unsecured creditor

An unsecured creditor is a person who is owed money by a company or person (a "debtor") but does not have recourse to a fund, asset or collateral for payment in the event of a default of payment by the debtor. In the event that the debtor is insolvent, and in liquidation or administrative receivership, an unsecured creditor stands pari passu with all other unsecured creditors in the insolvency, that is, behind secured creditors that have recourse against the assets of the debtor and others taking priority in a winding up, such as employees.

The proceeds received from assets owned by the debtor (i.e. including those of unsecured creditors) fall into the funds available for the general body of creditors, who share equally - pari passu - for a number of pence in the pound for the sums owed in the insolvency.

Secured Creditors

A number of methods are available to mitigate against the risk of standing as an unsecured creditor in the insolvency of the debtor. Firstly, and most obviously, a creditor may look to negotiate a secured interest over an asset of the debtor. In the event that a debtor is not prepared or not able to grant such a secured interest, an unsecured creditor may look to obtain personal guarantees for debts arising from directors of the company. Thirdly, bank guarantees may be sought to guarantee payment of debts arising under contracts of supply and goods of services.

A further option for an unsecured creditor is to ensure that properly drafted retention of title clauses exist in contracts for the supply of goods. Such clauses are frequently found in commercial contracts for supply of goods. Such clauses are founded on changing the time that ownership of goods are conveyed to the purchaser. Rather than ownership of goods vesting in the purchase at the time of delivery of the goods, retention of title clauses change that time to a later date, such as the time that the goods delivered are actually paid for by the debtor. An effective retention of title clause allows the unsecured creditor to collect goods from the debtor which have not been paid for, and require the debtor to hold funds received from its own customers on trust for the unsecured creditor.

Usage: The unsecured creditor participated in the insolvency

Related Words: pari passu; retention of title clause; secured creditor; equitable mortgage; legal mortgage; charge; fixed charge; floating charge; debenture; unsecured debenture; secured debenture; lien; equitable lien; pledge; secured interest.