Association of Chartered Certified Accountants (ACCA) Certification Practice Test

Which of the following ranks lowest in a liquidation?

1. Secured creditors

2. Preferential creditors

3. Trade creditors

4. Outstanding tax liabilities

The correct answer is: Trade creditors

In the context of liquidation, the order of priority in which claims are settled is critical to understanding how different creditors are treated. Trade creditors rank lower than both preferential creditors and secured creditors. Secured creditors, such as banks or lenders who have collateral backing their loans, have the first claim to the assets of the company being liquidated. This means they will be paid off before others using the specific assets they financed. Preferential creditors typically include employees owed wages, certain tax liabilities, and other specific statutory obligations that are given priority under insolvency laws. They rank directly below secured creditors, ensuring that essential obligations, such as employee payments, are settled prior to unsecured claims. Trade creditors are generally suppliers providing goods and services on credit who do not have any collateral backing their claims. In liquidation scenarios, they find themselves at the back of the queue when it comes to recovering outstanding amounts owed to them, receiving payment only after secured and preferential creditors have been satisfied. Outstanding tax liabilities are also considered preferential debts in many jurisdictions. Hence, while trade creditors are unsecured, outstanding tax liabilities typically fall higher in the liquidation hierarchy. This ranking reflects the statutory nature of these debts, which may offer them priority status over regular trade credit, aligning with the legal framework governing