How do creditors and other stakeholders rank on an insolvency of a debtor? Do any stakeholders enjoy particular priority (e.g. employees, pension liabilities)? Could the claims of any class of creditor be subordinated (e.g. equitable subordination)?
Restructuring & Insolvency
When a company is wound up, the statutory distribution waterfall in Australia generally provides that secured creditors are paid first in priority to unsecured creditors. There is an exception to this for employee entitlement claims. During a receivership, winding up (or under a deed of company arrangement), the entitlements of employees have priority over the proceeds available from a realisation of assets subject to a circulating security interest (formerly a floating charge).
The remuneration, costs and expenses of insolvency practitioners appointed will be afforded priority over all creditors’ claims, including employees.
There is no concept of equitable subordination under Australian law and shareholder loans generally rank equally with unsecured claims. The only shareholder claims that are subordinated to unsecured claims are:
- claims for a debt owed to a shareholder in that person‘s capacity as a shareholder; and
- claims arising from the buying, holding, selling or other dealing in shares of the company.
Otherwise, the relationship between creditor groups is very much a feature of contract and Australian courts will generally give effect to whatever contractual arrangement and/or structural subordination arrangements a company and its creditors have agreed to, even where doing so leaves whole creditor groups out of the money.
The legal rights of secured creditors are unaffected by the liquidation of a company and will be permitted to enforce their security by, for example, selling any charged asset in order to secure repayment of the sum owed. However, whilst secured creditors rarely participate in the liquidation process, in the event that the sale proceeds realised for a charged asset are insufficient to discharge the outstanding debt, a secured creditor may rank as an unsecured creditor in the liquidation for the balance of the debt.
Cayman law provides for a very limited class of preferential creditors. Such preferred debts include wages accrued during the four months immediately preceding the commencement of the liquidation, payments due in respect of any medical health insurance premium and any taxes due to the Cayman Islands Government. Under the Companies Law, preferred creditors rank ahead of both unsecured and secured creditors, where the secured creditor's security is in the form of a floating charge but behind the liquidation expenses (including the liquidator's remuneration and legal expenses).
The general body of unsecured creditors will rank pari passu in respect of their claims in the liquidation and the quantum of any distribution made to such creditors will be determined by the value of any realisations achieved by a liquidator in the liquidation.
Rights of set off and subordination are recognised under Cayman Islands law, although a creditor which extended credit to a company at a time when it had notice of a winding-up petition cannot offset such a debt against the debtor company. Netting agreements relating to financial contracts (including multilateral netting) will prevail over the statutory set-off provisions.
Secured claims are satisfied directly out of the net proceeds from the realisation of the collateral. Should the proceeds not be sufficient to satisfy the claim of the secured creditor, the remainder of the claim ranks as an unsecured and non-privileged claim.
Unsecured claims are divided into three classes. Insofar as corporate debtors are concerned, the first class consists of certain employee claims up to a maximum amount of currently CHF 148,200 per employee as well as certain pension related social security claims, the second class includes claims of various contributions to social insurances and all other claims are comprised in the third class. Claims in a lower ranking class will only receive dividend payments once all claims in a higher ranking class have been satisfied in full and claims within a class are treated on a pari passu basis.
Subordination may result from a contractual subordination or an equitable subordination:
- Contractual subordination comes in two forms, i.e. (i) in the form of a deep subordination within the meaning of Art. 725 para. 2 of the Swiss Code of Obligations (CO) where the creditor has agreed to come 'last in row' and (ii) in the form of a bilateral subordination (Nachrang) which only benefits selected creditors. The treatment of the former category is well established under Swiss law whereas the treatment of the latter category is disputed in an insolvency context.
- The concept of equitable subordination is being discussed primarily for shareholder and certain other affiliated parties' loans where funds were made available to a corporate debtor in a financial distress situation where no other third party financing would have been available. If admitted, an equitable subordinated claim would be treated in the same way as a claim subject to deep subordination.
It is generally distinguished between the
- costs of the proceedings,
- other liabilities of the estate (sonstige Masseverbindlichkeiten), ie any liabilities incurred by the (preliminary) insolvency administrator in the administration of the estate and
- general or secured insolvency claims.
General insolvency claims are those existing prior to the opening of the insolvency proceedings. They receive a dividend of the proceeds from the realisation of the estate’s assets after all costs of the proceedings and all liabilities of the estate have been fully satisfied.
Secured claims are general insolvency claims, but the security interest will entitle the creditor to separate satisfaction from the proceeds of the realisation of the collateral. To the extent that the secured claim is not satisfied in full by the realisation of the collateral, the secured creditor is entitled to a dividend pari passu with the other general (unsecured) insolvency claims in respect of the balance.
Certain claims are subordinated by law (Sec. 39 Insolvency Code), including:
- interest accrued after insolvency proceedings have been opened;
- costs incurred in asserting claims in the insolvency proceedings;
- fines and penalties in criminal and administrative proceedings;
- claims to gifts promised by the debtor; and
- shareholder loans.
With the exception of loans granted under an insolvency plan, super priority and preferred claims are foreign to German insolvency law. Claims of employees are general insolvency claims.