A preferential creditor (in some
jurisdiction
Jurisdiction (from Latin 'law' and 'speech' or 'declaration') is the legal term for the legal authority granted to a legal entity to enact justice. In federations like the United States, the concept of jurisdiction applies at multiple level ...
s called a preferred creditor) is a
creditor
A creditor or lender is a party (e.g., person, organization, company, or government) that has a claim on the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some propert ...
receiving a preferential right to payment upon the debtor's
bankruptcy
Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the deb ...
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 creditor
An unsecured creditor is a creditor other than a preferential creditor that does not have the benefit of any security interests in the assets of the debtor.
In the event of the bankruptcy of the debtor, the unsecured creditors usually obtain a '' ...
s. Some legal systems operate a hybrid approach; in the
United Kingdom
The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Northwestern Europe, off the coast of European mainland, the continental mainland. It comprises England, Scotlan ...
preferential creditors have priority over
secured creditor
A secured creditor is a creditor with the benefit of a security interest over some or all of the assets of the debtor.
In the event of the bankruptcy of the debtor, the secured creditor can enforce security against the assets of the debtor and avo ...
s 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
English law is the common law list of national legal systems, legal system of England and Wales, comprising mainly English criminal law, criminal law and Civil law (common law), civil law, each branch having its own Courts of England and Wales, ...
the concept was first introduced for personal bankruptcy in 1825 pursuant to the
Bankruptcy Act 1825 (
6 Geo. 4. c. 16), and for companies in 1888 pursuant to the Preferential Payments in Bankruptcy Act 1888 (
51 & 52 Vict. c. 62). Prior to that, all
unsecured creditor
An unsecured creditor is a creditor other than a preferential creditor that does not have the benefit of any security interests in the assets of the debtor.
In the event of the bankruptcy of the debtor, the unsecured creditors usually obtain a '' ...
s ranked equally and without preference ("''
pari passu
''Pari passu'' is a Latin phrase that literally means "with an equal step" or "on equal footing". It is sometimes translated as "ranking equally", "hand-in-hand", "with equal force", or "moving together", and by extension, "fairly", "without pa ...
''") in a series of statutes stretching back to the
Statute of Bankrupts 1542.
Classes of preferred creditors
Creditors who are characteristically preferred creditors are:
*
employee
Employment is a relationship between two party (law), parties Regulation, regulating the provision of paid Labour (human activity), labour services. Usually based on a employment contract, contract, one party, the employer, which might be a cor ...
s: If a company goes bankrupt, the employees of that company will be first in line to be paid. If the company owes wages, this is considered to be the top priority when it comes to dissolving the company.
*
revenue authorities: When a government is owed taxes, they are on the top of the list to get paid.
* in some countries,
tort
A tort is a civil wrong, other than breach of contract, that causes a claimant to suffer loss or harm, resulting in legal liability for the person who commits the tortious act. Tort law can be contrasted with criminal law, which deals with cri ...
victims: The rationale for tort victims is that they are perceived to be "involuntary" creditors of the bankrupt and thus should not be penalised by an insolvency in the same manner as parties who voluntarily became creditors of the bankrupt.
* in some countries, environmental clean-up costs: If a business files for bankruptcy and it is determined that they need to clean up the environment as a result of their business actions, the environmental clean up will get preferential treatment. The courts will allocate a designated amount of money to pay for the clean-up efforts.
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. The right of the Crown as a preferential creditor was removed by the
Enterprise Act 2002 but reintroduced with effect from 1 December 2020 by the
Finance Act 2020.
Creditors, and sometimes individual assets, are also placed in classes by specific laws for specific events, such as a
deposit insurance
Deposit insurance, deposit protection or deposit guarantee is a measure implemented in many countries to protect bank depositors, in full or in part, from losses caused by a bank's inability to pay its debts when due. Deposit insurance or deposit ...
scheme triggered by a bank failure. For example,
Switzerland
Switzerland, officially the Swiss Confederation, is a landlocked country located in west-central Europe. It is bordered by Italy to the south, France to the west, Germany to the north, and Austria and Liechtenstein to the east. Switzerland ...
's deposit protection has Class I (first-class), Class II (second-class) and Class III (third-class) unsecured creditors.
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.
Admiralty claims
In
admiralty law
Maritime law or admiralty law is a body of law that governs nautical issues and private maritime disputes. Admiralty law consists of both domestic law on maritime activities, and conflict of laws, private international law governing the relations ...
, 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:
*
salvage claims
* seaman's wages
* moorage fees: Cost of mooring is often a preferential claim of expediency. Otherwise it would be difficult to arrange mooring for vessels which are subject to arrest.
See also
*
Preferred stock
Preferred stock (also called preferred shares, preference shares, or simply preferreds) is a component of share capital that may have any combination of features not possessed by common stock, including properties of both an equity and a debt ins ...
Notes
References
{{Reflist, 2
Bankruptcy
Insolvency
Credit