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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?
In respect of immovable property, legal mortgages are the most common form of security taken over real property, aircraft and ships. An equitable mortgage may be taken over immovable property. Generally, charges over company assets may be registered on the Register of Charges maintained by the Registrar of Companies, and there are specific registers for Bermuda land, ships, aircraft and aircraft engines, and where these assets are owned by a Bermuda company, any charges over them must be recorded on the relevant specific register. Priority of security is determined by the registration date.
In relation to moveable property, the most common type of security is a charge, which can take the form of:
- a charge over shares;
- a debenture over shares and all assets of the chargor;
- an assignment of the proceeds of realisation of specific assets; or
- a general charge over book debts and future receivables.
Priority of security is determined by the registration date.
Chattel mortgages can also be taken over moveable assets which belong to natural persons, and these are registered on the Register of Chattel Mortgages.
Pledges can be registered on the Register of Charges. Equitable mortgages may also be taken in respect of intangible assets by way of an equitable assignment.
Ranking of creditors
How are creditors’ claims ranked in insolvency proceedings?
Secured creditors may claim any shortfall between the value of the security and the actual amount of the debt. The priority of unsecured claims in a corporate insolvency is:
- liquidation costs;
- employee wage claims (including severance payments up to 26 weeks);
- preferred creditors (taxes and obligations owed to the government);
- floating charge holders (subject to the note below);
- ordinary unsecured creditors (pari passu);
- subordinated unsecured creditors;
- preferred shareholders (in the event of a surplus); and
- ordinary shareholders (in the event of a surplus).
In accordance with Re Leyland Daf: Buchler v Talbot (2004, UKHL9), floating charge holders are likely to be treated as fully secured creditors.
Can this ranking be amended in any way?
The ranking of creditors cannot normally be amended. Group companies commonly enter into subordination agreements so that inter-company group debt will rank behind third-party secured and unsecured debt. The drafting of subordination agreements is a complex area and care must be taken to ensure that the subordination does not seek to hinder the rights of other creditors in the context of a liquidation proceeding.
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