Association of Chartered Certified Accountants (ACCA) Certification Practice Test

Preference in the order of debt repayment is given to which group?

1. Floating charge holders

2. Unsecured creditors

3. Preferential creditors such as wages and holiday pay

4. Members of the company

The correct answer is: Preferential creditors such as wages and holiday pay

Preference in the order of debt repayment is indeed given to preferential creditors, which include categories such as wages owed to employees and holiday pay. This prioritization arises from the principle that certain types of obligations are deemed more critical to the welfare of employees and society at large. Preferential creditors are usually paid before other unsecured obligations due to their essential role in maintaining employee relations and ensuring that individuals are compensated for their work. This reflects a broader social responsibility where the law protects employees by ensuring they receive at least some payment before other creditors in the event of insolvency. In contrast, floating charge holders, unsecured creditors, and members of the company have lower priority in the repayment hierarchy. Floating charge holders are creditors who have a security interest over a changing pool of assets, but their claim is subordinate to the rights of preferential creditors. Unsecured creditors do not have any specific claim against the company's assets, placing them even lower in the repayment structure. Lastly, members of the company, or shareholders, are the last to be paid and typically receive any funds only after all debts and obligations have been settled.