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PQ Co has entered formal liquidation proceedings. The company’s outstanding debts include 4 months of salary arrears of $800 owing to Shota who is an employee of PQ Co.
Which TWO of the following creditors will Shota rank ahead of on payment of PQ Co’s debts
by the liquidator? (2 marks)
1. Twelve months of PAYE arrears owing to HM Revenue & Customs
2. The prescribed part payment to unsecured creditors
3. A bank loan secured on the company’s property by a fixed charge
4. The expenses of the liquidationThis question was taken from Examiner’s report LW GLO (September 2018 to August 2019) and the answer is 1 and 2 but i dont understand Why. I always thought employee salary have second priority after Liquidator expense.
Can you help to explain?. ThanksSo your query is re “Why does a fixed charge debenture holder rank above a preferential creditor (the employee’s outstanding wages)”
A fixed charge debenture holder ranks equally along with the liquidator
If the liquidator refuses to acknowledge the priority of the debt secured by fixed charge, then the lender will simply take possession of the charged property and sell it
OK?
Thanks Sir for a very clear explanation.
Further, I would like to have your advise for two bellow questions:
1. Can number 1 in the situation “Twelve months of PAYE arrears owing to HM Revenue & Customs” be classified as unsecured creditor as well?2. After pay all debts, If company still have surplus, this surplus amount will be share among members. As per my understanding members here includes both original share and preference share holders base on their percentage of contribution. Am I right? Thanks
Since 2003 HMRC no longer ranks as a preferential creditor and falls fully into the ranks if unsecured creditors
It would be most unusual for preference shareholders to share in any surplus in a liquidation – that would happen only if their rights according to the company’s constitution describes them as ‘participating preference shares ‘
So the whole of any surplus is shared amongst the equity shareholders
OK?
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