ACCA Applied Skills · Corporate and Business Law (Global) · Loan capital
Kestrel Ltd is in liquidation. Its assets include land subject to a fixed charge to Bank X and inventory subject to a floating charge to Bank Y. Under the usual priority rules in company law, which statement is correct as between the two secured lenders and the company's preferential creditors?
The fixed charge holder is paid from the land first, ahead of preferential creditors, while the floating charge assets go to preferential creditors before Bank Y. Fixed charges generally rank above floating charges, and preferential creditors rank only ahead of floating charge holders.
- ABank X is paid from the land ahead of the preferential creditors, whereas Bank Y's floating charge assets are applied to preferential creditors firstCorrect
- BPreferential creditors are paid from all assets, including the land, before either bank
- CBank Y ranks ahead of Bank X because floating charges attach to the whole business
Explanation
A fixed charge holder is paid from the fixed charge asset first, ahead of preferential creditors. Floating charge assets are applied to preferential creditors before the floating charge holder. Floating charge holders do not outrank fixed charge holders; the fixed charge generally takes priority over a floating charge.
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