Division 6 of Part VI of the Insolvency Act (Chapter 253) sets the order in which the estate is applied.
Section 119 — the preferential debts
(a) local rates due from the insolvent at the date of the order of adjudication that became due and payable within 12 months before that date;
(b) rates and assessments assessed on the insolvent to 1 January or 1 July immediately preceding the adjudication, not exceeding in the whole one year’s assessment;
(c) wages or salary of a clerk, servant, labourer or workman — other than a person employed under an employment contract under the Employment Act (Chapter 373) — not exceeding three months’ wages or salary and not exceeding K100.00;
(d) wages of a person employed under an employment contract under the Employment Act (Chapter 373).
(2) Paragraph (c) applies only to wages or salary claimed for the three months immediately preceding the adjudication.
Read (c) and (d) together. A clerk, servant, labourer or workman not employed under an Employment Act contract is preferential only for three months’ wages, and only up to K100. A person employed under an employment contract under the Employment Act falls in paragraph (d), which states no monetary cap and no time limit.
The K100 figure in paragraph (c) is a historic amount that has not been raised, and it makes the distinction between the two paragraphs decisive in practice. Compare the corporate scheme, where Schedule 9 of the Companies Act gives employees four months’ wages, leave entitlements, workers’ compensation and superannuation, capped at K20,000 per employee.
(3) Preferential debts (a) — subject to section 120 — shall be paid in priority to all other debts; (b) rank equally between themselves; and (c) shall be paid in full unless the property is insufficient, in which case they abate in equal proportions.
(4) Except as provided by this section, all debts provable under the insolvency shall be paid at an equal rate.
Note that the four categories in subsection (1) all rank equally with each other — there is no internal order, unlike the four tiers of Schedule 9 in the Companies Act. Subsection (4) states the pari passu principle for everyone else.
Section 120 — the landlord’s position
(1) Distress for rent shall not be made, levied or proceeded in against the property of a debtor after (a) an order of adjudication has been made, or (b) the debtor has presented his own petition.
(2) The landlord, or person to whom rent is payable, is entitled to receive out of the estate, in priority to all other creditors — (a) so much rent as is then due, and (b) a sum in place of rent proportioned to the period between the last date rent became due and the date of adjudication — but the amount received shall not exceed three months’ rent.
(3) The landlord may prove for any surplus due above that amount.
The landlord gives up distress — the ancient self-help remedy of seizing goods on the premises — and receives in exchange a super-priority for up to three months’ rent, ahead even of the preferential debts in section 119. The balance is an ordinary provable debt.
Section 120 works with section 113, which allows rent to be proved for a proportionate part up to the day of adjudication as if it grew due from day to day — and with section 102(8), under which the trustee may retain leased premises for up to three months before disclaiming.
The corporate parallel is narrower: Schedule 9 section 9 of the Companies Act gives the preferential claims a first charge over goods distrained on within the month before commencement, and gives the distrainor the priority of the claimant it paid — it does not confer a rent priority.
The order of application
| Order | Claim | Section |
|---|---|---|
| Outside the estate | Secured creditors, to the extent of their security — they may realise it despite the adjudication | 47(2), 115 |
| 1 | Rent, up to three months, in priority to all other creditors | 120(2) |
| 2 | Costs and expenses of the insolvency, including the petitioning creditor’s taxed costs out of the first moneys received | 37(2), 128(b) |
| 3 | Preferential debts — local rates, assessed rates, capped wages, Employment Act wages — equally, abating rateably | 119 |
| 4 | All other provable debts, at an equal rate | 119(4) |
| 5 | Interest at the prescribed rate, then any surplus to the insolvent | 128 |
Section 128 — the surplus
Subject to Part VII, the insolvent is entitled to any surplus of his estate remaining after payment of (a) his debts, with interest at the prescribed rate, and (b) the costs, charges and expenses of the insolvency.
A surplus is rare but not unknown — typically where avoidance recoveries, an after-acquired asset such as an inheritance, or a rise in the value of land turns a deficient estate into a solvent one.
Note the interest. Section 116 allows interest only up to the adjudication when proving; section 128(a) then adds interest at the prescribed rate before any surplus returns to the insolvent. Creditors are made whole first, and only then does the balance go back.
The words “subject to Part VII” carry the reader to close of the insolvency and discharge — and note in particular section 141, under which payment in full is a ground for annulment of the adjudication.
How dividends are actually declared and paid — including the position of late proofs, distant creditors, and unclaimed dividends — is dealt with in sections 121 to 127.
Sources
- Insolvency Act (Chapter 253) — ss 37, 47, 102, 113, 115, 116, 119, 120, 128, 141
- Employment Act (Chapter 373)
- Companies Act 1997 — Schedule 9
Before relying on anything here, read the current text of the Companies Act 1997 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.