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Who are my preferential creditors?

Preferential creditors are one of several types of creditors to which your company can owe monies. When a limited company becomes insolvent and unable to cover its liabilities, those liabilities can be to one or multiple creditors, and the order they need paying back depends on the charges they hold over your business. This is called the ‘payment hierarchy’, as defined by the Insolvency Act 1986.

Who pays my creditors in insolvency?

Once you become aware your company is insolvent, you should contact us immediately to discuss your options. Ignoring the problem can worsen your situation, and even lead to your company trading whilst insolvent.

Once a suitable insolvency procedure is chosen, your insolvency practitioner takes over contacting your creditors and takes charge of issuing any payments they’re due.

The duties of an insolvency practitioner
While it can be tempting to pay your creditors in an order that feels right for you, this would be seen as creditor preference and can lead to further issues later on.

What are preferential creditors?

Preferential creditors are second in the payment hierarchy, after secured creditors with fixed charges on business assets. They’re paid before the company’s secured creditors with floating charges, unsecured creditors and shareholders.

Who is an unsecured creditor?
Who are my preferential creditors?

The company’s employees are classed as preferential creditors and can claim limited amounts of holiday pay, pension scheme contributions and wages they’re owed in arrears.

Additionally, if anyone has filed a lawsuit against the insolvent company for wrongful action against another, the victim (Tort victim), may become a preferential creditor.

What about HMRC?

Until 2002, HM Revenue and Customs (HMRC) was classified as a preferential creditor. After the implication of The Enterprise Act of 2002, HMRC was relegated to an unsecured creditor, meaning they would receive payment after all secured creditors, but above company shareholders.

As of December 1st, 2020, HMRC regains its preferential creditor status, paid before unsecured creditors and secured creditors with floating charges.

These changes apply to taxes collected by the company on behalf of employees and customers, such as VAT and PAYE. HMRC remains an unsecured creditor for corporation tax and employers’ National Insurance Contributions.

In summary

If a company becomes insolvent, your insolvency practitioner will distribute payments to the creditors in the order dictated by the payment hierarchy. Preferential creditors are second in the payment hierarchy, before secured creditors with floating charges and unsecured creditors. Company employees are preferential creditors and are entitled to limited amounts of holiday pay, pension contributions and wages owed in arrears.

While HMRC has been an unsecured creditor since 2002, from December 1st, 2020, they are preferential creditors again.

How we can help

If your company is suffering from debts that risk leading to insolvency, you should speak to us immediately to prevent the situation from worsening. Our team has years of experience in the industry and can help advise you how best to move forward for your business. Once you’re assigned a licensed insolvency practitioner and decided the process best for your company, we will take care of all communication with your creditors and payments. Contact us today for more information and free, impartial advice with no obligation.

Beverley Horton

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