What Are Secured Creditor Rights In Liquidation?
When a company becomes insolvent, it’s assets are valued and sold, with the proceeds being used to cover the outstanding debts that they owe. During the liquidation process, there is an order of priority in which repayments are made to the relevant party. There won’t always be enough money for creditors to be paid in full, which is why the order in which creditors are paid is significant. The order in which repayments are made to creditors will depend on whether the creditor is ‘secured’ or ‘unsecured’. Let’s take a look at what we mean by each of these terms, before looking at secured creditor rights in liquidation.
What Is An Unsecured Creditor?
An unsecured creditor is a creditor who does not hold any security interests over the assets of the debtor. This may include HMRC, suppliers, contractors and customers. Unsecured creditors receive payment after secured and preferential creditors, but before shareholders of the company. The amount of money that unsecured creditors receive will depend on the proceeds made from the sale of the company assets, and the value of the claims of secured and preferential creditors.
What Is A Secured Creditor?
A secured creditor is a lender or creditor who holds a secure claim to an insolvent company via a fixed or floating charge on the company assets. Fixed and floating charges act as a form of security for the debt, ensuring that the lender’s position is protected should the company become insolvent. The creditor must register these charges with the Companies House to ensure they receive their secured creditor rights in liquidation, in the event that the company enters insolvency.
Examples of this type of creditor may include:
- Banks who hold fixed charges on company assets, such as property
- An invoice factoring company that has the company’s sales ledger and holds a fixed charge over the debts that are owed by the company
- Lenders with a charge over company assets such as machinery, workplace equipment and the company inventory
Secured Creditor Rights In Liquidation
When a company goes into liquidation, the rights of secured creditors will always take priority over those of unsecured creditors. However the order in which they are paid will depend on whether they hold fixed or floating charges. Creditors who have a fixed charge over an asset have more control, meaning that the company cannot dispose of it without their consent. Creditors that hold fixed charges will get paid first in a liquidation process.
In contrast, creditors with floating charges that are not attached to fixed assets, do not have the same secured creditor rights in liquidation as those who hold fixed charges. As such, they will rank below preferential creditors.
The rights of secured creditors in liquidation fit into the following order of repayment:
- Secured Creditors (Fixed Charge)
- Preferential Creditors
- Secondary Preferential Creditors
- Secured Creditors (Floating Charge)
- Prescribed Part – Unsecured Creditors
- Unsecured Creditors
If you have any further questions regarding secured creditor rights in liquidation, please don’t hesitate to get in touch with our experienced team of licensed insolvency professionals.
