Association of Chartered Certified Accountants (ACCA) Certification Practice Test

Which of the following represents the last group in the order of debt repayment during liquidation?

1. Members

2. Fixed Charge holders

3. Unsecured creditors

4. Preferential creditors

The correct answer is: Members

In the context of liquidation, the order of debt repayment follows a specific hierarchy, designed to protect those with the highest claim to assets first. The group that is last in this order is the members of the company, often referred to as shareholders. When a company is liquidated, various creditors are categorized and repaid in the following manner: Fixed charge holders are paid first as they have secured claims against specific assets. After them, preferential creditors, who might include certain employees or tax authorities, are settled. Following this, unsecured creditors, who have no specific claim on particular assets, receive their payments based on the remaining available funds. Members or shareholders typically receive returns only after all creditors have been satisfied. In many cases, especially during liquidation of distressed companies, there may be little to no assets left to distribute to members after creditors have been paid. This structured approach to debt repayment ensures that those owed money are compensated according to the priority of their claims, safeguarding the interests of secured creditors first and allowing for an equitable resolution of outstanding debts.