Creditor hierarchy
A creditor hierarchy determines the relative priority of claims when available funds are insufficient to pay everyone. Secured, preferential, unsecured and subordinated claims can have different treatment, while ordinary shareholders generally receive a residual after claims ahead of them. Actual priority depends on jurisdiction, security, insolvency costs and legal rules. Greater subordination usually exposes a lender to more potential loss and may increase the return demanded, but priority does not guarantee full recovery.
Worked example
A simplified agreement ranks $70 of senior debt ahead of $30 of subordinated debt. If $80 remains for those two claims after all prior-ranking costs and claims, senior debt receives $70 and subordinated debt receives $10. Real distributions require applicable insolvency rules.
Common mistake
Assuming all lenders have equal priority or that secured status guarantees complete repayment regardless of collateral value and costs.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | AFM | Supporting | September 2026–June 2027 |
| ACCA | FM | Direct | September 2026–June 2027 |