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A preferential creditor (in some
jurisdiction Jurisdiction (from Latin 'law' + 'declaration') is the legal term for the legal authority granted to a legal entity to enact justice. In federations like the United States, areas of jurisdiction apply to local, state, and federal levels. J ...
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 property ...
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 debto ...
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" \n\n\nsecurity.txt is a proposed standard for websites' security information that is meant to allow security researchers to easily report security vulnerabilities. The standard prescribes a text file called \"security.txt\" in the well known locat ...
, but more commonly, the preferential creditors are only given priority over unsecured creditors. 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 Europe, off the north-western coast of the continental mainland. It comprises England, Scotland, Wales and ...
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 av ...
s whose security is in the nature of a
floating charge 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 ambulato ...
, but creditors with fixed security take ahead of the preferential creditors generally. In
English law English law is the common law legal system of England and Wales, comprising mainly criminal law and civil law, each branch having its own courts and procedures. Principal elements of English law Although the common law has, historically, b ...
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 In psychology, economics and philosophy, preference is a technical term usually used in relation to choosing between alternatives. For example, someone prefers A over B if they would rather choose A than B. Preferences are central to decision t ...
. Prior to that, all unsecured creditors 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 parties regulating the provision of paid labour services. Usually based on a contract, one party, the employer, which might be a corporation, a not-for-profit organization, a co-operative, or any ot ...
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 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 criminal wrongs that are punishable ...
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 cleanup efforts. In the United Kingdom, employees’ holiday pay/wages are classed as preferential – if they are paid via
redundancy payments A layoff or downsizing is the temporary suspension or permanent termination of employment of an employee or, more commonly, a group of employees (collective layoff) for business reasons, such as personnel management or downsizing (reducing the ...
fund then the
Department of Employment The Secretary of State for Employment was a position in the Cabinet of the United Kingdom. In 1995 it was merged with Secretary of State for Education to make the Secretary of State for Education and Employment. In 2001 the employment functions w ...
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 The Enterprise Act 2002 is an Act of the Parliament of the United Kingdom which made major changes to UK competition law with respect to mergers and also changed the law governing insolvency bankruptcy. It made cartels illegal with a maximum pri ...
but reintroduced with effect from 1 December 2020 by the
Finance Act 2020 A Finance Act is the headline fiscal (budgetary) legislation enacted by the UK Parliament, containing multiple provisions as to taxes, duties, exemptions and reliefs at least once per year, and in particular setting out the principal tax rates f ...
. Creditors, and sometimes individual assets, are also placed in classes by specific laws for specific events, such as a
deposit insurance Deposit insurance or deposit protection 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 systems are one component of ...
scheme triggered by a bank failure. For example,
Switzerland ). Swiss law does not designate a ''capital'' as such, but the federal parliament and government are installed in Bern, while other federal institutions, such as the federal courts, are in other cities (Bellinzona, Lausanne, Luzern, Neuchâtel ...
'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 Admiralty law or maritime 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 private international law governing the relationships between priv ...
, 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 inst ...


References

{{reflist, 2 Bankruptcy Insolvency Credit