What is priority of payments?

What is priority of payments?
Published on: 17 May 2023

Table of contents

Priority of payments is a legal term used to describe the order in which the debts and obligations of a company or individual are paid. In other words, it is a list that establishes which creditors have priority over others in case the available resources are not sufficient to pay all creditors at the same time. A commercial lawyer would be the right person to assist you in this matter.

Priority of payments is governed by country-specific laws and regulations. For example, in some countries, taxes have an absolute priority in the priority of payments, which means that taxes must always be paid first before any other debt. In other countries, workers may have a high priority of payment, meaning that they must be paid before other creditors.

The different types of priorities that can be set in a priority of payments are:

  • Absolute priority: some types of debts have absolute priority over all other debts. This means that, in case of insolvency, these debts must be paid first before any other debts. Taxes are a common example of debts with absolute priority. In many countries, taxes have priority over all other debts and, in some cases, even over secured debts.
  • Secured priority: A secured debt is a debt that is backed by a specific property or asset. For example, a mortgage loan is secured by the property that is purchased with that loan. In a priority of payments, secured debts usually have a high priority. In the event of insolvency, the assets backing these debts are sold to pay the secured debts before other debts are paid.
  • First priority: First priority are debts that have a higher priority than ordinary debts, but are unsecured. A common example of a senior debt is employee wages and severance payments. If a company goes bankrupt, workers have a high priority in the priority of payments and must be paid before other debts are paid.
  • Ordinary debts: Ordinary debts are those that do not have a special priority in the priority of payments. In the event of insolvency, these debts are paid after senior, secured and preferential debts have been paid.

It is important to note that the priority of payments is not a fixed list that applies in all situations. In many cases, agreements can be made between creditors and debtors to change the order in which debts are paid. For example, creditors may agree to waive their priority to allow a debtor to pay other creditors who are in a more critical situation first.

When is there a priority of claims?

Priority of claims is used to determine the priority of claims and the way in which available resources are distributed among creditors. In this regard, it is essential to understand the different types of claims and how they are classified in order to establish a priority order.

Claims can be classified into different categories, depending on the nature and characteristics of each claim. The main categories of receivables used in the ranking of receivables are described below:

  1. Secured claims: these are claims that are backed by a security interest, such as a mortgage, pledge or any other type of collateral. In the event of insolvency, the assets backing these claims are sold and the proceeds are used to pay the debts.
  2. Personally secured claims: these are claims that are not backed by collateral, but are secured by a guarantee or personal guarantee from a third party. In the event of insolvency, the third party's guarantee or personal guarantee is used to repay the debt.
  3. Subordinated claims: these are claims that are junior to secured and unsecured claims: these claims are paid after the obligations of secured and unsecured claims have been satisfied.
  4. Ordinary claims: These are claims that do not have any specific security and do not have a privileged position in the priority of claims. These claims are paid after the obligations of secured claims, unsecured claims and subordinated claims have been satisfied.

The ranking of claims is made according to the above classification, so that an order of priority is established for the payment of obligations. In the event that there are insufficient resources available to pay all debts, debts are paid in accordance with the order established in the priority of claims. In this respect, secured claims have priority over unsecured claims, subordinated claims and ordinary claims.

Types of priority of claims

There are several types of priority of claims that are used in different contexts and jurisdictions.

  1. General privileges: These are privileges that are granted to creditors according to their category, irrespective of the nature of the debt. For example, tax and labour obligations usually have a general privilege. This means that creditors with these types of debts have priority over other creditors when liquidating the company's assets.
  2. Special privileges: These are granted to creditors based on the specific nature of their debt. For example, in some countries, mortgage claims have a special privilege, which means that they have priority over other claims at the time of liquidation of the company's assets.
  3. Subordinated claims: These are claims that have a lower priority in the priority of claims. This means that, in the event of insolvency or bankruptcy, subordinate creditors are paid after preferential creditors. Subordinated creditors can include shareholders of the company, lenders who have agreed to less favourable terms, etc.
  4. Unsecured claims: These are claims that do not have any kind of privilege or security. These claims have the lowest priority in the priority of claims. Unsecured creditors are paid only after preferential and subordinate creditors. In some cases, unsecured creditors are not paid at all if there are insufficient assets to cover senior and junior debts.
  5. Secured claims: These are claims that are backed by some form of collateral, such as a mortgage or pledge. In the event of the debtor's default, the creditor can enforce the collateral to recover payment of the claim. Secured claims usually have a higher priority in the priority of claims than unsecured claims. However, the exact priority will depend on the applicable law and regulations.

What is the priority rule in tax matters?

The priority rule in tax matters refers to the order in which tax debts (taxes, fees, and special contributions) are paid in case the debtor does not have sufficient resources to pay all his debts.

In general, in most countries, the priority of tax claims is established by law and has a specific order of priority. Taxes are generally considered privileged debts, meaning that they have priority over other types of debts. In some countries, tax debts may also have a special privilege that places them above other privileged debts.

For example, in Spain, the priority of claims in tax matters is governed by Article 90 of the General Tax Law. According to this law, in the event of the debtor's insolvency, tax debts have a higher priority than any other credit, whether privileged or non-privileged. Tax debts have a special privilege that places them above other privileged debts, such as mortgage debts.

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