Association of Chartered Certified Accountants (ACCA) Certification Practice Test

An administrator can pay out monies to which of the following without court approval?

1. Secured creditors

2. Preferential creditors

3. Both secured and preferential creditors

4. Unsecured creditors

The correct answer is: Both secured and preferential creditors

In the context of insolvency and administration, the ability of an administrator to distribute funds without court approval typically depends on the nature of the creditors involved. Secured creditors have a legal claim over specific assets of the debtor, which allows them to recover debts directly from those assets. Because of this secured status, the administrator can pay them out directly from the proceeds of selling the secured assets or from the available funds, often without needing additional court approval. Preferential creditors, such as employees owed wages, have a priority claim during the distribution process as defined by statutory rights. Their claims are treated preferentially in insolvency situations, meaning an administrator can also pay these creditors without needing further court consent. This means that in many cases, an administrator has the authority to settle obligations to both secured and preferential creditors during the administration process without first having to seek approval from the court. On the other hand, unsecured creditors do not have specific claims over assets and typically would be paid only after secured and preferential creditors have been satisfied, often requiring more formal processes, including court involvement, before any distributions can be made to them.