What are Secured Creditors?
If you owe money to a secured creditor, you’ll need to understand what that means, and what their rights are.
The two main types of security which your company may have given are either:
- a fixed legal charge over specific assets
- floating charges over some or typically all of the company’s assets.
The risks associated with giving creditors security are defined in the underlying documents you will almost certainly have signed if you have given creditors security. These documents will often give the creditors powers to effectively take control of your business and even trigger closure if there is a technical default by you.
If you are worried that your business is in difficulties and need advice as to what your options are, please do contact us. We are very experienced in dealing with issues arising with secured creditors.
Read our complete guide below.
Secured Creditor: Definition
A secured creditor holds security over some or all company assets and in a liquidation, they are in the most favourable position as they are paid as a priority over other creditors. Secured creditors fall into two categories – fixed and floating charge.
Both fixed and floating charge status needs to be registered with Companies House, which is the UK’s registrar of businesses. The terms and conditions of the detailed in a document called a debenture. It is important for investors to be able to see if company has charges against it. Depending on the terms, some secured creditors and qualified floating charge holder is able to appoint an administrator.
- Lenders with a charge over assets
- invoice factoring company with a lien over assets
What is a Fixed Charge?
Fixed charges as held by secured creditors are over large and physical assets. In liquidation, once the asset is sold, the creditor will be paid the money they are owed, after costs are deducted, such as for the liquidator’s services.
A secured creditor may also choose to take possession of and sell any their secured property themselves, although are required to pay any surplus to the liquidator. Examples of fixed charge company assets could be property such as an office building or warehouse, vehicles, plant and machinery and sales ledgers.
Secured creditors may also provide structured credit products such as corporate bonds and syndicated loans. Examples of secured creditors are banks, asset-based lenders, and finance and agreement providers such as factoring companies.
Secured creditors tend to issue loans to companies at more preferential rates because they hold the collateral of an asset and so are far more likely to be able to have their investment returned. What is more, the company is unable to sell or dispose of the asset without the creditor’s approval.
What is a Floating Charge?
A floating charge held by a creditor is so called because it is not fixed – instead it ‘floats’ over the whole business. An example of this type of asset could be stock, work in progress, vehicles not subject to fixed charges and unfactored debtors. Recovering funds during a liquidation can be more difficult than with a fixed charge asset.
A fixed charge can be taken over a variety of assets, both current and future. During this time, the company is able to sell assets without the creditor’s consent, which can provide business owners with more flexibility. However, if there is a default, then the floating charge ‘crystallises’ into a charge. It is then that the company loses the right to sell or trade the asset. The reasons for crystallisation will be outlined in the loan terms, such as when a repayment is not made and automatically on liquidation.
It should be noted that recovering money for floating charge creditors can be more difficult, compared to secured creditors. They are also below secured and preferential creditors (who are often the company’s employees) in terms of prioritisation. Meanwhile, unsecured creditors have no claim over any asset and may well receive little or no payback if there is a liquidation.
Secured Creditor vs Unsecured Creditor
At the lower end of the creditors, in order of priority, are unsecured creditors. These include company suppliers, and contractors. They’ll be one of the last to be paid in any insolvency event, above
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The primary sources for this article are listed below, including the relevant laws, and acts which provide their legal basis.