Who is a Creditor?

A creditor is a person, either natural or legal (i.e. company, organisation or government)  that claims on the services of another person or entity.  A creditor can be considered as an entity to whom money is owed by another person or entity. In simple terms, a creditor can be said to be a person, business or entity that is owed money because the person or business provided goods or services or advanced money to another person, business or entity. Legal definitions go ahead to define a creditor as a person who has a claim against a debtor.

Rights of Creditors

Rights of creditors are the legal and procedural provisions that have been put in place to protect  creditors and guarantee their right to collect money they are owed from debtors.  The law on the protection and rights of creditors varies from one country to another. Many jurisdictions have different options which may be exercised by creditors. These options include putting a lien on the property or assets of a debtor or effecting a seizure and forced sale of the property or assets belonging to the debtor or effecting a garnishment of the wages of a debtor, amongst other options. These rights that are available to a creditor will depend on the reason for which and how  the debt is owed.

In the event of liquidation of a business, secured and unsecured creditors have different rights. Secured creditors rank first in the hierarchy of repayment after the costs of liquidation have been paid. Creditors with a legal charge over the debtor’s assets or property are entitled to be paid first once the debtor’s assets have been sold. Unsecured creditors will be the last to be paid after payment of the liquidator and the secured creditors.

Unsecured creditors have a right to attend creditor’s meetings where a company is being liquidated. This right also applied to secured creditors.

Another right that both secured and unsecured creditors have during liquidation of a business is the right to vote for the appointment of a liquidator. This right will be applicable only when the debtor is undergoing a creditor’s voluntary liquidation.

Another right that creditors have is the right to take back possession of goods they own that are in the hands of the debtor. The creditor needs to prove ownership of those goods to the liquidator upon which they can have them returned or reimbursed the value of those goods.

Creditors also have a right to claim interest on the outstanding debt. This right will be available in some circumstances and the creditors could have a provision in their contracts with the debtor for the levying of interest on any unpaid amounts. In such a case, interest can be claimed from the date of the debt up to the date the liquidation takes place.

A creditor also has the right to sue or institute judicial or legal process against the debtor to recover the owed amounts. A creditor can sue for the outstanding amount after which the can enforce a judgement obtained from a court of law against the debtor. This is right is however rarely exercised as it is costly and expensive.

Recognising Creditor Rights

Recognising and enforcing creditor rights is done through various legal mechanisms imposed by various countries. These legal mechanisms include bankruptcy and insolvency laws. Countries that are largely involved in international trade have put in place strong institutions and regulations for the purpose of protecting creditors.

Such institutions and regulations make up what is referred to as the insolvency mechanism, which has three main components. First, every robust insolvency mechanism must have strong institutions that are in charge of insolvency proceedings. These institutions are usually the courts of law. The second component is an operational system which is used to process cases and make decisions on insolvency matters. The third and final element is a system of recognising the integrity of the insolvency system.

Some countries ad jurisdictions have put in place informal systems such as out-of-court processes to dealing with creditor-debtor disputes. Informal processes are more likely to yield better results and outcomes for both the creditors and debtors. These informal systems include processes like  voluntary negotiation or mediation. Informal dispute resolution mechanisms can also be employed to ensure that both creditor and debtor rights are protected.

Conclusion

In order to ensure your rights as a creditor are protected, it is important to establish the context or way in which the debt arose before taking steps to enforce your rights as a creditor. The nature of the debt, whether domestic or cross border will determine what actions a creditor can take against the debtor to recover outstanding debt. It is recommended that creditors and debtors engage in informal processes such as negotiations before taking specific legal action such as litigation or insolvency proceedings. These informal processes tend to be time saving and affordable where there is co-operation by the debtor.