What Are the Rights and Obligations of Secured and Unsecured Creditors?

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Table of Contents

• Voluntary Administration
• Receivership
• Liquidation
• Key Takeaways

Creditors come into existence due to the range of financial transactions a company enters into. If a company owes you money, you are a creditor of that company. For example, if you provide the company with a loan or if you supply goods or services that await payment, you are a creditor. Employees can also be creditors of a company if they are owed payments such as superannuation or outstanding wages. Despite the circumstances at which you become a creditor, you will either be a secured or unsecured creditor.

A secured creditor has a security interest in some or all of a company’s assets. On the other hand, an unsecured creditor does not. A security interest can take the form of a charge or mortgage. Your status as a secured or unsecured creditor is important. For example, if a company is in financial difficulty or insolvent, your status will determine your rights and obligations in company affairs. It will also affect your priority in receiving payment.

Voluntary Administration

A company that goes into voluntary administration aims to improve the way business is run. The goal is to continue business activity for the long term. If insolvency is likely, another purpose of voluntary administration is to administer company affairs. Hence, creditors can receive a more optimal return. The outcome of voluntary administration will either be:

1. reinstatement of directors’ control;
2. wind up of company and appointment of the liquidator; or
3. creation of deed of company arrangement to outline the repayment of debts.

During voluntary administration, both secured and unsecured creditors rights are limited.

There are, however, two meetings where creditors can take part. The first meeting of creditors will be to vote on the replacement of the administrator and the creation of a committee of creditors. The second meeting of creditors will be to vote on the company’s future. After reviewing the voluntary administrator’s reports, the creditor can determine which of the three above outcomes is best. In order to vote in both meetings, creditors need to lodge details of their debt and claims directly with the voluntary administrator.

Receivership

A secured creditor has certain rights if a company is not able to fulfil its obligations arising from a security interest. For example, they can appoint a receiver whose role will be to secure a part or all of the company assets in order to repay the creditor’s debt. Any assets that may need to be sold must be sold at the market value or the best price reasonably obtainable. In receivership, the receiver’s prime obligations are due to the secured creditor. This also means that the receiver does not need to report to unsecured creditors either in writing or in a formal meeting. During a receivership, however, an unsecured creditor can still apply to the court to wind up the company (liquidation).

Liquidation

Liquidation refers to the winding up of the company. Effectively this means that a liquidator takes control of company affairs for the benefit of all creditors. Both secured and unsecured creditors can initiate this process either through a court order or as a result of the creditors’ decision. Creditors can decide to go into liquidation following voluntary administration or through a shareholder resolution.

During liquidation, unsecured creditors have the following rights and responsibilities:

• lodge details of a debt or claim with the liquidator in a ‘Proof of Debt’ form;
• vote at a creditors’ meeting once the ‘Proof of Debt’ form is approved;
• approve liquidator’s fees;
• request the liquidator to recover unfair preferences;
• inform the liquidator about their knowledge of company affairs;
• receive information from the liquidator through a creditors’ meeting or access to reports;
• ask questions about the liquidation process and status;
• receive dividends after priority creditors have been paid; and
• lodge complaints to the Australian Securities and Investment Commission (ASIC) or the court on the execution of the liquidator’s duties.

The rights held by secured creditors are similar to those of unsecured creditors, for example, to vote at creditors’ meetings and to receive dividend payments. However, even when a company is in liquidation, a secured creditor can still appoint a receiver to take control of secured assets to repay their debt. Secured creditors can also request the liquidator to deal with the secured assets on their behalf.

Key Takeaways

Company insolvency is complicated and highly regulated. If you are a creditor and the company is in financial difficulty, it is important to know where you stand. At LegalVision we have commercial lawyers who specialise in insolvency. As a creditor, it would be important to get the appropriate legal advice to ensure you are aware of your rights, responsibilities and options.