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

Hungary Small Flag Hungary

Priority of secured creditors
Claims secured by security deposits (collateral securities)
Holders of collateral securities arranged before the time of opening liquidation proceedings are entitled to exercise their right to direct satisfaction, irrespective of whether liquidation is opened or not, and shall refund any excess collateral to, and settle accounts with, the liquidator. If the collateral holder fails to exercise his right to direct satisfaction within three months following publication of the opening of liquidation, he may seek satisfaction as a lien holder as set out in the following paragraph.

Claims secured by liens, mortgages and fiduciary collaterals
Lien holders and following the most recent amendment of Act XLIX of 1991 on Bankruptcy Proceedings and Liquidation Proceedings (the “Insolvency Act”) holders of fiduciary collaterals (an option right on a specific asset of the debtor established by way of security, the transfer / assignment of ownership, other right or claim by way of security – please refer to Question 1) may enforce their claims in priority in accordance with the following scenario. Where a lien was established, or a fiduciary collateral was arranged prior to the time of opening of liquidation proceedings, the liquidator deducts from the proceeds of the sale of the pledged property (or from the proceeds from the enforcement of a claim) the following costs (in the following statutory sequence):

(i) costs of works ordered by administrative decision required for fixing up the pledged property where it is considered to endanger lives and property;

(ii) the costs of keeping it in good repair, maintenance, costs of the sale of the pledged property;

(iii) taxes and public administrative fees which became due and payable following the opening of the liquidation proceedings;

(iv) costs of the enforcement of the claim;

(v) 1% of the net purchase price as liquidation expenses;

(vi) 7.5% of the net purchase price (proceeds from the enforcement of the claim),
and uses the remainder to satisfy the claims (principal, interest and other charges) for which such property or claim was pledged, in the sequence provided for in the Civil Code, if there is more than one lien (general ranking based on the establishment of the lien).

General order of satisfaction
The company’s debt is satisfied from the funds realised in the course of the liquidation in the following statutory order:

(i) liquidation costs;

(ii) the parts of a claim secured by a pledge that were not satisfied in priority before the time of opening liquidation proceedings up to the amount of the proceeds from the sale of the pledged property, exclusive of value added tax, shall also be used for satisfying claims secured by pledge; if there is more than one lien on the pledged property they shall be satisfied according to general rules under the Civil Code pertaining to the ranking of liens;

(iii) alimony and life-annuity payments, compensation benefits, income supplement to miners, which are payable by the debtor and, furthermore, monetary aid granted to members of agricultural cooperatives in lieu of household land or produce, to which the beneficiary is entitled over his / her lifetime;

(iv) with the exception of claims based on bonds, other claims of private individuals not originating from economic activities (in particular claims resulting from insufficient performance, compensation for damages or restitution, also including the amount of the guarantee obligations ordinarily expected in the given trade, as calculated by the liquidator), claims of small and micro companies and small-scale agricultural producers, and the receivables of the Common Capital Fund of Cooperative Credit Institutions, etc.;

(v) debts owed to social security funds, taxes and outstanding public dues enforced as taxes, sums payable to the State established in criminal proceedings, repayable State aid and financial aids from the European Union and other international resources by virtue of international agreements, as well as public utility charges and condominium maintenance fees, etc.;

(vi) other claims;

(vii) irrespective of the time and grounds of occurrence, default interests and late charges, as well as surcharges and penalty and similar debts;

(viii) claims, other than wages and other similar benefits if below double of the prevailing minimum wage or, in case of employees whose wages are paid on the basis of performance only, double the guaranteed salary specified in the Labor Code, and if it does not exceed six months’ average earnings held by:

(a) any member (shareholder) of such economic operator with majority control;

(b) any executive officer of the economic operator;

(c) any executive employee referred to in the Labor Code;

(d) the close relatives and domestic partners of the persons mentioned in subparagraphs (a)-(c);

(e) an economic operator under the debtor’s majority control;

(f) a body (person) benefiting from the debtor’s gratuitous commitments.

Based on the above statutory sequence and on the rules applicable to the enforcement of secured claims in liquidation proceedings, secured creditors have priority of payment over all other creditors, subject to the exception of enforcement costs and to the extent of their security.

Annuity-like claims [(iii)], claims of private individuals not originating from economic activities [(iv)] and debts owed to social security funds, taxes, outstanding public dues enforced as taxes and other sums payable to the State [(v)] rank ahead of all other claims [(vi)-(viii)].

Claims arising out of default interests and late charges, as well as surcharges, penalties and similar debts [(vii)], claims of members / shareholders (equity claims), claims of the debtor’s executive officers and other executive employees, claims of the debtor’s subsidiaries, and claims of anyone benefiting from the debtor’s gratuitous commitments, are subordinated compared to general claims [(vi)].

Hungarian insolvency law does not recognise the concept of contractual subordination, the statutory sequence set out above may not be altered by the parties. We note, that according to Section 404 of the Criminal Code any person who has powers to control the assets, or any part thereof, of the debtor, or has the opportunity to do so, following the order of liquidation, provides preferential treatment to any creditor in violation of the sequence of satisfaction specified in the Insolvency Act shall be found guilty of a misdemeanor punishable by imprisonment not exceeding two years (please refer to Question 11).

