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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 general principle under Maltese law is that any party that has bound itself is obliged to fulfil its obligations with all of its property present and future. Accordingly, the property of the debtor constitutes the common guarantee of all of its creditors, all of whom have equal rights against such property, unless there exist between them lawful causes of preference.

Hypothecs and privileges are the two forms of security interest that can be created over immovable property.

Hypothecs can be legal (these arise by operation of the law), judicial (originated from a judgment) or conventional (established by contract). Hypothecs can take one of two forms: general or special. A general hypothec affects all of a debtor’s property (present and future) and includes both movable and immovable property owned by the debtor; while a special hypothec extends over only specific immovables of the debtor.

A privilege is another right of preference and ranks above a hypothec, even if the privilege is registered at a later date. The rationale for this is that privileges can be created only in the context of situations which the law considers to merit such preferred treatment. A privilege, which may exist over movables and immovables, exists only in the cases contemplated by law and accordingly cannot be created by the will of the contracting parties.

Generally, hypothecs and privileges must be registered in order to have effect. While privileges rank according to the nature of the debt that they secure, hypothecs rank according to the date on which they are registered.

Ranking of creditors

How are creditors’ claims ranked in insolvency proceedings?

The specific nature of various lawful causes of preference (eg, general privileges, special privileges over movables, special privileges over immovables and hypothecs) makes it impossible to rank the causes of preference in one list. This is compounded by the fact that the lawful causes of preference affect movables and immovables within the debtor company’s patrimony, thus not allowing for one sequential list.

Can this ranking be amended in any way?

Creditors’ claims will rank according to law. However, an arrangement entered into between a company in the course of being wound up and its creditors will, subject to appeal, be binding on the company if approved by an extraordinary resolution and on the creditors if acceded to by two-thirds in value.

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