When a company enters into formal insolvency proceedings, such as liquidation or administration, the creditors are placed into a hierarchy determining the order in which they’re repaid. This means that the rights of a secured creditor vs unsecured creditor will vary as they sit in different positions within the hierarchy. Let’s take a look at the main difference between a secured creditor vs unsecured creditor, starting with the definitions of each.
What Is A Secured Creditor?
Secured creditors are at the top of the hierarchy when it comes to reclaiming debt from insolvent companies. Whilst there is a difference between a secured creditor vs unsecured creditor, there is also a difference between secured creditors themselves. Secured creditors are split into two types depending on the securities that they have placed on their debts, as follows:
Fixed Charge Creditor
A fixed charge is a security taken by a creditor for a particular debt. This is a charge over a specific asset, such as property, vehicles, machinery or equipment. A fixed charge creditor will be paid the money that they are owed through the sale of the specific asset that they hold the charge over.
Floating Charge Creditor
A floating charge is a security over a group of non-constant assets that may change in quantity and value, such as stock. A fixed charge creditor does have some level of security, however they are placed below fixed charge creditors in the hierarchy of repayment.
What Is An Unsecured Creditor?
The most important difference between a secured creditor vs unsecured creditor is the order in which they’re paid in a liquidation or administration process. Unsecured creditors are paid after secured creditors have been paid, with any remaining money that is left from the sale of assets. They are however placed above shareholders. The money available will vary depending on the circumstances of the individual insolvency case. Unlike secured creditors, unsecured creditors don’t have any security over the debts they are owed, hence why they are placed lower in the order of priorities.
Summary
So, to summarise, as we’ve emphasised, the main difference between a secured creditor vs unsecured creditor is the order in which they’re paid, with secured creditors being paid first in the hierarchy. In addition to this, a secured creditor has a charge over a fixed asset or changing asset, whereas unsecured creditors don’t hold the same securities – they will only receive money should there be enough left once the other creditors have been paid.
These are some examples of each:
Secured Creditors:
- Banks holding a fixed charge on assets
- Lenders that have a charge over inventory assets
- Invoice factoring companies that hold a charge over the sales ledger
Unsecured Creditors:
- Contractors
- HMRC*
- Customers
- Suppliers
*In some cases, HMRC are classed as preferential creditors, and paid after fixed charge holders but before floating charge holders.
If you are a creditor or business owner that needs insolvency advice, please don’t hesitate to get in touch with our experienced team of business rescue experts and insolvency professionals at Ballard Business Recovery.
