Glossary · UK
What is Preferential Creditor?
A creditor whose claims are paid ahead of floating-charge holders and ordinary unsecured creditors when a company or individual becomes insolvent.
Full Definition
A preferential creditor is a party legally entitled to be paid before most other creditors in a UK insolvency, such as a liquidation, administration or bankruptcy. The order of priority is set by the Insolvency Act 1986. After fixed-charge holders and insolvency costs, preferential debts are paid next, ahead of floating-charge claims and ordinary unsecured creditors. Preferential debts include certain employee claims, such as unpaid wages up to a statutory cap and accrued holiday pay. Since December 2020, HMRC is a 'secondary preferential creditor' for taxes it collects on behalf of others, including PAYE, employee National Insurance and VAT, but not for taxes the business itself owes, such as Corporation Tax. This ranking matters because it determines who recovers money when funds are limited; ordinary unsecured creditors often receive little or nothing. If you are owed money by an insolvent business, your position in this hierarchy largely decides your prospects of repayment.