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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?
Suretyship A suretyship is a means to secure a loan by which a creditor wishes to protect itself against the insolvency of its debtor. Under a suretyship agreement, the surety undertakes to repay the debtor's debt to the creditor if the debtor fails to do so itself. Due to deal-specific nature of a suretyship, such suretyship secures only the primary debt for which it is granted and only the amount that is still outstanding. If the primary debt expires, the suretyship will automatically expire with it.
Guarantee A guarantee agreement is an undertaking of a third party (the guarantor) to guarantee a certain outcome and/or pay the damage that may be caused by a particular business decision. In contrast to a suretyship, a guarantee agreement is non-deal specific and therefore establishes a claim in its own right that is independent from the creation and continuation of the principal debt.
Mortgage A mortgage is a right in a real property to secure a monetary claim which is legally tied to the existence of this claim. If the claim expires, the mortgage will also expire.
Land charge A land charge is a right in a real property to secure a monetary claim, which in contrast to a mortgage is not legally tied to the continuation of a specific monetary claim. If the claim expires, the land charge will generally continue to be valid.
Lien The debtor can create a lien over a movable asset or a right in favour of the creditor in order to secure a claim. The creditor has the right to seek satisfaction of a secured claim from the encumbered asset. The creation of a lien requires that the creditor is in possession of the relevant asset (ie, that the creditor has effective control over it).
Collateral assignment Collateral assignment means that movable assets or rights are transferred to secure a creditor’s claim. In contrast to a lien, a creditor receives ownership in the asset or right while the asset or right itself remains within the debtor’s possession so that the debtor can continue to use it or may continue to collect any claims so assigned.
Ranking of creditors
How are creditors’ claims ranked in insolvency proceedings?
Creditors entitled to separate satisfaction may demand from the insolvency administrator the separation and recovery of assets held by the debtor but owned by the creditor (eg, leased objects or goods delivered under reservation of title). These items are not part of the insolvency estate.
Creditors entitled to separate satisfaction have had a security right created in a certain asset (eg, a lien or collateral transfer) to secure a monetary claim against the insolvency debtor prior to the insolvency event. If such asset is realised during an insolvency procedure, the proceeds will be used to primarily satisfy the claim of the entitled creditor, and only proceeds in excess of such a claim will be distributed to the ordinary insolvency creditors.
The debts incumbent on the estate will also be satisfied before the claims of the ordinary creditors. These include, for instance, insolvency administrator costs, court costs and costs for the continuation of business operations during the insolvency procedure.
After that, the claims of the ordinary creditors without any special rights will be satisfied. The remaining assets are distributed among them, mostly on a pro-rata basis. This means that all creditors will receive the same percentage of their claims (eg, 5% of the original value of the claim).
If there are still assets available after the satisfaction of all ordinary insolvency creditors, subordinated debts will also be paid. These include shareholder loans or claims that have the same economic effect as such loans. This is rare.
Can this ranking be amended in any way?
The creditors of an (insolvent) company generally have no means of improving their ranking. Rank improvements individually agreed in contracts between an insolvent company and a creditor are generally invalid because this would put the other creditors at a disadvantage and therefore violate the principle of equal creditor treatment. However, a contractual lowering of the rank may be agreed without any problem (subordination).