Association of Chartered Certified Accountants (ACCA) Certification Practice Test

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Which of the following is a preferential creditor when a company goes into liquidation?

Trade creditors
Arrears of holiday pay due to employees
Secured creditors
Unsecured creditors

The correct answer is: Arrears of holiday pay due to employees

A preferential creditor refers to a specific category of creditors that have a legal right to be paid before others in the event of a company's liquidation. Among the choices provided, arrears of holiday pay due to employees qualify as preferential creditors. This status arises because many jurisdictions prioritize employee claims, particularly those related to earned wages or holiday pay, during the distribution of a company's assets when it goes into liquidation. Trade creditors, secured creditors, and unsecured creditors do not hold the same preferential status. Trade creditors are typically unpaid suppliers or service providers, whereas secured creditors have a claim against specific assets of the company. Unsecured creditors have the least priority and are only paid after preferential and secured creditors have been satisfied. This reflects the legal framework surrounding insolvency, whereby employee rights to owed wages are protected to a greater extent, ensuring that they are compensated ahead of many other types of debts owed by the company.