Secured and Unsecured Creditors: What Is the Difference?

A fixed charge normally applies to a specific asset or clearly identifiable category of assets.

Examples may include:

• Commercial property
• Machinery
• Vehicles
• Particular equipment
• Certain investments
• Other specifically identified assets

The company’s ability to sell, transfer or otherwise deal with the asset may be restricted by the security agreement. It may be possible to sell an asset with the lender’s consent or by repaying the secured amount from the proceeds, but directors should not dispose of charged assets without checking the agreement.

1. The costs associated with preserving and realising that asset
2. The amount owed to the fixed-charge creditor
3. Any remaining surplus, which becomes available to the appropriate part of the insolvency estate

If the sale proceeds are insufficient to clear the secured debt, the unpaid balance is known as a shortfall. The creditor may then claim for that shortfall as an unsecured creditor, subject to the security documents and circumstances.

A floating charge usually covers a category of company assets that can change during normal trading.

Possible examples include:

• Stock
• Raw materials
• Certain book debts
• Cash
• Work in progress
• Other circulating business assets

While the charge is floating, the company can generally continue using and replacing those assets in the ordinary course of business, subject to the terms of the security agreement.

A floating charge may crystallise following an event specified in the finance documents or by law. Crystallisation attaches the charge to the assets then covered, but it does not simply turn the creditor into a fixed-charge holder for insolvency priority purposes.

The proceeds of assets subject to a floating charge may first be used for relevant insolvency expenses, preferential claims and, where applicable, the prescribed part before the remaining balance is paid to the floating-charge creditor.

An unsecured creditor is owed money but does not hold specific security over company assets for that debt.

Common examples include:

• Suppliers and trade creditors
• Utility providers
• Contractors
• Customers owed refunds or deposits
• Landlords without security
• Unsecured lenders
• Professional advisers
• Some HMRC liabilities
• Judgment creditors without security

Unsecured creditors may still take recovery action before formal insolvency begins. Depending on the circumstances, this can include court proceedings, enforcement or a winding-up petition.

However, obtaining a County Court Judgment does not normally give an unsecured creditor the same status as a creditor holding a valid fixed or floating charge.

If your company is already unable to meet several payments, read our guide to facing creditors when a company cannot pay.

Yes. A creditor can be secured for part of its claim and unsecured for the remaining balance.

For example, a lender may be owed £200,000 but hold security over an asset that produces only £150,000 after realisation costs. Subject to the terms of its security, the lender may have:

• A secured claim against the proceeds covered by the charge
• An unsecured claim for the remaining shortfall

This is one reason why the total amount owed to a secured lender does not automatically tell directors how much that lender will recover.

Preferential creditors do not necessarily hold security over company assets. Instead, qualifying claims receive statutory priority over ordinary unsecured debts.

There are two broad levels of preferential debt.

Ordinary preferential creditors

Ordinary preferential claims can include certain amounts owed to employees, such as qualifying:

• Wages
• Accrued holiday pay
• Occupational pension contributions

Statutory conditions and limits apply. Not every employment-related claim will be preferential in full.

Secondary preferential creditors

HMRC is a secondary preferential creditor for specified taxes collected by a business from employees or customers.

These include certain amounts relating to:

• VAT
• PAYE Income Tax
• Employee National Insurance contributions
• Construction Industry Scheme deductions
• Student loan deductions

This treatment applies to formal insolvency procedures commencing on or after 1 December 2020.

Not every tax debt has preferential status. Corporation Tax and employer National Insurance contributions, for example, do not receive secondary preferential status merely because they are owed to HMRC.

The prescribed part is an amount set aside from qualifying floating-charge assets for distribution to ordinary unsecured creditors.

It may apply where the relevant floating charge was created on or after 15 September 2003 and the company has sufficient net property from which to make the calculation.

The prescribed part exists because, without it, assets subject to a floating charge might otherwise be paid to the floating-charge holder without providing any return to ordinary unsecured creditors.

The amount available depends on:

• The company’s net property
• The date the floating charge was created
• The statutory calculation
• The costs associated with making a distribution
• Whether the court allows the prescribed part not to be distributed

The prescribed part does not guarantee that unsecured creditors will be paid. There may be insufficient assets, or the dividend may be relatively small.

Broadly, the order can include:

1. Fixed-charge creditors: Paid from the proceeds of their charged assets after the relevant costs of preserving and realising those assets.
2. Insolvency fees and expenses: Paid from the assets available to the insolvency estate in accordance with statutory rules.
3. Ordinary preferential creditors: Including qualifying employee and pension claims.
4. Secondary preferential creditors: Including HMRC for specified taxes.
5. The prescribed part: Set aside from qualifying floating-charge assets for ordinary unsecured creditors.
6. Floating-charge creditors: Paid from the remaining assets covered by their charges.
7. Ordinary unsecured creditors: Paid from remaining uncharged assets and any applicable prescribed part.
8. Shareholders or members: Receive a return only if all creditor claims and relevant interest have been paid.

This is a broad explanation rather than a calculation for a particular company. Actual distributions depend on the assets, charges, costs, creditor claims and formal procedure involved.

When funds are available for ordinary unsecured creditors, they will normally receive a dividend based on the admitted value of their claims.

Creditors within the same class are generally paid proportionately. For example, if sufficient funds exist to pay a dividend of 10 pence for every pound owed, a creditor with an admitted £10,000 claim would receive £1,000.

The liquidator will normally ask known creditors to submit a proof of debt and supporting documentation. This may include:

• Invoices
• Contracts
• Statements
• Court judgments
• Correspondence
• Details of payments already received
• Information about any security held

Submitting a claim does not guarantee payment. A distribution can only be made if sufficient funds remain after higher-ranking claims and relevant insolvency costs have been addressed.

A personal guarantee is separate from the company’s liability and from any security held over company assets.

A lender may hold:

• Security over company assets
• A personal guarantee from a director
• Both company security and a personal guarantee

If company assets do not repay the debt in full, the lender may seek payment from the guarantor for the amount covered by the guarantee.

Entering liquidation does not automatically cancel a personal guarantee. The lender’s rights will depend on the guarantee wording, the balance outstanding and any amounts recovered from other sources.

Understanding the company’s creditors helps directors assess:

• Which assets are subject to security
• Whether lenders hold fixed or floating charges
• Whether personal guarantees exist
• Which payments are overdue
• Whether creditors have started recovery action
• Whether the company can continue meeting debts as they fall due
• Whether a rescue or restructuring remains realistic

If the company may be insolvent, directors must consider the interests of creditors and avoid unnecessarily worsening their position.

Directors should be cautious about making selective payments to connected parties or preferred creditors without understanding the consequences. A payment is not automatically improper simply because one creditor is paid before another, but transactions made before insolvency may later be examined by an insolvency practitioner.

Start by preparing an accurate creditor schedule.

For each debt, record:

• The creditor’s name
• The amount outstanding
• Whether the debt is disputed
• The payment due date
• Any security held
• Any personal guarantee
• Current recovery or court action
• Whether the creditor supplies something essential to trading

Then assess whether the company can meet its ongoing costs and clear the arrears within a realistic period.

Depending on the company’s viability, options may include:

• Negotiating revised payment arrangements
• Improving collections and cash flow
• Suitable refinancing
• Restructuring company debt
• A Company Voluntary Arrangement
• Administration
• Creditors’ Voluntary Liquidation

Our business debt help guide explains these options in more detail.

If the company is insolvent and cannot realistically recover, a Creditors’ Voluntary Liquidation may provide an orderly way to cease trading. It should not be treated as inevitable merely because the company has an unsecured creditor or has missed a payment.