The term preferential creditor, sometimes interchangeable with ‘preferred creditor’, is a creditor whose right to payment is deemed of more importance than another.
When a company can’t pay its bills, certain payments are prioritised over others based on criteria outlined in the Bankruptcy and Insolvency Act.
Non-preferential creditors, also known as an unsecured creditor, are usually standard trade creditors and, in cases of insolvency, are paid after preferential debts have been settled.
Examples of Preferred Creditors
Preferred creditors, simply meaning those at the top of the list to get paid and include:
(a) Company employees, whose unpaid wages are considered the highest priority since these people have given their time and skills to a company that is no longer solvent. Included in this is any holiday pay accrued.
(b) Tort victims – In a situation where the insolvent company has a lawsuit filed against them for wrongful action against another, the victim is often assigned a position of a preferential creditor.
Preferential vs Fixed Charge Creditors
A certain type of creditor may hold some security over company’s assets, and hence they are entitled to either to sell that security to recoup the money owed them. Fixed charge creditors, however, the situation under themselves and should not be confused with ’preferential creditors’, a legal term referring only to unsecured creditors.
Is Hmrc Considered a Preferential Creditor?
As of 1st December 2020 HMRC will again be a preferred creditor, as a result of the The Finance Act 2020.
Before 2002, HMRC was always considered a preferential creditor.
The Enterprise Act of 2002 the removed this right, placing them as merely an unsecured creditor in all forms of tax.
Although there has been speculation that the law to put this back in place might be postponed due to COVID-19, this has not happened.
HMRC now ranks ahead of floating charges and unsecured creditors, with no time limit it or financial cap.
With regards to taxes that HMRC collects directly such as corporation tax and National Insurance, the current law will stand, meaning HM & Revenue remain an ordinary unsecured creditor.
Fixed charge holders will still rank as the top creditor in terms of priority, even above HMRC.
Are Employees Always Preferred Creditors?
In terms of wage arrears, and outstanding holiday pay, and pension scheme contributions employees are always considered preferred creditors.
There are limits set by the government, however, as to the maximum amount which can be claimed.