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The difference between secured and unsecured creditors

Most companies owe money to creditors, its part and parcel of running a business.  A successful company probably does not give much thought as to what type of creditor these debts are owed. However, if a business starts to struggle to pay their debts as they fall due and subsequently becomes insolvent it becomes quite important to understand the difference between secured or unsecured creditors, which category they fall into and what charges they hold over the company.

Similarly, on the flip side if you are a director of a company who is owed money by a client it’s useful to understand the chances of recovering your money should the client fall into insolvency.

Debts owed by an insolvent company fall into a defined payment hierarchy:

  1. Secured creditors with fixed charges
  2. Preferential creditors
  3. Secondary preferential creditors (HM Revenue & Customs)
  4. Secured creditors with floating charges
  5. Unsecured creditors
  6. Shareholders

1. Secured Creditors with Fixed Charges

A fixed charge is attached to an identifiable asset. Which can include business premises, vehicles, machinery, equipment and  book debts.

This type of charge is registered at Companies House and financed typically by a bank or asset based lender.  The lender has full control of fixed charged assets so the company would need the lenders approval should it need to be sold to pay off the debt.
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2. Preferential Creditors

Certain employee liabilities are classed as a preferential creditor.  Unpaid wages (which is capped), pension scheme contributions and holiday pay can be claimed.  Employees have rights if the company they work for is declared insolvent.  

For more information see Employee rights if your employer is insolvent.
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3. Secondary preferential creditors

HMRC are classed as a secondary preferential creditor for certain taxes.  

See more on this here.
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4. Secured creditors with floating charges

A floating charge is a charge that floats above ever-changing assets that are disposed of in the ordinary course of business. It gives more flexibility for a company to sell, transfer or dispose of assets without seeking approval from the lender.

Examples of a floating charge asset would be work in progress, stock and inventory, trade debtors, fixtures and fittings.  They give some security for creditors but because these assets tend not to be fixed, recovering money for them can be more difficult.
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5. Unsecured Creditors

Unsecured creditors do not have the same security as secured creditors or preferential creditors.  

Ranking fourth on the list, unsecured creditors are paid after secured and preferential creditors.  What money is left will then go to unsecured creditors.  Examples of unsecured creditors would be contractors, suppliers and customers.
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6. Shareholders

Ranking last in order of payment priority, shareholders are not classed as secured, preferential or unsecured creditors and are the very last to be paid if there is any money left.  

If you are reading this because you have concerns about company finances and struggling with debt, please call us without delay.  Our friendly team are on hand to give debt advice and run through your options with no obligation.
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