Association of Chartered Certified Accountants (ACCA) Certification Practice Test

In what order must the liquidator repay debts, starting with fixed charge holders?

1. Fixed Charge holders, Unsecured creditors, Members, Interest

2. Fixed Charge holders, Expense of Liquidation, Preferential creditors, Floating Charge holders

3. Members, Interest, Expense of Liquidation, Fixed Charge holders

4. Floating Charge holders, Unsecured creditors, Members, Preferential creditors

The correct answer is: Fixed Charge holders, Expense of Liquidation, Preferential creditors, Floating Charge holders

The correct order for a liquidator to repay debts starts with fixed charge holders, which is established in insolvency legislation. Fixed charge holders have a legal claim over specific assets and are prioritized in repayment because they are secured by collateral. Following fixed charge holders, the expenses associated with the liquidation process are covered. These expenses can include fees to the liquidator and any costs incurred while managing the process. It is critical to settle these expenses promptly to ensure the liquidation process can proceed smoothly. Next in line are preferential creditors, who are given priority over unsecured creditors due to their specific legal status, often pertaining to certain groups such as employees owed wages or certain tax liabilities. Finally, floating charge holders are paid. They typically have a lower rank than fixed charge holders since their claim is not secured against a specific asset but rather over a pool of assets that can change in nature. Overall, this order reflects a legal hierarchy established in insolvency proceedings to protect the rights of various stakeholders, giving the highest priority to those with secure claims, then addressing operational costs, followed by preferences for specific unsecured claims.