Kestrel Ltd went into compulsory liquidation in 2025. Its fixed charge holder has been paid in full from its security, and the costs and expenses of the liquidation have been met. The remaining claims are: (1) a bank holding a floating charge created in 2018; (2) HMRC for VAT, and for PAYE income tax deducted from employees' wages but not paid over; (3) employees' arrears of wages and holiday pay within the statutory limits; (4) unsecured trade creditors. In what order are these claims paid?

Correct answer: A) 3, 2, 1, 4, with a prescribed part of the floating charge realisations set aside for unsecured creditors before the floating charge holder is paid

Explanation

Preferential creditors are paid before the floating charge holder. Within that class, ordinary preferential debts, such as employees' wage arrears and holiday pay within the statutory limits, are paid first. For insolvencies beginning on or after 1 December 2020, certain HMRC claims, including VAT and PAYE income tax and employee NICs deducted from wages, are secondary preferential debts ranking after ordinary preferential debts. Before the floating charge holder is paid, the liquidator sets aside the prescribed part of the floating charge realisations for unsecured creditors (s176A Insolvency Act 1986). The floating charge holder is then paid, followed by unsecured creditors. HMRC's other claims, such as corporation tax, remain unsecured.