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Thanks so much to the Commercial Law blog folks for inviting me to be their guest for a while! I am thrilled to have a chance to discuss topics outside my primary area of scholarship, though I am delighted to have been granted license to talk about bankruptcy and comparative insolvency law, as well. In my first post, then, I thought I'd mention something at the intersection of commercial law stricto sensu, bankruptcy, and my love for all things comparative law.
In the course of researching for the book I'm co-authoring on international bankruptcy, I got to explore the different approaches to the treatment of secured creditors in bankruptcy around the world. I have to admit that I was surprised to find that in many countries, when the rubber really meets the road (i.e., in the borrower's bankruptcy), secured creditors are not the king of the hill, as in U.S. law. Quite a few bankruptcy laws subordinate secured claims to (1) administrative claims arising in the reorganization/liquidation process (e.g., fees for trustees, lawyers, appraisers, auctioneers, etc.), (2) taxes and other public debts, (3) employee wage and benefit claims, and even certain kinds of other unsecured claims (in the Czech Republic before January of this year, secured creditors enjoyed priority in insolvency cases in only 70% of the value of their collateral, with the remaining 30% reserved for unsecured creditors!). One of my favorite curious subordination laws is section 134(4) of the new Russian Bankruptcy Law, which subordinates secured claims to two kinds of unsecured claims if they arose before conclusion of the security agreement: (1) compensatory tort claims for personal injury and associated "moral harm" (emotional damages) and (2) claims for compensation for the use of intellectual property. One wonders whether the unique IP exception was designed to buttress Russia's bid to join WIPO or some other international IP or trade pact.
Along similar lines, I sheepishly admit that after teaching Secured Transactions for years, I was unaware of the substantial differences between "fixed" and "floating" charges (consensual liens) in English law. As a gross over-generalization, a "floating" charge is a blanket lien, generally on all of an enterprise's property, which "crystallizes" into a "fixed" charge and divests the debtor of unfettered control over the property upon default--for a more detailed exploration of the not-altogether-clear distinction between fixed and floating charges, see here. Floating charges are often subordinated to a variety of different unsecured claims in places like England, Australia, Bermuda, and the Cayman Islands, and in England, floating charges created after 15 September 2003 are subordinated to general unsecured claims as to a percentage of the collateral proceeds, capped at £600,000 [this clause has been edited--see comments]. Indeed, in Sweden, the equivalent of floating charges (företagshypotek on immovables and företagsinteckning on movables) created after 1 January 2004 are limited to 55% of the value of the debtor-company’s unencumbered assets (with the remaining value reserved for unsecured claims).
These kinds of significant limitations on secured creditors' rights are anathema in the United States, and given my U.S. training, I had been a strident "secured creditors über alles"-type guy. Having been exposed to these very different approaches from countries that I regard as populated by reasonable-minded, intelligent, generally commerce-friendly people, however, really opened my mind and made me think twice. For more of this kind of mind-opening study, take a look at the proceedings from a recent World Bank conference on secured transactions and insolvency law reform here.
We have a lot to learn from our friends around the world, and it's so darned FUN to travel (at least mentally) to exotic places with unfamiliar commercial and insolvency law systems. I hope to share some of my joy in the travel-and-learning process during my visit. Thanks again for having me!
2 comments:
Hi Jason
I don't quite recognise your description of subordination of the English floating charge.
What unsecured creditors get, the so-called "prescribed part", is a proportion of the "net property" (that would otherwise have been available to the floating charge holder). The proportion is 50% of the first £10,000 and 20% of the rest, with a total cap of £600,000.
So, any net property above £2.985 million goes wholly to the floating charge creditor (to the extent of its charge).
The reason for the prescribed part is that when the preferential status of sales and payroll taxes was abolished in the Enterprise Act 2002, the legislature wanted unsecured rather than floating charge creditors to benefit from that change. The prescribed part is the rough and ready mechanism for achieving that.
Good luck with the blogging!
Chris
Oh my gosh! First, I know you (or more precisely, your wonderful international insolvency blog), Chris, so I'm honored that you responded to my post. Your blog has taught me a lot!
What a way to stumble my way out of the gate--and with such an eminent audience! Sheepishly once again, I acknowledge that my original language was inaccurate (I'll edit it both here and in my book MS). I always had a nagging sense that I was describing it wrong. Thanks for pointing this out. Of course, section 176A of the Insolvency Act 1986 explains the prescribed part just as you have done here--it is the prescribed part, not the floating charge recovery, that is limited to £600,000 (so the floating charge holder is no longer subordinated in any net proceeds above about £3 million, and it retains its priority in about £2.4 million of those initial proceeds, too).
This is still a massively unwelcome and unexpected incursion into the rights of secured creditors from a U.S. perspective. Indeed, as I understand it, each COMPANY in an insolvent group is subject to a prescribed part, so the total set-aside could vastly exceed £600,000 within a large conglomerate. This is serious food for thought for policy makers on this side of the Pond (where recommendations like the "10 per cent fund" in the Cork Report have never gotten much traction--quite the opposite, secured creditors have fared better and better in insolvency reforms here, especially the latest in 2005, about which I'll blog more later . . .).
Thanks once again for straightening me out. I'm totally thrilled to have gotten your attention and received your guidance, Chris. Keep up the great work on your blog!
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