What is the difference between a preferential and non-preferential creditor

Where do preferential and non-preferential creditors rank in the creditor hierarchy?

In the creditor hierarchy, preferential creditors hold the highest position for payment during company liquidation, including fixed-charge holders. Following them are non-preferential creditors, who are placed lower in priority.

What are the different types of company creditors?

In simple terms, a creditor is anyone, be it an individual or a company, who is owed money. Company creditors vary widely and can include suppliers, contractors, customers, employees, landlords, and finance companies. 

If you’re the director of a company facing insolvency, you might even find yourself listed as a creditor if you’ve been lending money to the business from your personal funds.

In a perfect scenario, every creditor would receive their due as per the initial agreement, whether it’s a single payment, monthly salary, or quarterly rent. However, financial struggles can disrupt this ideal, especially when a company faces insolvency. In such cases, not all creditors hold equal standing.

What will happen to my liquidated company assets?

Basically, when a company goes into liquidation, a licensed insolvency practitioner takes charge to shut down the business and gather as much money as possible for the creditors. 

They achieve this by selling off the insolvent company’s assets, a process known as ‘liquidating’, and using the proceeds to pay back those the company owes money to.

Because of the circumstances surrounding an insolvent liquidation, there won’t be enough funds available within the business to reimburse all creditors fully. Some will inevitably face a shortfall in what they’re owed, while others might not receive any payment at all.

Who are preferential creditors?

If a company becomes insolvent and undergoes a formal insolvency procedure like a Creditors’ Voluntary Liquidation (CVL), certain creditors have a higher likelihood of reclaiming the money owed to them compared to others. 

These are termed preferential – or preferred – creditors, and they are given precedence over non-preferential creditors when the insolvency practitioner allocates funds.

When distributing funds to creditors, insolvency practitioners are bound by a specific payment hierarchy outlined in the Insolvency Act 1986. This hierarchy dictates the sequence in which creditors are reimbursed and the portion of funds they receive. The order is as follows:

  • Fixed charge holders, such as secured creditors like mortgage providers and asset finance companies, take precedence.
  • Following them are preferential creditors, including employees.
  • Secured creditors with a floating charge, alongside the ‘prescribed part,’ come next.
  • Then, unsecured creditors, who constitute the bulk of creditors in an insolvency scenario. These encompass unsecured bank loans, credit card providers, suppliers, landlords, and contractors.

Is HMRC considered a preferential or non-preferential creditor?

At present, HMRC stands as a non-preferential creditor, placed alongside other unsecured creditors of the company. Consequently, they usually receive minimal returns when an insolvent company undergoes liquidation.

There are proposals underway to grant HMRC secondary preferential status for specific tax debts such as VAT, PAYE, and NICs. Although they would belong to the lowest tier of preferential creditors, this change would elevate their position in the payment hierarchy when distributing funds.

This adjustment is anticipated to boost HMRC’s annual returns by £195 million. However, it would come at the expense of other unsecured creditors and floating charge holders, who should anticipate a corresponding decrease in their returns.

Thinking about liquidation? Seek Professional Guidance With Vanguard Insolvency 

If your company is facing financial difficulties and you’re worried about how a potential liquidation might impact your creditors, reach out to the specialists at Vanguard Insolvency for prompt advice and support.

We can guide you through your circumstances and suggest the most suitable course of action. With over 100 offices spread across the country, expert assistance is always within reach.

Senior Partner at Vanguard Insolvency Practitioners | Website | + posts

I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.