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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?

Under the Companies Act, ‘security interest’ is any actual or contingent interest in or charge upon any property of a company – by way of mortgage, bond, lien, pledge or other means – that is created or taken to secure the payment of an obligation of the company.

In the Bahamas, the main forms of security over moveable and immoveable property are:

  • mortgages;
  • debentures;
  • pledges;
  • charges;
  • liens; and
  • promissory notes.

A ‘mortgage’ is a transfer of an interest in property, subject to a right to redeem. It includes every instrument by which land is conveyed, assigned, pledged or charged as security for the repayment of money or money’s worth lent, and can be reconveyed, re-assigned or released on satisfaction of the debt.

A ‘debenture’ is a long-term security issued by a company and secured against assets of the company.

A ‘pledge’ is a deposit of goods according to a contract as security for a debt. The right to property or goods pledged vests in the creditor to the extent necessary to secure the obligation. A company may also pledge its shares as security.

A ‘charge’ gives an individual certain rights over property as security for the debt. The charge is usually given by way of debenture, and can be fixed (ie, attached to specific assets of the company which cannot be disposed of by the borrower) and/or floating, which extends to cover assets that may need to be dealt with by the borrower (eg, shares, stock or assets). When there is a default under a security document, the floating charge crystallises and becomes a fixed charge, and the creditor can sell the assets to enforce the debt.

A ‘lien’ is a legal right which usually arises where a creditor is legally entitled to possess an asset and moneys are due to the creditor for services carried out. The creditor is entitled to keep possession of the asset until the moneys are paid. A lien arises by operation of law based on the right to lawful possession.

A ‘promissory note’ (or ‘bill of exchange’) is a written order by one party to another to pay a sum accepted or endorsed on behalf of a company by a person acting under the company’s authority, or if expressed to be made, accepted or endorsed on behalf or account of the company by a person acting under the company’s authority. 

Mortgages and debentures have legal effect once executed and registered in accordance with the Conveyancing and Law of Property Act, the Companies Act and the Registration of Records Act. Floating charges also have similar legal effect under a debenture. 

Ranking of creditors

How are creditors’ claims ranked in insolvency proceedings?

In insolvency proceedings, all creditors’ claims are ranked pari passu (ie, equally), subject to taking into consideration and giving effect to the rights of preferred and secured creditors, which take priority. The legal rights of creditors with mortgages or charges over a company’s assets (ie, secured creditors) are unaffected by the ranking of creditors, because secured creditors are entitled to enforce their security without leave of the court.

After the claims of secured creditors have been satisfied, the order of creditors’ claims in insolvency proceedings is as follows:

  • the expenses of the liquidation, insofar as there are sufficient assets to meet them, including the liquidator’s fees and disbursements;
  • preferential debts, which are all rates, taxes, assessments or impositions imposed or made under the provisions of any act;
  • sums due by the company to employees – whether employed in the Bahamas or elsewhere – for salaries, wages and gratuities accrued in the four months preceding commencement of the winding up;
  • wages due to any worker or labourer for services rendered to the company in the two months preceding the relevant date (ie, the date of commencement of the winding up or, in the case of a company ordered to be compulsory wound up which had not commenced winding up voluntarily, the date of the winding up order);
  • sums due and payable by the company on behalf of employees in respect of medical health insurance premiums or pension fund contributions;
  • sums due by the company to former employees in respect of severance pay and earned vacation leave, where employment contracts have been terminated as a consequence of the company being wound up; and
  • sums due to workers for personal injury accrued before the relevant date, unless:
    • the company has, on commencement of the winding up, an insurance contract with rights capable of being transferred to – and vested in – the workers; or
    • the company is being wound up voluntarily merely for the purpose of reconstruction or amalgamation with another company.

Can this ranking be amended in any way?

No, although the collection and application of an insolvent company’s property in insolvency proceedings is also subject to any agreement between the company and its creditors that the creditors’ claims will be subordinated or otherwise deferred to those of any other creditors, and to any contractual rights of set-off or netting of claims between the company and any party.

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