Keith is the Managing Director of KSA Group Insolvency Practitioners which has been established for 25 years. The company has undertaken more CVA led rescues than any other firm. Read our case studies to see how.
A preferential (or preferred) creditor refers to a creditor who has the right to payment before others. The priority of secured, preferential, and unsecured creditors is set out in the Insolvency Act 1986. Preferential creditors are prioritised before unsecured creditors in liquidation but below creditors with a fixed charge on assets such as property.
Employees of the company are given higher priority as these people put their time and effort into the company. Any unpaid wages (up to a maximum of £800), pension scheme contributions and holiday pay are entitled to be paid. Employees have had and will continue to have, long-standing title as preferential creditors.
In 2014 changes took place which meant that depositors protected by the FSCS gain preferential status to the extent that the amounts owed to them do not exceed the compensation they are entitled to under the scheme. There is a cap of £85,000.
The Banks and Building Societies Order 2014 added a new type of preferential creditor, secondary preferential creditors. This new class has been applied since 2015. They are paid after the ordinary preferential debts have been paid and compromise of the amounts owed to a depositor eligible under the FSCS but exceeding the compensation payable and deposits made through a non-European Economic Area (EEA) branch of an authorised credit institution which would be eligible for compensation from the FCSC if made through an EEA branch of that credit institution.
They are paid after fixed charge holders have been paid in full. These are creditors who have an asset against their debt, so they are able to sell that security to recoup the money owed.
Insolvency events include, liquidation, administration and CVAs and bankruptcy for sole traders.
The concept is known as the ranking of creditors in insolvency. The priority of secured, preferential, and unsecured creditors is set out in the Insolvency Act 1986 and updated by various changes to insolvency legislation since then.
The ranking above sets out how the money is legally distributed, if there is any to distribute!
These are complex rules and you should speak to us about this order of priority if you have any questions.
Employees of the company are given higher priority as these people put their time and effort into the company. Any unpaid wages (up to a maximum of £800) are paid out first. Pension scheme contributions and holiday pay are entitled to be paid.
If employees are owed more than £800 then the remainder of their debt is classed as unsecured debt.
For example if a company goes into liquidation on the 25th of a month and no wages/salaries have been paid. If in this case an employee is owed £2500 for salary how would they recover this?
The employee would receive £800 from the liquidator or more likely the Redundancy Payments Office part of the Insolvency Service (RPO) and the balance of £1700 would become an ordinary unsecured debt. This is unlikely to be recovered by the employee.
Remember redundancy claims and lieu of notice claims are NOT primary preferential creditor claims. These are usually met by the RPO but are capped at £643 per eligible week.
HMRC Debts Pre-2002 HMRC was classed as a preferential creditor. In 2002, the new revisions of the Enterprise Act meant this right was removed, making them an unsecured creditor from 2003 until 2020.
However as of 1st December 2020, HMRC rank ahead of floating charge holders in any insolvency. This may mean that lenders get less recovery in insolvency due to lower recovery under a floating charge.
HMRC ranks as a secondary preferential creditor in relation to any taxes paid by employees and customers that are held by a business on their behalf, i.e. PAYE, VAT, NICs and Construction Industry Scheme deductions. For corporation tax and any other taxes owed directly by a company, HMRC is an unsecured creditor.
There is no age limit on secondary preferential creditors.
When speaking to insolvency advisors such as ourselves it is always good practice to have prepared a list of the debts owed to HMRC and to banks/lenders with security. Please also have a list of all unsecured creditors available as that helps us advise your company.