What are preferential payments in liquidation?

Preferential payments are payments made to certain creditors that have priority over others during liquidation. Employees are the main group of preferential creditors, entitled to unpaid wages, holiday pay, and some pension contributions up to statutory limits. Secured creditors with floating charges also rank ahead of unsecured creditors, though they must set aside a prescribed part of recoveries for unsecured claims. Preferential payments ensure that employees, who are often most vulnerable in insolvency, receive at least partial protection. Directors should understand that making payments to certain creditors before liquidation that place them in a better position than others can be considered unlawful preference. Liquidators have the power to challenge such payments and recover funds to distribute fairly. This rule is designed to maintain fairness among creditors and prevent directors from favoring connected parties or preferred suppliers before insolvency proceedings.