Preferential creditor

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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.

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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 Bankruptcy 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] but reintroduced with effect from 1 December 2020 by the Finance Act 2020. [5]

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. [6] 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. [7]

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

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<span class="mw-page-title-main">Bankruptcy in the United States</span> Overview of bankruptcy in the United States of America

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In finance, a floating charge is a security interest over a fund of changing assets of a company or other legal person. Unlike a fixed charge, which is created over ascertained and definite property, a floating charge is created over property of an ambulatory and shifting nature, such as receivables and stock.

<i>Bankruptcy and Insolvency Act</i>

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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.

An unfair preference is a legal term arising in bankruptcy law where a person or company transfers assets or pays a debt to a creditor shortly before going into bankruptcy, that payment or transfer can be set aside on the application of the liquidator or trustee in bankruptcy as an unfair preference or simply a preference.

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In finance, senior debt is debt that takes priority over other unsecured or otherwise more "junior" debt owed by an issuer. Senior debt is frequently issued in the form of senior notes or referred to as senior loans. Senior debt has greater seniority in the issuer's capital structure than subordinated debt. In the event the issuer goes bankrupt, senior debt theoretically must be repaid before other creditors receive any payment.

<span class="mw-page-title-main">United Kingdom insolvency law</span> Law in the United Kingdom of Great Britain and Northern Ireland

United Kingdom insolvency law regulates companies in the United Kingdom which are unable to repay their debts. While UK bankruptcy law concerns the rules for natural persons, the term insolvency is generally used for companies formed under the Companies Act 2006. Insolvency means being unable to pay debts. Since the Cork Report of 1982, the modern policy of UK insolvency law has been to attempt to rescue a company that is in difficulty, to minimise losses and fairly distribute the burdens between the community, employees, creditors and other stakeholders that result from enterprise failure. If a company cannot be saved it is liquidated, meaning that the assets are sold off to repay creditors according to their priority. The main sources of law include the Insolvency Act 1986, the Insolvency Rules 1986, the Company Directors Disqualification Act 1986, the Employment Rights Act 1996 Part XII, the EU Insolvency Regulation, and case law. Numerous other Acts, statutory instruments and cases relating to labour, banking, property and conflicts of laws also shape the subject.

<i>Re Barleycorn Enterprises Ltd</i> British case on insolvency

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<i>Re Grays Inn Construction Co Ltd</i>

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<span class="mw-page-title-main">British Virgin Islands bankruptcy law</span>

British Virgin Islands bankruptcy law is principally codified in the Insolvency Act, 2003, and to a lesser degree in the Insolvency Rules, 2005. Most of the emphasis of bankruptcy law in the British Virgin Islands relates to corporate insolvency rather than personal bankruptcy. As an offshore financial centre, the British Virgin Islands has many times more resident companies than citizens, and accordingly the courts spend more time dealing with corporate insolvency and reorganisation.

<span class="mw-page-title-main">Cayman Islands bankruptcy law</span>

Cayman Islands bankruptcy law is principally codified in five statutes and statutory instruments:

Anguillan bankruptcy law regulates the position of individuals and companies who are unable to meet their financial obligations.

Australian insolvency law regulates the position of companies which are in financial distress and are unable to pay or provide for all of their debts or other obligations, and matters ancillary to and arising from financial distress. The law in this area is principally governed by the Corporations Act 2001. Under Australian law, the term insolvency is usually used with reference to companies, and bankruptcy is used in relation to individuals. Insolvency law in Australia tries to seek an equitable balance between the competing interests of debtors, creditors and the wider community when debtors are unable to meet their financial obligations. The aim of the legislative provisions is to provide:

<span class="mw-page-title-main">Hong Kong insolvency law</span> Financial regulation in Hong Kong

Hong Kong insolvency law regulates the position of companies which are in financial distress and are unable to pay or provide for all of their debts or other obligations, and matters ancillary to and arising from financial distress. The law in this area is now primarily governed by the Companies Ordinance and the Companies Rules. Prior to 2012 Cap 32 was called the Companies Ordinance, but when the Companies Ordinance came into force in 2014, most of the provisions of Cap 32 were repealed except for the provisions relating to insolvency, which were retained and the statute was renamed to reflect its new principal focus.

References

  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". Legislation.gov.uk. The Crown of United Kingdom.
  5. "Finance Act 2020". Legislation.gov.uk. The Crown of United Kingdom.
  6. Einlagensicherung Archived 12 October 2008 at the Wayback Machine . Deposit Protection of Swiss Banks and Securities Dealers. Retrieved 2008-10-09 (English)
  7. "Companies Act 1956" (PDF). Government of India: Ministry of Corporate Affairs. 18 January 1956. Retrieved 29 July 2014.