being paid the money they are owed, above other creditors. The different types of preferential creditors will vary, with the type of payment that they are owed varying from case to case. Let’s take a look at which parties might count as preferential creditors. 

Who Are Preferential Creditors In A Liquidation?

The individuals or organisations who may be allocated as preferential creditors in a liquidation can include:

  • Employees (if a company owes employees wages or holiday entitlement then this is considered a top priority.  For more information please read Employee Rights Under Insolvency – What Can You Claim?)
  • Subrogated Preferential Claims  (On some occasions other parties, banks for example, may lodge a claim as a preferential claim if they settled other preferential claims that would have otherwise ranked in the liquidation)
  • HMRC (if the company has outstanding tax debts then repayment to HMRC will be high on the list as a secondary preferential creditor)

Preferential creditor rights come after secured creditors of fixed charges, but before floating charge and unsecured creditors. Secured creditors who have fixed charges have more control  over their assets, and take precedence before preferential creditors. As such, preferential creditors fit into the order of repayment as follows:

Secured Creditors (Fixed Charge)Person counting coins on a table
Preferential Creditors
Secondary Preferential Creditors
Secured Creditors (Floating Charge)
Prescribed Part – Unsecured Creditors
Unsecured Creditors

How Is The Order Of Repayment In Liquidation Decided?

As we’ve highlighted, secured creditors who hold fixed charges are always paid first in a liquidation, with unsecured creditors being the last to receive payment. Factors influencing how much individual parties receive will also include the cost of the liquidation process, the number and value of assets for sale, and the ease with which those assets can be realised. 

If you have any further questions regarding the rights of preferential creditors in liquidation, or if you are concerned that your company might be facing insolvency, please don’t hesitate to get in touch with our experienced team of insolvency professionals today. 

  

 

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