How to Claim for Preferential Payments in Liquidation

When a company goes into liquidation in England and Wales, not all debts are treated equally. Some creditors have legal rights to be paid before others because their claims are considered of greater importance under insolvency law. These are known as preferential debts. Knowing how and when to claim for preferential payments can significantly affect what you recover from an insolvent estate.

This article explains what preferential payments are, who qualifies, how to claim them properly in liquidation, the legal framework and time limits, and common questions for employees, tax authorities and other stakeholders seeking repayment.

What Are Preferential Payments?

In a liquidation, assets realised by the liquidator are distributed according to a strict order of priority set out by law. After secured creditors and insolvency costs, certain unsecured creditors with preferential claims must be paid before ordinary unsecured creditors.

Preferential debts are typically outstanding amounts that the legislature considers deserving of priority, such as certain employee entitlements or specified statutory liabilities. Identifying which elements of a claim are preferential - and which are not - is a key part of proving your debt in the liquidation process.

Who Qualifies as a Preferential Creditor?

Only certain types of creditors are treated as preferential under the Insolvency Act 1986 and associated rules:

Employees

Employees often have preferential status for:

• Unpaid wages or salary earned in the four months prior to the date of insolvency, up to a statutory limit (for example, capped at a set amount per employee).
• Accrued but untaken holiday pay and holiday pay-related entitlements.
• Certain employer pension contributions due to occupational pension schemes.

Often a claim will consist of both preferential and non‑preferential elements (for example, wages above the statutory cap); these must be specified when proving the debt.

HM Revenue & Customs (HMRC)

Since December 2020, certain tax and National Insurance liabilities held by a business when it enters insolvency rank as secondary preferential debts. These include:

• VAT owed
• PAYE income tax and employee National Insurance contributions
• Students loan repayments
• Construction Industry Scheme deductions

Not all HMRC liabilities are preferential - for example, corporation tax generally remains a non‑preferential debt.

Legal Basis and Order of Priority

The priority of preferential claims is set out in the Insolvency Act 1986 and related insolvency rules. Preferential debts are paid:

1. After the liquidator's costs and expenses but before other unsecured debts.
2. Ahead of ordinary unsecured creditors and holders of floating charges (subject to the prescribed part where applicable).
3. Within the class of preferential debts, creditors share available funds proportionally if assets are insufficient to satisfy all such claims in full.

How Assets Are Applied

Generally:

• Assets not subject to a security charge are used first to satisfy preferential claims.
• If insufficient, the liquidator may look to assets subject to floating charges (above the floating charge holder) to meet preferential debts.
• Preference status does not extend automatically to all unsecured claims.

How to Claim for Preferential Payments

1. Determine Whether Your Debt Is Preferential

Before submitting a claim, clearly identify which part of your debt qualifies as preferential and which part is ordinary. For example, an employee may be owed two months' wages - only the portion up to the statutory cap and within the qualifying period before liquidation is preferential; the remainder is an ordinary unsecured claim.

2. Submit a Proof of Debt to the Liquidator

To claim payment, you must prove your debt in the liquidation. This involves:

• Completing a proof of debt form provided by the liquidator.
• Clearly noting any preferential portion of the claim on the form.
• Attaching supporting documentation such as payslips, employment contracts, invoices, HMRC statements or correspondence showing amounts owed and when they arose.

Many liquidators communicate with known creditors once appointed and provide guidance on how to submit claims. If you receive such a request, respond by the deadline specified.

3. Provide Accurate Information

Accurate categorisation and supporting evidence are crucial. Incorrectly claiming a debt as preferential may delay processing or result in rejection of the claim. Provide:

• Dates of work performed or tax liabilities accrued before the insolvency date.
• Clear breakdowns of amounts that are statutory preferential and amounts that are not.
• Any relevant statutory limits on entitlement.

4. Follow Liquidator Instructions

Liquidators may set deadlines for claims and provide additional instructions on how to submit supporting evidence. Complying with these instructions helps ensure your claim is considered in time for any dividend payment.

Time Limits and Practical Considerations

There are no fixed statutory time limits in the Insolvency Act for submitting a proof of debt, but liquidators usually set a deadline in the initial notice to creditors. Missing that deadline may forfeit your right to participate in any dividend.

In addition:

• Liquidators evaluate claims before declaring a dividend, so early submission helps ensure your debt is included.
• If you're unsure whether your claim has a preferential element, consult the insolvency practitioner handling the liquidation or seek qualified guidance.

What Happens After You Claim

Once preferential debts are admitted:

• The liquidator will calculate and pay preferential debts before distributions to non‑preferential unsecured creditors.
• If assets are insufficient to satisfy all preferential claims, they share available funds proportionately.
• Any unpaid non‑preferential claim (the balance of a mixed claim) is considered later in the distribution sequence after preferential entitlements.

Potential Risks and Challenges

• Disputed Claims: A liquidator may query whether part or all of a claim is actually preferential. In such cases, provide clear evidence or consider seeking clarification.
• Insufficient Assets: If the estate has limited assets, even preferential creditors may receive only partial payment.
• Complex Claims: Debts involving multiple elements (e.g., holiday pay plus redundancy issues) may require careful categorisation and evidence.

Common Questions

Can an employee claim unpaid wages after liquidation?

Yes. Employees can claim unpaid wages and holiday pay as preferential debts, subject to statutory limits and timing rules. Any amount above the preferential cap is an ordinary unsecured claim.

Does HMRC always have preferential status?

Only certain HMRC debts - such as VAT, PAYE and NICs - rank as secondary preferential creditors for insolvencies after December 2020. Other tax liabilities, like corporation tax, remain ordinary unsecured claims.

Must I submit a proof of debt form?

Yes. To participate in a distribution, you normally need to provide a proof of debt with evidence so the liquidator can verify and admit your claim.

Key Takeaways

In liquidation in England and Wales, preferential creditors have a statutory right to be paid ahead of ordinary unsecured creditors. Typical preferential claims include employees' unpaid wages and holiday pay, and certain HMRC liabilities. To claim, you must identify which part of your debt is preferential, submit a proof of debt form with supporting evidence to the liquidator, and comply with any deadlines or instructions. Understanding the order of priority, statutory limits and proof requirements helps ensure that you maximise the chances of recovering what you are owed in an insolvency context.