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Position of creditors

Forms of security

What are the main forms of security over moveable and immoveable property and how are they given legal effect?

The most common forms of security are mortgages and fixed and/or floating charges. 

A ‘mortgage’ is a transfer of title to an asset, subject to a right of re-transfer (known as the ‘equity of redemption’). A mortgage must be in writing and executed as a deed, and is subject to certain registration requirements. If these are not met, the mortgage may be void.

A ‘fixed charge’ involves no transfer of legal or beneficial title, but is an encumbrance on an asset. A fixed charge is created over an ascertainable asset, over which the lender will have a degree of control (eg, a right to consent before the asset is sold). 

A ‘floating charge’ is an encumbrance over an asset which may change from time to time (eg, cash in a fund or stock) and over which the lender does not have the same control as a fixed charge.

All floating charges and most mortgages and fixed charges (depending on the asset being secured) must be registered with the registrar of companies within 21 days, failing which they will be void. Certain exceptions apply, including for security taken over financial collateral.

Ranking of creditors

How are creditors’ claims ranked in insolvency proceedings?

A combination of domestic legislation and common law establishes a hierarchy or ‘waterfall’ of claims. A key principle underlying insolvency law in England and Wales is that debts rank pari passu – or equally among themselves, according to their priority.

The order of priorities applicable in administration or liquidation is broadly as follows:

  • the liquidator’s or administrator’s costs and expenses of realising fixed charge assets;
  • the fixed charge holders (to the extent of their security);
  • the obligations incurred under new contracts and the pay of employees whose contracts have been adopted;
  • the general expenses and costs of administration;
  • preferential debts (these relate almost exclusively to employees’ rights);
  • the ‘prescribed part’ (ie, a certain amount of the proceeds of realising assets, subject to any floating charge which must be set aside to settle the claims of unsecured creditors. Currently set at 50% of the first £10,000, plus 20% of anything thereafter, subject to a cap of £600,000;
  • the claims of floating charge holders (to the extent of their security);
  • the claims of unsecured creditors (that remain after payment of the prescribed part);
  • interest accrued on unsecured debts since commencement of the process; and
  • the claims of shareholders.

Can this ranking be amended in any way?

Yes. Parties commonly agree in subordination or inter-creditor agreements that debts that would otherwise rank pari passu may be subordinated to one another.

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