Understanding Unsecured Creditors: Definition, Examples, and Process
Many people facing insolvency, or dealing with insolvent companies, wonder what an unsecured creditor is.
In this guide, we will explore the nature of unsecured creditors, the types of entities that can fall into this category, their prioritization in the event of a liquidation, and the steps they can take to maximize their chances of being repaid.
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’s the Difference between Secured and Unsecured Creditors?
The critical difference between a secured and unsecured creditor is the order they receive money in the event of insolvency.
Secured creditors get paid first due to their ‘collateral’ or ‘security’ over a particular asset. Unsecured creditors must wait their turn to see if monies are left from selling company assets.
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
- 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.
Can you Register as an Unsecured Creditor?
Some may hear the business has collapsed later, and they can then register as a creditor and be added to the list. This allows them to be kept informed about the case and to vote on decisions in meetings. If the amount owed is more than £1,000, they must also provide a ‘Proof of Debt’ form.
There is no longer a requirement for a liquidator to hold creditors’ meetings automatically unless 10% of creditors – or 10 individuals – request this. Otherwise, information is provided to creditors via email.
It is common for unsecured creditors to receive little or no recompense because there are often others with large debts ahead of them in the queue – and even more so now that HMRC is a secondary preferential creditor.
All creditors can do is ensure their debt collection procedures are as robust as possible and resort to other measures before a business is declared insolvent. This can include obtaining a County Court Judgement where bailiffs can be used to seize goods to pay for the debt.
Common Outcome 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 recent 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.
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.