March 2014


40.97 Preferential debts - general

Preferential debts are debts which are to be paid in preference to other unsecured debts and also in preference to the holder of a floating charge (see paragraph 40.130) [note 1] [note 2] [note 3].

Following changes to the law in September 2003 the categories of debt that are considered to be preferential were significantly reduced with the Crown losing most of its preferential status.

Since the majority of those cases to which the pre-September 2003 rules applied will now have been dealt with, this Part does not discuss in detail those debts that were formerly preferential but, in summary, they are debts due to HMRC such as PAYE deductions, duty and VAT (see Annex A).

Chapter 77 provides guidance on direct taxation and Chapter 78 provides guidance on VAT. 


40.98 Definition of relevant date

The categories of preferential debts are defined to the extent that they are owed at, or leading up to, the ‘relevant date’ [note 4].  So far as concerns compulsory liquidation and bankruptcy the relevant date is defined as: 

  • In relation to a winding up, the date of the winding-up unless that was preceded by administration (in which case the relevant date is the date that the company entered administration), or the earlier date of the appointment of a provisional liquidator [note 5]. 
  • In relation to bankruptcy, the date of the making of the bankruptcy order, or the earlier date of the appointment of an interim receiver [note 6].


40.99 Contributions to occupational pension schemes as a preferential debt

A debt in respect of a sum due by the insolvent in respect of an employer’s contributions to an occupational pension scheme in the 12 months prior to the relevant date (see paragraph 40.98) or in respect of an employee’s contributions deducted but not paid into the scheme in the four months prior to the relevant date is a preferential debt [note 7] [note 8].


40.100 Claims by National Insurance Fund in respect of pension contributions

The trustee of a pension scheme can make a claim to the National Insurance Fund for outstanding pension contributions (see paragraph 61.93).  Where such a claim is made, the National Insurance Fund, in the person of the Secretary of State for BIS will have a subrogated claim (see paragraph 40.22) in the insolvency for the payment, part or all of which may be preferential.


40.101 Remuneration of employees as preferential debts – wages

Any amount which is owed by the insolvent to a person who is or has been an employee of the debtor and is payable by way of remuneration in respect of the whole or any part of the period of four months before the relevant date (see paragraph 40.98). This is subject to a limit of £800 [note 9] [note 10], is preferential.

The legislation provides further qualification of the types of debts that would be considered preferential under this provision, such as relating it to statutory employment rights claims [note 11] (see Chapter 76) and the dismissal of the employee [note 12].

See paragraphs 40.22 to 40.23 regarding the subrogation of claims where such debts are paid by the Secretary of State or other third-party.


40.102 Remuneration of employees as preferential debts – holiday pay

An amount owed by way of accrued holiday pay, in respect of any period before the relevant date (see paragraph 40.98), to a person whose employment has been terminated by the insolvent (whether before, on or after that date) is a preferential debt [note 13] [note 14] [note 15].

See paragraphs 40.22 to 40.23 regarding the subrogation of claims where such debts are paid by the Secretary of State or other third-party.


40.103 Protective awards

Where an employer fails to consult properly prior to dismissing employees as redundant, an Employment Tribunal may make a financial award in favour of the dismissed employees.  Such an award is known as a protective award (see paragraphs 76.33 to 76.35) and should be treated as provable debt which is preferential [note 16]. This is the case even if the award is not made until after the insolvency order [note 17].


[Back to Part 3 – Non-provable debts] [On to Part 5 – Secured creditors and finance agreements]