Preferential Creditor

A preferential creditor is a creditor whose claim ranks ahead of ordinary unsecured creditors in the distribution of an insolvent estate. Under Schedule 6 of the Insolvency Act 1986 (as amended), preferential debts include employee wages and holiday pay (up to statutory limits) and, since December 2020, HMRC for certain taxes including VAT, PAYE, and employee National Insurance contributions (the secondary preferential creditor category).

In practice

In a distribution, the statutory order of priority is: (1) costs of the insolvency proceedings, (2) preferential creditors (ordinary and secondary), (3) holders of floating charges, (4) ordinary unsecured creditors, (5) statutory interest, (6) members/shareholders. Preferential debts rank equally among themselves and abate proportionally if the assets are insufficient to pay them in full.