A guide, not advice. This explains how things generally work. A licensed insolvency practitioner will tell you what applies to your company or to you.
What Are Preferential Creditors?
In a liquidation, not all creditors are paid in the same order. Preferential creditors are a category of creditor who rank ahead of most others - paid after the costs of the liquidation but before secured creditors (in most cases) and unsecured creditors.
Understanding preferential status matters for both creditors (who may recover more) and directors (who need to understand how the company's limited funds will be distributed).
Who Are Preferential Creditors?
Since changes to the insolvency rules, the main preferential creditors are:
- Employees - for certain unpaid employment-related claims:
- Unpaid wages (up to a limit)
- Holiday pay (up to a limit)
- Certain pension contributions
These are paid ahead of unsecured creditors. Amounts above the statutory limits rank as unsecured claims.
How Preferential Status Works
The order of payment in a liquidation is broadly:
- Liquidation costs - the liquidator's fees and disbursements
- Preferential creditors - certain employee claims
- Secured creditors - those with a charge over specific assets
- Unsecured creditors - suppliers, HMRC (for most tax), and others
- Shareholders - last, rarely paid in an insolvent liquidation
The Prescribed Part
Where a creditor holds a floating charge over the company's general assets, a portion of the proceeds - the "prescribed part" - is set aside for unsecured creditors, even though the charge holder is otherwise entitled to the proceeds. This protects unsecured creditors to some extent.
HMRC's Position
Since 2020, HMRC lost its preferential status for most tax debts (which were preferential before 2003 and again briefly). VAT and Corporation Tax are now generally unsecured. However, certain employee-related debts (such as PAYE) can be preferential in specific circumstances.
Why It Matters
If you are an employee, preferential status means you are more likely to recover your unpaid wages and holiday pay - and the Redundancy Payments Service steps in where the company cannot pay. If you are an unsecured creditor, preferential claims reduce what is left for you.
Speak to a Licensed IP
If you want to understand where you rank in a liquidation, our Manchester-based practitioners will explain clearly and honestly.