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What is the difference between secured and unsecured creditors?
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Written by: Jonathan Munnery
Secured v Unsecured Creditors
Creditors can be split into a range of different classes, the main ones being secured and unsecured. Secured creditors are those that hold a charge over a company asset such as property, machinery, or stock. Unsecured creditors, however, have lent money to the company without having this type of charge or security in place. The majority of trade creditors will be unsecured.
What is the difference between secured and unsecured creditors?
Secured creditors have a charge - or 'security' - over a specific company asset or class of asset, such as property, vehicles, or stock. Unsecured creditors are those which have extended credit to a company without having any security over the borrowing in place.
The security a creditor holds becomes particularly important should the company they have loaned money to becomes insolvent.
When a company enters an insolvent liquidation process, all its assets are sold, and the proceeds go towards settling the outstanding debts. The very nature of a company being insolvent means that there is not enough money available to ensure all creditors are paid what they are owed in full. Unfortunately this means that some - typically unsecured creditors - inevitably miss out.
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What are secured creditors?
Secured creditors rank highly when it comes to receiving payment following a liquidation process. This is because secured creditors have a charge over assets held by the company and once these assets have been sold, the creditor will receive what they are owed directly from the sale.
These assets can include property, as well as vehicles, machinery and fixtures and fittings. A secured creditor stands a higher chance than most of receiving payment following liquidation due to this security over specific named assets or a class of assets. Examples of secured creditors are banks, asset-based lenders, and finance and agreement providers.
For the purposes of liquidation, secured creditors are divided into two sub-categories, those with a fixed charge, and those with a floating charge.
- Fixed charge – With a fixed charge, the creditor has a claim over a specific asset. This could be a piece of property, a vehicle, or certain machinery or equipment. This fixed charge will have been formally registered with Companies House. The creditor will be paid the money they are owed as a direct result of selling the asset they are holding a charge over. So for example, a mortgage company would be paid back the money they are owed from the sale of the mortgaged property. This type of charge gives the lender a huge amount of security, and significantly increases their chances of receiving payment in the event of liquidation.
- Floating charge – Floating charges are slightly more complicated as creditors with this type of charge do not have a claim over a particular asset. Floating charges cover things that the business would use to generate business and that which a company could (and may be expected to) dispose of in the course of business proceedings, such as stock. It would not be practical to have a fixed charge over each individual item of stock; therefore a floating charge is more appropriate. Having a floating charge provides the lender with some security, however as they do not have a claim over a specific asset, recovering money is slightly more difficult. Creditors with a floating charge are placed further down in the order of priority than those with a fixed charge; however they are ahead of unsecured creditors in the queue for payment.
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What are unsecured creditors?
Unsecured creditors rank below secured creditors when it comes to receiving payment following the liquidation of a company.
Unsecured creditors do not have the benefit of having a claim over a particular asset, and can include suppliers, contractors, landlords and customers. Perhaps surprisingly HMRC is also an unsecured creditor for certain tax debts.
As unsecured creditors do not have a charge over any particular asset it is typically much harder for them to recover the money they are owed. Instead they have to hold tight and hope there is enough money left to go around after the secured creditors and those that rank ahead of them have been paid in full. Unfortunately, the reality is that unsecured creditors typically receive very little, if anything, following the liquidation of a company.
How Real Business Rescue can help?
If you are considering liquidation for your company, the experts at Real Business Rescue can help you understand your options and explain what a formal insolvency process could mean for your company and its creditors. Call the team today on 0800 644 6080.
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Still unsure whether liquidation is right for your company? Don't worry, the experts at Real Business Rescue are here to help. Our licensed insolvency practitioners will take the time to understand the problems your company is facing before recommending the best course of action going forward based on your own unique circumstances.
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