Preferential creditor

Unsecured creditor Floating charge Bankruptcy

A preferential creditor (in some jurisdictions called a preferred creditor) is a creditor receiving a preferential right to payment upon the debtor's bankruptcy under applicable insolvency laws.

In most legal systems, some creditors are given priority over ordinary creditors, either for the whole amount of their claims or up to a certain value. In some legal systems, preferential creditors take priority over all other creditors, including creditors holding security, but more commonly, the preferential creditors are only given priority over unsecured creditors.[1] Some legal systems operate a hybrid approach; in the United Kingdom preferential creditors have priority over secured creditors whose security is in the nature of a floating charge, but creditors with fixed security take ahead of the preferential creditors generally.

In English law the concept was first introduced for personal bankruptcy in 1825 pursuant to the Bankrupts (England) Act 1825, and for companies in 1888 pursuant to the Preferential Payments in Bankruptcy Act 1888. Prior to that, all unsecured creditors ranked equally and without preference ("pari passu") in a series of statutes stretching back to the Statute of Bankrupts 1542.

Classes of preferred creditors

Creditors who are characteristically preferred creditors are:

In the United Kingdom, employees’ holiday pay/wages are classed as preferential – if they are paid via redundancy payments fund then the Department of Employment becomes a secured creditor. If there is a shortfall, in those cases where someone earns in excess of the government limit, then they can claim preferentially too. [3] The right of the Crown as a preferential creditor was removed by the Enterprise Act 2002.[4]

Creditors, and sometimes individual assets, are also placed in classes by specific laws for specific events, such as a deposit insurance scheme triggered by a bank failure. For example, Switzerland's deposit protection has Class I (first-class), Class II (second-class) and Class III (third-class) unsecured creditors.[5] following are the preferential creditors:- 1.all revenues, taxes, cesses and rates, whether payable to the Government or local authority, due to payment by the company with in 12 months before the date of commencement of winding up.[6]

Admiralty claims

In admiralty law, many legal systems accord certain claims preferential status where a ship is subject to arrest. These claims vary from country to country, but commonly include:

See also


  1. ^ "Liquidation: a guide for creditors" (PDF). Australian Securities & Investments Commission. Retrieved 29 July 2014.
  2. ^ "4 Types of Preferential Creditors". Retrieved 29 July 2014.
  3. ^ Smith, Mike. "Company Liquidation: A Directors' Guide to a Creditors' Voluntary Liquidation". Archived from the original on 15 August 2014. Retrieved 24 July 2014.
  4. ^ "Enterprise Act 2002". The Crown of United Kingdom.
  5. ^ Einlagensicherung. Deposit Protection of Swiss Banks and Securities Dealers. Retrieved 2008-10-09 (English)
  6. ^ "Companies Act 1956" (PDF). Government of India: Ministry of Corporate Affairs. 18 January 1956. Retrieved 29 July 2014.