A creditor is owed money because they have provided loans to a company. It can also include goods and services provided to a company. Both forms of creditors have different rights when it comes to liquidation. This article will go through the difference between secured and unsecured creditors.
A person who is owed money by a company if a certain event occurs can also be a creditor. Further, they are also referred to as ‘contingent’ creditors. This is the term used given when there is a successful legal claim against a borrower. The details are outlined in a loan agreements.
An employee can be a creditor as well. In the sense that they are owed money for unpaid wages or other entitlements. In a liquidation, their entitlements are paid in priority to the claims of other unsecured creditors.
Secured Creditor (SC)
SC are lenders who have a security interest with borrower’s assets. This can be in the form of:
- A mortgage
- In some or all of the company’s assets
Further, lenders usually require a security interest in company assets when they provide a loan. Thus, this essential in order to secure a debt owed by a company.
The PPSR regsters Security interests over personal property other than land. This is done to ensure the creditor’s security interest is enforceable and given priority in insolvency.
Liquidation
If a company goes into liquidation, a SC can appoint a qualified person to take control of some or all of the secured assets. This is done in order to repay the debt owed to the secured creditor. This right continues after the company goes into liquidation.
The SC can also ask the liquidator to deal with the collateral. This means to account for the proceeds and costs of selling those assets.
A SC has a right to vote at creditors’ meetings for the amount the company owes them that exceeds the amount they are likely to receive from the selling of the collateral.
Unsecured Creditor (UC)
UC are lenders who do not have a security interest in the company’s assets. Thus, the creditor has not secured its debt.
The problems for this loan is that the risk to the creditor is much higher than for a secured loan. To account for this high risk the creditor will usually charge a higher interest rate. Thus, the risk is that when you will default on your loan payments and the creditor will not be able to recover their money.
Secured v Unsecured
Further, the main problem is that for an unsecured loan the risk to the creditor is much higher than for a secured loan. Hence, creditors will usually charge a higher interest rate. A Commercial Lawyer can assist you to find out whether being a secured or unsecured creditor is right for you or for your business.
