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Wednesday, 2 November 2011

Priorities On payment of Debts

A)   Secured and unsecured Debts

All provable debts rank equally and if there are insufficient funds available to meet them all in full, they are paid proportionally.

The Act distinguishes between secured and unsecured debts.

A secure creditor need not prove his debt in a winding up and wait for payment with other unsecured creditors.

A secure creditor has the right to realize the secured assets. Meaning that, he is unaffected by a winding up.

In the case of companies, its secured creditors include debenture-holders who have fixed or floating charges over particular assets.

 Secured creditors are paid ahead of unsecured creditors. Secured creditors may  prove their debts where the debts exceed the value of the property secured.

When secured creditors prove for their debt, they lose their security and rank equally with the unsecured creditors.

B)   Preferential Debts

Sec.292 ranks the debts of particular classes of unsecured creditors in order of priority. The creditors with priority are known as preferential creditors ( debts referred as preferential debts)

Preferential creditors, between themselves ranked in priority. The scheme of priorities is only relevant if the company is insolvent and there are insufficient funds to pay all unsecured creditors in full.

Where there is the case,  preferential creditors are paid in full before any amount is paid to the others.

If there is insufficient to meet all the claims of all preferential creditors of a particular rank, they are paid proportionally

The debts of preferential creditors:-

1)    The costs, charges and expenses of winding up (including the costs of the   applicant who petitioned for winding up and remuneration of the liquidator.  

2) Wages and salaries in respect of services rendered to the company by employees within a period of four months from the commencement of winding up. Entitled to priority only in respect of the first RM 1, 500 due to each such employee.

3)   All amounts due in respect of workers` compensation , where the liability arose before winding up

4)    All amounts which are due on or before winding up, respect to vacation leave accrued

5) Any contributions accruing over the past 12 months prior to the commencement of winding up to any employee superannuation or provident or such approved retirement benefit schemes under the federal law ( income tax)

6)    Priority is given to all federal taxes which have been assessed before the time fixed for the proving of debts has expired.

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