What is the difference between secured and unsecured creditors?
When a company goes into liquidation, it sells all its assets. The money earned is used to pay off the debts. If a company is insolvent, it doesn’t have enough money to pay all its creditors fully. So, some creditors may not get paid what they’re owed.
In the payment process during liquidation, there’s a set order for paying creditors. Creditors fall into two main groups: secured creditors and unsecured creditors.
Here’s how they differ:
1. Secured creditors
Secured creditors are prioritised in receiving payments because they have a claim over specific assets owned by the company. These assets can range from property to vehicles, machinery, and fixtures.
A secured creditor has a better chance of getting paid after liquidation. Examples include banks, asset-based lenders, and finance providers.
Secured creditors are further divided into two sub-categories: those with a fixed charge and those with a floating charge.
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- Fixed charge
With a fixed charge, the creditor has a claim over a particular asset, such as property, vehicles, machinery, or equipment. This charge is officially registered with Companies House. The creditor gets paid the money they are owed by selling the asset they have a charge over.
For instance, a mortgage company would recover the money they are owed from selling the mortgaged property. This type of charge provides extra security to the lender, greatly boosting their chances of getting paid in case of liquidation.
- Floating charge
Floating charges are a bit more complex because creditors with this type of charge don’t have a claim over a specific asset. They cover items that the business uses to operate and that the company might sell during normal business operations, like stock.
It’s not practical to have a fixed charge on every single item of stock, so a floating charge is more suitable. While a floating charge offers some security to the lender, the challenge lies in the fact that they don’t have a claim on a specific asset, making it more challenging to recover money.
Creditors with a floating charge are placed lower in the priority order than those with a fixed charge. However, they still come before unsecured creditors in line for payment.
2. Unsecured creditors
Unsecured creditors are positioned below secured creditors in receiving payment after a company’s liquidation. They lack the advantage of claiming a specific asset and can consist of suppliers, contractors, landlords, and customers.
HMRC is also considered an unsecured creditor. Without a hold over any specific asset, it’s notably challenging for unsecured creditors like HMRC to recover the money owed to them. They must wait and hope there’s enough money remaining after secured creditors have been paid.
Unfortunately, in reality, unsecured creditors usually receive very little, if anything, after a company’s liquidation.
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