Secured creditor

What it means

A secured creditor is a creditor whose claim is secured by a right over the debtor's assets, most often a charge or pledge, but also a right of retention, a security transfer of title or a security assignment of receivables. A typical secured creditor is a bank holding a charge over the company's property, machinery or receivables.

The secured creditor's position shows fully in bankruptcy. Unsecured creditors are paid pro rata from the general estate, whereas a secured creditor is paid first from the proceeds of realising the asset securing its claim. The costs of realisation and the trustee's fee are deducted first, and the rest goes to the secured creditor.

If the proceeds are not enough to pay the claim in full, the balance ranks as unsecured alongside the other creditors. If the proceeds exceed the claim, the surplus goes to the general estate. The ranking of several secured creditors over the same asset follows the order in which their security rights arose.

How it works in practice

To be paid as secured in bankruptcy, the creditor must state the security right, its basis and ranking in its proof of claim, within the statutory deadline. Failing to mention the security may mean it is disregarded. A secured creditor can give the trustee binding instructions on realising the secured assets.

For a company as supplier, it pays to think about securing receivables in advance, not just for loans. A charge over the customer's assets, retention of title when selling goods, a shareholder guarantee or bank guarantees significantly improve the chances of recovery if the partner becomes insolvent.

Charges over movables and receivables are registered in the Notarial Central Register of Charges, and over real estate in the land register. Before granting a larger loan or extended payment terms, it is worth checking whether the partner's assets are already encumbered in favour of other creditors.

What to watch out for

The most common mistake is assuming security works automatically. The charge must be validly created, correctly registered, and the claim filed on time. An error at any step can make the creditor unsecured, and its recovery in bankruptcy will drop to a fraction.

Watch the risk of challenge too. Security created shortly before the debtor's insolvency, especially in favour of related parties, may be attacked by the trustee as a preferential transaction. Security should therefore be created when credit is granted, not when the debtor is already in difficulty.