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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 grant of a security interest or lien by an obligor in an agreement or pursuant to a statute typically is not enough to provide a creditor with protection from the loss of its collateral. A creditor must also take certain actions to perfect its security interest or lien, which provides notice to other parties of the existence of its security interest. Once perfected, subsequent security interests cannot take priority over the earlier-filed interest, with limited exceptions (eg, with the creditor’s consent or if the creditor allows its filing to lapse).

In the United States, the perfection of security interests is governed by state law. The perfection of security interests in most forms of personal property, including intangible property, is governed by the Uniform Commercial Code. To perfect a security interest under the code, a creditor must record a Uniform Commercial Code financing statement with the secretary of state of the state of incorporation of the obligor granting the security interest.

Under the code, security interests in cash, accounts or investment property cannot typically be perfected through a central Uniform Commercial Code filing. Instead, perfection of such security interests requires possession or control, which may be by an agreement that provides the creditor with control over the property. One common example of perfection in that form is perfection of a cash account through a deposit account control agreement.

The code does not apply to real property. Accordingly, if the security interest or lien applies to real property, it must be perfected under the individual state in which the property is located. Although state laws on the perfection of security interests can vary widely, they typically require that a mortgage or deed of trust be recorded in the country in which the real property is located.

Ranking of creditors

How are creditors’ claims ranked in insolvency proceedings?

The Bankruptcy Code establishes the following hierarchy for distribution of a debtor’s assets: 

  • secured claims (to the extent of the creditor’s interest in the property);
  • administrative claims;
  • priority unsecured claims;
  • unsecured claims; and
  • equity interests. 

The absolute priority rule provides a basic framework for ensuring fair distribution of the debtor’s assets by mandating that claims of higher priority are paid in full before claims and interests of lower priority may realise any recovery.

Can this ranking be amended in any way?

Claim holders may agree to treatment different from that established by the Bankruptcy Code’s absolute priority rule. For example, a class of creditors may negotiate to give part of its recovery to an immediately junior class in order to facilitate the confirmation of a bankruptcy plan. 

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