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Liquidation: preferential debts

The order of payment of debts in a liquidation is that secured creditors are paid first, then unsecured creditors, pari passu. There are, however, certain categories of unsecured creditors entitled to payment in full before paying others. Debts with priority are: (1) cost of liquidation, this being a first charge; (2) rates and taxes but not for more than one year (the relevant authority can choose the year); (3) wages of clerks, servants, workmen or labourers for not more than four months and not more than £800 each; (4) amounts owing to Customs and Excise with regard to V.A.T. falling due within the twelve months up to the commencement of the liquidation; (5) accrued holiday pay due to any persons in category (3) on termination of employment; (6) employers’ contributions under the various National Insurance Acts (for a period, of twelve months); (7) compensation due to workmen, the relevant date being the date of the winding-up order or the date of the appointment of a provisional liquidator. All these debts rank pari passu amongst themselves. Where a person has advanced money to the company to pay wages that would have had priority, the person may claim priority by subrogation. Crown debts have no priority as such.

Reference: The Penguin Business Dictionary , 3rd edt.