When a company enters into an insolvency procedure, its creditors will be arranged into a specific hierarchy based on who is entitled to money and when they can claim it. The hierarchy for creditors will see secured creditors paid first, then preferential and finally unsecured will receive however much is available of what is left from the business.
What is an unsecured creditor?
An unsecured creditor is an individual or company which lends money or allows credit without obtaining some sort of collateral. Many lenders lend against an asset, such as property, however unsecured creditors do not and they take a greater risk because they have nothing to fall back on should the debtor default.
Unsecured creditors are one of the last groups to be paid in an insolvency situation, placed only above the shareholders of the company. As such, unsecured creditors usually receive a much smaller amount of money back from the distribution of company assets once the secured and preferential creditors have been paid.
Secured and preferential creditors
A secured creditor is a lender or supplier which will only lend money against an asset of the business. They will usually hold a fixed or floating charge over an asset(s) of the business. If the business they have lent money to becomes insolvent, the specific asset(s) they hold security over will be sold in order to provide repayment to the lender.
If the value of the security does not fully cover the amount of the debt, the creditors may claim as an unsecured creditor for the shortfall.
- Fixed charge: This exists when a lender secures their loan against a specific asset of the business and they now hold a charge over it. The fixed charge could be on the premises, vehicles, machinery or equipment or it could be against the sales ledger which was bought by a factoring company. Fixed charges are always registered at Companies House. The debtor cannot dispose of the asset without permission from the secured creditor.
- Floating charge: A creditor holding a floating charge for their loan provides them with some security but the charge will relate to various current assets which may change during day-to-day trading.
Preferential creditors are unsecured creditors who are paid before other unsecured creditors. Employees of the company are seen as preferential creditors and this can include the director(s), if they were an employee of the company in respect of any wage arrears, holiday pay and any other employment costs up to a certain limit.
Shareholders of the company are not included in this group and they will be the last group to obtain repayment in an insolvent situation.
How do I know which category my creditors fall into?
- Secured: These are usually banks or asset-based lenders, such as invoice financers, hire purchasers etc.
- Preferential: Employees
- Unsecured: Suppliers, customers, contractors and HMRC
How will an unsecured creditor deal with debts?
If unsecured creditors are not paid, after issuing reminders and demand letters, this may result in them:
- Issuing a county court judgement (CCJ)
- Instructing bailiffs to recover assets totalling to the money owed
- Issuing a statutory demand
- Issuing a winding up petition
These avenues escalate in their severity and a winding up petition, if left undealt with, can spell the end of a company through a compulsory liquidation. When a company or lender approaches the court to apply for one of these court orders, it is a serious matter and you should seek advice before matters accelerate.
How to deal with unsecured creditors?
If your company owes money which it cannot pay, you should get in touch with your creditors as soon as possible. Inform them of your current situation financially and they may be able to come to a payment arrangement with you.
Inform them of any changes to your financial situation after your initial discussion, particularly if things get worse, to try to come to a revised arrangement that works for both of you. If you have a number of creditors and are struggling with cash flow, we can help manage the situation.
If you are facing legal action, or threats of it, such as a CCJ or a winding up petition, you should get in touch with us without delay. In the case of a winding up petition, in particular, you will need to deal with this quickly in order to save your company.
We will be able to discuss your current situation with you and provide you with the best solution to your company’s debt problems, whether there is legal action involved or not. Contact us on 0800 901 2475 to speak to one of our knowledgeable advisers now.