Analysing the difference between a secured creditor and unsecured creditor
Creditors receiving money in the event of company insolvency are split into two categories, that of secure and unsecure.
What is a secured creditor?
As the name suggests, secured creditors are those that have been granted security from the company. Secured creditors rank at the top of the distinct hierarchy, with a legal charge or right over company assets. They rank higher than the repayment of unsecured creditors and, in the case of insolvency, their ‘property’ will be sold for repayment. Secured creditors are also split into two more categories, those with a fixed charge or floating charge.
Fixed charge creditor
A fixed charge describes a charge that is attached to an identifiable asset. Identifiable assets can refer to land, property and much more, with the fixed charge protecting the repayment of company debt. These assets are not typically sold, and the business would need the permission of a lender to do so
Floating charge creditor
A floating charge ‘floats’ above ever-changing assets. While a fixed charge is attached to an identifiable asset, a floating charge refers to a charge over changing company assets. Unlike the fixed charge, a floating charge allows the company more freedom, without asking for the lender’s permission.
It’s important to note the ‘prescribed part’ when speaking of floating charge holders. The prescribed part states a share of assets, subject to a floating charge, are reserved to distribute to unsecured creditors, should a company head for insolvency.
You can find out more information on the differences between the charges, and the subsequent examples, with our fixed and floating charge post.
What is an unsecured creditor?
Unlike secured creditors, unsecured creditors do not have the same security when it comes to recouping losses in the event of company insolvency. Thus, they rank below secured creditors and even preferential creditors, in order of repayment. Unsecured creditors do not hold charge over a company asset and, therefore, take greater risks in the hierarchy of creditors. As such, they are one of the last groups to be reimbursed in the event of company insolvency. Once the secured and preferential creditors have received their money, unsecured creditors will get what is left. Often, the unsecured creditors get very little back after the other creditors have been paid.
However, the prescribed part is the part of the proceeds of realising assets that are covered by floating charge holders, and distributed towards unsecured debts.
What is a preferential creditor?
Preferential creditors are, effectively, described as unsecured creditors, but they are reimbursed before unsecured creditors and floating charge creditors, but after that of fixed charge creditors. Company employees are regarded as preferential creditors, due to the likes of holiday pay and arrears of wages, for example.
Who are the creditors?
The creditors are defined in an order, deemed as to who receives repayment first with company insolvency, and can take many forms.
- Secured creditors can include banks – they make up the majority of secured creditors – as well as lenders with charges over assets for a company.
- Those falling into the unsecured creditor’s category includes suppliers, customers, contractors and also HMRC, after the provisions of the Enterprise Act 2002, were brought into use on 15th September 2003.
- Employees of the company hold the status of preferential creditors.
If you believe your company is heading into the early stages of insolvency, there is a wealth of information available. Our What is Insolvency Law article highlights the legislation and what you need to know. Alternatively, you can get in touch with one of our business rescue experts to discuss your situation confidentially.