View/Open - Research Commons - The University of Waikato

Voluntary creditors can be divided into secured creditors, unsecured creditors and
preferential creditors.
9.2.1.1 Secured Creditors
Secured creditors are so called because they hold security over the company‟s assets
either in the form of fixed charge 7 or floating charge. 8 The creation of the security
will allow creditors to be able to realise the assets if the company fails to fulfil its
obligations. 9 The proceeds from the sale of the assets will be used to pay the
company‟s obligation and any surplus will be returned to the company. 10
Normally, creditors who are able to secure such arrangements are banks and
financial institutions or large corporations. This type of creditor will be least affected
by the company‟s insolvency since they are able to recoup their debts by realising
assets at the first sign of distress, provided the security is adequate. 11 Otherwise, the
creditor will become an unsecured creditor in respect of the unpaid balance. In
addition to security over the company‟s assets, creditors can also include other forms
of security in their contracts. 12 These contractual securities include the retention of
title clauses, director‟s personal guarantee and restrictive covenants, particularly the
7 A fixed charge is attached to a specific asset of the company as security in favour of the creditor.
The company cannot deal freely with the assets without consent of the creditor.
8 A floating charge is not attached to any specific assets of the company. A floating charge will
become a fixed charge once the charge crystallizes. Crystallization occurs upon the occurrence of
event(s) specified in the instrument creating the charge. Unlike fixed charge, the company is free to
deal with the assets in the ordinary course of business until crystallization.
9 Vanessa Finch “Security, Insolvency and Risk: Who Pays the Price?” (1999) 62 MLR 633 at 634
[“Security”].
10 Eilis Ferran “Floating Charges-The Nature of the Security” (1988) 47 CLJ 213 at 216.
11 Ferran above n10 at 216.
12 Finch “Security” above n9 at 635.
189