View/Open - Research Commons - The University of Waikato

negative pledge. 13 The effectiveness of the contractual securities depends on the
constructions of the terms in question.
9.2.1.2 Unsecured Creditors
Most creditors fall within this group and they include small suppliers and trade
creditors. When the company is insolvent, they will be the most vulnerable and often
end up having to compromise with their payment. Since they rank at the bottom of
the pile, the likelihood of receiving full payment for their debts is small. Therefore
they will have to be satisfied with the distributions based on the pari passu
principle. 14
9.2.1.3 Preferential Creditors
Generally they are unsecured creditors who have been given preferential treatment
through statute such as the government‟s claim for tax and employees‟ claim for
unpaid wages. The United Kingdom and Australia have abolished the priority
accorded to the government‟s claim for taxes. 15 Employees‟ claim for unpaid wages
is treated as priority because they are in the most vulnerable position compared to
other trade creditors. Employees, unlike trade creditors, cannot diversify and, in most
cases, wages are their only source of income.
9.2.2 Directors
Directors are appointed to manage the affairs of the company in accordance with the
Articles of Association and the Memorandum of Association. Generally, directors
13 For further discussions see Keay above n5 at 19 and ch 20.
14 See Finch “Security” above n9 at 634; Roy Goode Principles of Corporate Insolvency Law (Sweet
& Maxwell, London , 2005) at [7-01]-[7-04].
15 Goode above n14 at [7-27]. For lists of preferential debts-see Schedule 6 of the Insolvency Act
1986.
190