What is a Preferential and Non-Preferential Creditor?

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.

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Preferential VS Non Preferential Creditors

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?

Before 2002, HMRC was always considered a preferential creditor. However, the Enterprise Act of 2002 removed this right, placing them as merely an unsecured creditor in all forms of tax. More recently, however, they do now have powers which give them the rights to take moneys owed to them directly from bank accounts, assuming certain criteria are met. Although their official status as unsecured creditors hasn’t changed, this do give them an obvious advantage over other creditors.

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.

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