Difference between secured and unsecured creditors

If your company owes money to any parties, you have creditors. Creditors are either ‘secured’ or ‘unsecured’, and which category your creditors fit into depends on the assets involved, and what charges they hold over the company. These charges become even more significant if a company becomes insolvent, as they determine the order that creditors receive reimbursement from any repayments.

When a company becomes insolvent, it will owe debts to creditors. A payment hierarchy categorises creditors based on who is entitled to proceeds and when they can claim them. The categories are as follows in descending order: secured creditors with fixed charges, preferential creditors, secured creditors with floating charges, unsecured creditors, and finally shareholders.

Who are my secured creditors?

Secured creditors with fixed charges are first in the hierarchy of receiving proceeds from a liquidated or insolvent company. Usually, they are lenders or suppliers that hold charges over business assets.

• Banks and other money lenders
• Invoice factoring companies

Depending on specific assets creditors have to their name, these charges are either fixed or floating.

Fixed charge creditors

Secured creditors are only first in the payment hierarchy if they hold fixed charges. Fixed charges are a charge or claim over specific company assets. Companies House always registers fixed charges and assets cannot be disposed of without consulting with the secured creditor first.

Assets classified as fixed charges could include:

• Premises
• Vehicles
• Machinery
• Equipment
• Sales Ledgers

Fixed charge creditors will be among the first to be paid back when a company becomes insolvent or is liquidated.

Floating charge creditors

Although classed as secured, floating charge creditors are further down the payment hierarchy than preferential creditors. They don’t usually hold claims over fixed company assets but will instead have assets such as stock or works-in-progress, which are ever-changing. Floating charges provide some security for creditors, but since the assets aren’t fixed, recovering money can be more difficult.

Who are my unsecured creditors?

Unsecured creditors come after secured and preferential creditors in the payment hierarchy. They don’t have the benefit of claims over company assets, and this means they often receive much smaller amounts compared to preferential and secured creditors.

Unsecured creditors are:

• Contractors
• Suppliers
• Customers

How can unsecured creditors recover debts?

As unsecured creditors are further down the payment hierarchy, they may resort to issuing written reminders and sending letters of demand to recover their outstanding debt. If these methods are unsuccessful, creditors may resort to more extreme measures:

• Issue a County Court Judgement (CCJ)
• Send bailiffs to recover assets with the debt’s value
• Issue a statutory demand
• Issue a winding-up petition (WUP)

If creditors send bailiffs or High Court Enforcement Officers (HCEOs) to your premises, it’s important that you understand the powers they can exercise. You should also understand what your rights are and what they are legally allowed to take.

Never ignore the threat of a winding-up petition (WUP). Insolvency and liquidation can follow if you don’t act and the petition goes as far as being advertised in The Gazette.

If I am insolvent, what happens to my creditors?

When a company becomes insolvent, it will owe debts to creditors. A payment hierarchy categorises creditors based on who is entitled to proceeds and when they can claim them. The categories are as follows in descending order: secured creditors with fixed charges, preferential creditors, secured creditors with floating charges, unsecured creditors, and finally shareholders.

How can I 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 financial situation, and they may be able to come to a payment arrangement with you. Or in the case of HMRC, a Time to Pay Arrangement.

If you are facing legal action, or threats of it, such as a CCJ or a WUP, you should get in touch with us immediately. In the case of a WUP, you will need to deal with this quickly to save your company.

What are preferential creditors?

Preferential creditors are unsecured creditors but paid before others in that category. Company employees are classed as preferential creditors if they’re owed wage arrears, holiday pay, pension contributions and other employment costs. These will have a limit on the maximum amount available to claim.

What about shareholders?

Company shareholders will be the last group to be repaid. They aren’t classified as secured, preferential or unsecured creditors. Shareholders will only receive proceeds if any amount remains after all other creditors have been paid.

In summary

When a company becomes insolvent, a payment hierarchy dictates which creditors are allocated funds and in what order. Secured creditors with fixed charges over company assets are first to be paid back. Preferential creditors, including employees, are second. Secured creditors with floating charges over assets like stock and works-in-progress are third. Unsecured creditors, such as contractors, suppliers, customers and HMRC, are fourth. Finally, shareholders will be paid if anything remains.

Although unsecured creditors aren’t the top priority when distributing collected debts, they may resort to issuing a CCJ, sending bailiffs or HCEOs, and issuing a statutory demand or WUP. Know your rights if bailiffs or debt collectors visit you and take immediate action if threatened with a WUP.

How we can help

If your company is unable to pay off its debt to its creditors, or if you’re facing legal action, get in touch with us without delay. We can discuss your situation and provide you with the best solution to your company’s issues, whether there is legal action involved or not. We can help you decide on the best arrangement for your company and propose it to your creditors, emphasising the benefits to them. Our advisors and consultants can offer you free, impartial advice with no obligation, and we also offer face to face consultations nationwide.

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