When the term preferential creditor is used it means a creditor that is given the right to be paid before any other unsecured creditor. This provision was created via the 1986 Insolvency Act as per the unsecured, secured and preferential creditors. While any preferential or preferred creditor is given priority over an unsecured creditor in matters of liquidation, they are rated below creditors having a fixed charge on assets such as property.
Those that fall under the category of preferential creditors are:
Company employees: Those employees working in companies are prioritised because of their contributions to the company as workers. For this pension scheme contributions, holiday entitlements and unpaid wages (up to £800) are to be paid to them. Consequently, employees will continue to retain their status as preferential creditors.
Tort victims: If any insolvent business or company faces a wrongful action lawsuit against another business, the latter is generally given the status of a preferential creditor.
FSCS (Financial Services Compensation Scheme): As per a law passed in 2014, all depositors are safeguarded by the FSCS with preferential status. It is to the limit that the compensation they are entitled should not exceed the amount they are owed. The limit is up to £85,000.
Also, in 2014, the Banks and Building Societies Order created another kind of preferential creditor known as secondary preferential creditors. This has been in force since 2015 with them receiving payment after the primary preferential debts are cleared.
The insolvency regime changed in 2002 under the Enterprise Act, and HMRC was no longer classed as a preferential creditor. HMRC now ranks alongside unsecured creditors, which will result in lower returns for the Crown but will increase the insolvency returns for trade creditors.
When are preferential creditors paid their dues?
All preferential creditors dues are cleared after the fixed charge creditors are paid in totol. Fixed charged creditors have assets as collateral against the money owed to them and they have the legal right to sell that to recover the money owed to them.