Unsecured Creditors

What is an Unsecured Creditor?

An unsecured creditor does not hold any security or collateral against the debt owed to them.

They are generally the largest group of creditors and come after preferential creditors in terms of payment priority in liquidation.

Unsecured creditors may include providers of unsecured loans, suppliers, contractors, and landlords, but they all rank equally and are paid a percentage of available funds, if any exist. Unfortunately, it is common for unsecured creditors to receive little or no recompense as there are often larger debts ahead in the queue.

What are Examples of Unsecured Creditors?

There are many types of unsecured creditors, including:

• Providers of unsecured loans, including payday loans and credit card companies
• Suppliers, such as utility and broadband providers
• Contractors
• Landlords, such as for rent arrears
• HMRC – but only when trying to collect Corporation Tax and business rates

All unsecured creditors rank equally in terms of their prioritisation, and if sufficient funds remain, they are paid the same percentage of what is available. There is no recourse for unsecured creditors following a liquidation if they do not receive the return of their debts, or indeed, nothing at all.

Many creditors will already know that a business is in liquidation as they have been chasing for payment, and they may receive notice directly from the liquidator. 

Differences Between Secured and Unsecured Creditors

Secured creditors have a legal right to specific assets of a company if it fails to repay its debts. This provides them with a safety net, allowing them to recover funds by seizing and selling these assets. Unsecured creditors, however, extend credit without such security, making them more vulnerable in case the company cannot fulfil its financial obligations.

This fundamental difference impacts their priority in debt repayment during insolvency, with secured creditors being first in line. For directors managing a company’s financial health, understanding these distinctions helps in making informed decisions about debt management and risk assessment.

Common Outcomes for Unsecured Creditors

In many cases, unsecured creditors may receive little or no recompense due to prioritising debts owed to other creditors with more significant amounts due.

The change in the status of HM Revenue & Customs as a secondary preferential creditor has further decreased the chances of unsecured creditors receiving full payment.

Despite the expected outcome for unsecured creditors, it is still essential for them to have robust debt collection procedures and to pursue other measures, such as obtaining a County Court Judgment, before a business is declared insolvent. By registering as a creditor and providing proof of debt form, unsecured creditors can be kept informed about the case and have the opportunity to vote on important decisions during creditor meetings.

Although the requirement for liquidators to hold creditors’ meetings automatically has been eliminated, information is still provided to creditors via email or upon request.

Article sources

All Company Debt insolvency content is written by our licensed insolvency practitioners.

The primary sources for this article are listed below, including the relevant laws, and acts which provide their legal basis.

1. Insolvency Act 1986 – unsecured creditors
2. UK Government – register as an unsecured creditor