Secured Creditors in Bankruptcy
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To answer the question of ‘who is a secured creditor?’ we must first look at insolvency itself, and what that means for a company that has run out of funds to keep running as a business. As a company enters an insolvency process, all of its assets are valued and sold, with all of the proceeds being paid out to cover outstanding debts. As the whole idea of a company being insolvent means that there isn’t enough money to ensure all creditors are paid in full, this leaves a dilemma. This is where insolvency experts can help, balancing the needs of the creditors with the assets available to them.
Once a company has entered into a formal insolvency process, creditors may have different rights of priority. These creditors are essentially split into two defined sections; the secured creditors and the unsecured creditors. We’ll walk you through the differences betweenthese below.
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Four Key Questions on Secured Creditors
What is a Secured Creditor?
A secured creditor will hold a prior ranking status in terms of collecting debt owed by an insolvent company or individual. They will have the priority to claim what is owed above unsecured creditors. So, who is a secured creditor? A lender or creditor that is tied to the insolvent company through an investment or issuance of credit and backed by collateral.
Examples of secured creditors include:
- Lenders that hold a charge over any assets held by a company, such as machinery, workplace equipment and the company inventory
- Invoice Factoring Companies that find the company’s sales ledger and hold a fixed charge over the debts the company owes
- Banks are the main source of secured creditors, holding fixed charges on business assets, including property
As you can see, secured creditors can be various entities, with financial institutions commonly issuing secured loans with the collateral of an asset of some sort. A secured creditor may also have provided structured credit products to companies in the form of corporate bonds and syndicated loans. With any business, the credit that can be achieved through a secured loan often gives the foundation and chance to grow smoothly. It is only when problems arise in a financial sense, further down the line, that secured credit could be seen as a problem.
Who is a Secured Creditor?
A secured creditor will hold a form of security which is registered over the assets of the company. This security must be validly registered at Companies House.During good times with any company, it might not appear to be a problem at all that certain assets, including the workplace itself, is held in security by a bank. It is only at times of financial trouble that this becomes an issue. If a company cannot pay its bills on time and is facing the threat of insolvency, the secured creditor becomes the may seek to enforce its rights under the terms of its security. The secured creditor has a legal right to claim the secured asset to be seized and sold should the borrower default on payments agreed.
There are two types of secured creditors, those who hold a fixed charge on an asset of the business, and those with a floating charge.
- Fixed Charge – A secured creditor with a fixed charge on a specific company asset could be a bank that holds the control over business premises, vehicles, machinery and equipment that has been bought through a secured loan or other items and/or services purchased in this way. The other example of this is the Invoice Factoring Company mentioned above, who find the sales ledger and hold specific security over the debts.
- Floating Charge – In the event of insolvency for a company, the secured creditor with a floating charge will maintain various right of enforcement, such as the power to appoint an Administrator of the company, although their security is not over a specific asset. By registering a floating charge, the lender has some security on a loan but not through a specific asset in the same way as a fixed charge.
What is an Unsecured Creditor?
The difference between an unsecured creditor and secured creditors can be easily defined.The unsecured creditor includes HMRC, contractors, suppliers to the insolvent company and customers. Unsecured creditor claims rank after those of secured creditors and preferential creditors (preferential creditors are employees of the company in most cases, seeking wage arrears and outstanding holiday pay), but above shareholders of the company.
In many cases of insolvency, the amount received by unsecured creditors will be dependent upon the proceeds achieved from the sale of company assets, and the value of secured and preferential creditor claims.Unsecured creditors are heavily involved in the initial discussion around insolvency, in order to be formally notified of the financial position of the company and to vote on the Insolvency Practitioner.
What’s the Process of Paying a Secured Creditor?
During the process of insolvency, an insolvency practitioner will be in a position to undertake a full analysis and evaluation of all company assets, instructing an independent agent to value all items and property. The main difference then between a secured creditor and an unsecured creditor, is that the secured creditors have the first right to sale proceeds from the sale of whichever asset they hold a charge over, once the costs of the process have been paid. So, in the case of a mortgage given by a bank on a property, the sale of the property would result in a repayment to the bank under the terms of its security.
When it comes to answering the question of what is a secured creditor, we hope that by putting this guide together we have helped you to understand a little bit more about the various order of payments to creditors in an insolvency scenario, from secured creditors in bankruptcy to any similar situation. The Insolvency Experts offer a friendly expert advice service, and our team is available to talk through your specific issues and answer any questions you may have. Over the years we have helped myriad businesses gain control over their business during troubled times. If you’d like to speak with us we are available via telephone or email.
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