Discuss critically the role of secured creditors in business Essay

Discuss critically the role of secured creditors in business insolvency - Essay Example The security grant provided to the creditors is entirely dependent upon the whether the debtor is able to conform to the loan covenants. In case, the debtor is not in default, the creditor does not have control on the security3. However, if the debtor is in default, the creditor has complete control on the collateral, subject to any limitations imposed by insolvency law. Additionally, the secured creditor gets priority at time of settlement from the sale of security compared to other creditors. If one sees it with a creditor’s point of view, the provision of collateral reduces the default risk of creditor and in return, the debtor expects some valuable terms of loan, which create flexibility for debtor in repayment. One of the valuable terms is less interest payment on secured credit than an unsecured credit4. The priority given to secured creditors in repayment create a less advantageous situation for unsecured creditors, which does not allow them to agree on flexible terms i n loan. This often leads to consensus on a higher interest rate in case of unsecured loan. If all these terms are seen with the eyes of a debtor, both secured and unsecured creditors try to reduce their risk by agreeing on particular terms of loan. In one case, there is a grant of security with a reduced interest on loan; in another, there is a higher rate of interest on compensating for no security and less priority. There has always been debate over this matter in the literature and it suggests the debtor not bother much while choosing between the two. History US federal bankruptcy law offers two choices for formal bankruptcy, which are Chapter 7 or Chapter 115. Chapter 7 involves the transfer of control of the firm to a creditor-appointed trustee. In Chapter 11, the debtor’s management usually remains in control of firm during the proceedings. Earlier, debtors had more control in the proceedings of insolvency, which the creditors noticed and did not prefer6. This later led creditors to come up with more strict contracts regarding provision of finance in Chapter 11, which shifted a significant control to the creditors from debtors. Despite this control, chapter 11 is weaker when compared to Recent UK Bankruptcy situations enjoyed by secured creditors. English insolvency law did not factually enforce a stay on the implementation of secured claims. This allowed a secured creditor having an all-encompassing security interest, commonly known in UK as a ‘floating charge’—to impose against the entireness of the debtor firm’s assets. In effect, the floating charge holder (FCH) led to a private liquidation, known as an ‘administrative receivership’ (or ‘receivership’ for short)7. When a company is financially distraught, a secured creditor or court takes the company into receivership. A company is in receivership when a secured creditor or a court appoints a receiver who can control all the assets of the co mpany. The appointment of receiver comes under the security of fixed charge such as land, plan, machinery, equipment etc. It also comes under the security of floating charge such as cash and stock. The receiver can also have right to manage the company matters subject to terms of