Whether it is an individual or a company that enters into insolvency, your status as a secured or unsecured creditor will affect legal rights as to the steps that can be taken to recover debt.
What is the difference?
A secured creditor is a creditor whose debt is tied to (“secured” by) a particular asset. For example, a home loan is usually secured by the home itself, a car loan is usually secured by the car, farming business loans may be secured by cattle and other farming plant and equipment, and so on.
On the other hand, an unsecured creditor is a creditor whose debt is not tied to any asset/s of the debtor.
What are my rights as a secured or unsecured creditor?
When an individual or a company enters into insolvency, status as a secured or unsecured creditor affects legal rights and obligations in the insolvency process, and the priority given in terms of entitlement to payments.
If you are a secured creditor, then:
- you are generally still able to enforce your security in pursuing payment of the debt in accordance with your rights under any security agreement. This means you have priority over unsecured creditors.
- for example, if the debtor is unable to maintain repayments, you may be able to take possession of and sell the secured asset/s to recover the debt owed to you.
- if you do sell the secured asset/s and the proceeds of sale do not cover the full amount of the debt, then any “shortfall” amount becomes an unsecured debt in the insolvency. You must lodge a proof of debt for any shortfall amount.
If you are an unsecured creditor, then:
- once a bankruptcy trustee or liquidator has realised the debtor’s assets, and the costs of the bankruptcy/liquidation and priority payments (e.g. to Secured Creditors) have been made, you will be entitled to receive a share in any available funds left.
- if there are not enough funds left to pay unsecured creditors the full amount of their debts, then the liquidator will pay each creditor a dividend which will cover a portion of the debts owed to them. For example, if the assets left are to the value of $50,000 and the debtor owes unsecured creditors $100,000, then the bankruptcy trustee or liquidator will pay to the unsecured creditors a dividend of 50 cents in the dollar. This means you would receive 50% of the debt owed to you.
- except for independent contractors, employees are a distinct class of unsecured creditor because any outstanding payments owed to employees take priority over other unsecured creditors. Liquidators/Bankruptcy trustees’ fees are also paid in priority to ordinary unsecured creditors.
Both secured and unsecured creditors have the right to attend and vote at meetings of creditors and to receive information from the bankruptcy trustee or liquidator about the progress of the insolvency process.
If you are owed a debt and the debtor is having cash flow issues, or has entered into insolvency, our experienced Litigation + Dispute Resolution team can assist.