Unsecured And Secured Creditors

Unsecured and Secured Creditors. Written by John A Waller. Reviewed June 28th, 2024.

What is the Difference Between Unsecured and Secured Creditors?

If you run a limited company with outstanding money owed to any party, it is known as a creditor. Creditors remain 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, however, become even more significant if a company becomes insolvent, as they determine the order in which creditors receive reimbursement from any repayments.

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

SECURED CREDITORS

Secured creditors with fixed charges remain first on the tree to receive proceeds from a liquidated or insolvent company. These are usually lenders or suppliers with a registered charge over business assets.

Distinction Between Unsecured And Secured Creditors – FIXED CHARGE CREDITORS

Secured creditors can only rank first if they hold fixed charges. A fixed charge retains a charge or claim over specific company assets. Companies House registers charges over such assets in all cases. Fixed charges and assets may, therefore, not be disposed of without conferring first with the secured creditor over the assets.

Assets which may have a fixed charge:

  • Motor vehicles – Cars, Lorries, Buses etc.
  • Premises – Land, offices, buildings, etc.
  • Vehicles – Cars, Lorries, Buses etc.
  • Equipment.
  • Machinery.
  • Sales Ledgers – Debtors of a trading company.
  • Fixed charge creditors are usually the first to be repaid during insolvency.

FLOATING CHARGE CREDITORS

Floating charge creditors remain lower on the payment tree compared to preferential creditors. Usually, they have no claims registered over company fixed assets. They will, however, have assets that change (Debtors and stock). Floating charges, however, afford basic security for creditors. Because the assets aren’t fixed, recovery can be challenging.

MY CREDITORS, WHO Remain UNSECURED?

Unsecured creditors rank after secured and preferential creditors on the payment tree. However, they have no security over company assets. Therefore, they often do not receive money compared to preferential and secured creditors.

Distinction Between Unsecured And Secured Creditors – UNSECURED CREDITORS

If a company becomes insolvent, what happens to its creditors? Understanding the distinction between unsecured and secured creditors is essential.

Once a trading company becomes insolvent, it usually owes money to its creditors. A payment tree then ranks creditors on how they’re repaid. Based on security and ranking, it, therefore, outlines priority for repayment and when creditors may claim them. Creditor types remain, and they are known as the following: the first is paid out in preference to the others. They then rank in order of preference: secured creditors with fixed charges, preferential creditors, secured creditors with floating charges, unsecured creditors, and finally, shareholders.

If your company has received a winding-up petition, ACT FAST. It is important to deal with a winding-up petition swiftly. Contact HBG ADVISORY to ensure you keep as many resolution options open as possible.

UNSECURED CREDITOR Examples?

TRADE SUPPLIERS – Supplying goods, etc., to the company
CONTRACTORS – Those who carry out work on behalf of the company.
The HMRC – VAT, Corporation Tax. PAYE & NATIONAL INSURANCE ETC
Potentially Customers of the company.

UNSECURED CREDITORS – What is the best way to recover unsecured debts?

Unsecured creditors remain down the payment tree. They can, however, issue reminders and letters of notice to recover any debt owed. When these methods fail, creditors may then resort to more severe actions:

INSTRUCT FOR A COUNTY COURT JUDGEMENT.

Appoint bailiffs to secure them and retrieve assets to cover the outstanding debt.
Instruct and forward a statutory demand to the outstanding creditor.
Issue a winding-up petition (WUP).
Once chasing creditors instruct bailiffs or High Court Enforcement Officers to attend your premises, it’s then imperative you understand the powers they can exercise. You should also understand your rights and what they may legally remove.

IMPORTANT – Never disregard the threat of a winding-up petition (WUP). If you disregard them, your company faces insolvency, and potentially, a liquidation may follow if you take action and the petition.

Preferential Creditors

Preferential creditors rank like unsecured creditors. However, they have no charge but prefer status for payment before other creditors in that division. Employees of the failed company rank as preferential creditors if they are owed wage arrears, outstanding holiday pay, pension contributions, and other associated employment costs. Capping exists on the amount available to claim.

HOW DO SHAREHOLDERS RANK?

Shareholders of the failed company remain the last group to be repaid. They have no security ranking and may only receive proceeds once the repayment of all other creditors.

HOW CAN HBG ADVISORY HELP YOUR FAILING BUSINESS?

When your company cannot clear its debt to creditors, or maybe your business has potential or indeed pending legal action, then as a responsible director, you need to seek help immediately. Our experienced team can discuss your financial situation and offer the best solution to your company’s problems, even if legal action is in progress. Our highly skilled team will direct you so you may settle on the arrangement for your company and help with the proposed plan for your company’s outstanding creditors, stressing the overall benefits to the company’s creditors. HBG Advisory offers free, no-obligation, unbiased advice. We offer online secure consultations in the privacy of your home or office, with no awkward people attending and causing distress in the workplace.

Book a Virtual Meeting - Free Confidential Advice
If you need help understanding the best way forward for your company, we can provide confidential free initial advice. You can book a free virtual meeting or call us on 0800 612 5448..

Download Guide

Business Rescue Guide For Accountants
Support Is Just A Call Away
Business recovery for distressed directors and limited companies. Free advice from approachable team of advisors.Tel: 0800 612 5448
Business Debt advice and Guide
IPA Logo
TMA Logo
R3 Logo
Business Recovery & Rescue.
Liquidation Specialists.
Experts in dealing with Company Debt

    Get Help Today

    1. Name: (*)

    2. Company Name:

    3. Telephone: (*)

    4. Email:

    5. Message:

    *Required Fields

    CALL TODAY FOR
    EXPERT CONFIDENTIAL ADVICE

    0330 056 3120

    Further Reading