In order to ensure the priority ranking, the security holder must report its claim within 40 days from the time of opening liquidation proceedings. If the security holder fails to report its claim within 40 days, this does not prevent the sale of the pledged property; however, the proceeds must be handled separately and the security holder will be satisfied only if there are sufficient funds remaining after settlement is made according to the general rules of the order of satisfaction.

Unsecured claims shall also be reported within 40 days. The liquidator must register those unsecured claims against the debtor which are reported after 40 days, but within 180 days of the publication of the opening of liquidation proceedings. These claims must be satisfied if there are sufficient funds remaining following the settlement of the debts according to the general rules of the order of satisfaction. Failure to observe the time limit of 180 days constitutes a waiver of rights.

Italy Small Flag Italy

In bankruptcy proceedings, creditors and shareholders' claims are ranked as follows:

Administrative priority claims (crediti prededucibili): administrative priority claims rank ahead of all other creditors, provided that secured creditors keep the right of preferential satisfaction over the proceeds of sale of their collateral. Administrative priority is, for example, given to claims (i) for fees owed to insolvency practitioners or (ii) that have arisen either from certain pre- or post-commencement DIP financing or following the adjudication in bankruptcy;

Secured claims (crediti privilegiati): creditors with a mortgage, pledge or statutory priority claims (like employees or tax and social security authorities) are secured creditors. Among secured creditors, claims secured by a pledge rank ahead of claims with statutory priority over specific movable assets. Claims with statutory priority over specific real estate assets rank ahead of claims secured by a mortgage. Creditors with statutory priority are paid in the order expressly set out by law according to the nature of their claim. Nothing can be distributed to a lower class unless full satisfaction is obtained by the members of the higher class;

Unsecured claims (crediti chirografari): this category includes claims without security incurred before the debtor's bankruptcy;

Subordinated claims (crediti postergati): repayment of a loan made by a quotaholder to a limited liability company is subordinated to the claims of any other ordinary creditor in the distribution of bankruptcy assets, when, at the time the financing was granted, there was an abnormal disproportion between the borrower's indebtedness and net equity or the borrower's financial situation required an equity contribution rather than a loan. The same equitable subordination rules apply to certain intra-group down-stream and cross-stream loans;

Shareholders' contributions: shareholders' contributions can be reimbursed only when all the creditors of the company have been paid in full.

Spain Small Flag Spain

The Spanish Insolvency Act provides for two main categories of claims: (i) insolvency claims, and (ii) administrative expenses or credits against the estate.

The administrative expenses (“créditos contra la masa”) not included in the liabilities of the insolvency estate, being paid as they become due, are those that (i) generally arise after the declaration of insolvency, (ii) and are mainly originated to facilitate the insolvency procedure.

Insolvency claims, as claims filed before the declaration of insolvency, are divided into privileged (general and special), ordinary and subordinated (both unsecured credits).

Privileged credits can have a special or general privilege, depending on whether the security is created over a specific asset (special privilege) or over all of the debtor’s assets (general privilege).

Credits with special privilege generally include those in which collateral consists of specific property or rights (mortgage or pledge) or equivalent rights (financial lease agreement for the leased property). The privilege will only cover the part of the claim not exceeding the value of the respective guarantee.

Credits with general privilege include (i) credits relating to salaries (subject to the legal limits of triple the minimum inter-professional salary) and indemnity for termination of agreements, occupational health and safety claims, provided they are incurred prior to the insolvency; (ii) tax and social security withholdings; (iii) credits for individual work by independent contractors and those corresponding to authors for the assignment of licensing rights over intellectual property works, accrued during the six months prior to the declaration of insolvency; (iv) tax credits, other credits of public entities and Social Security credits up to a maximum of 50% of their value; (v) credits arising from tort liability; and (vi) finally, 50% of the credits held by the creditor at whose request has been declared the insolvency.

Finally, creditors’ claims can also be considered as subordinated (those which are legally relegated to a position below ordinary credits) in the following cases: (i) notice of the credit is given late, (ii) contractual covenant, (iii) its ancillary nature (e.g. surcharges and interest, except those having an in rem guarantee), (iv) penalty (fines), or (v) the credit holder’s personal status (parties specially related to the debtor, or parties that have executed bad faith actions that are detrimental to the insolvency proceedings or that obstruct performance of the agreement to the detriment of the insolvency).

Insolvency Act also foresees that creditors entering into a refinancing agreement shall not be affected by equitable subordination for being considered as: (i) de facto directors, when said creditors have undertaken certain obligations in connection with the viability plan ; nor (ii) as specially related persons for purposes of equitable subordination, when said creditors have become shareholders of the debtors as a result of a debt-for-equity swap implemented in the context of a statutory refinancing agreement.

Japan Small Flag Japan

In bankruptcy proceedings, creditors’ claims are ranked in the following order:

  1. estate claims (e.g. fees for trustees, administrative expenses, tax claims which became due within one year before the commencements of bankruptcy proceedings, employee compensation for their work within three months before the commencements of bankruptcy proceedings);
  2. superior bankruptcy claims (e.g. tax claims and employee compensation which are not estate claims);
  3. ordinary bankruptcy claims; and
  4. subordinated bankruptcy claims (e.g. interests after the commencement of bankruptcy proceedings).

In special liquidation proceedings, creditors’ claims are ranked in two categories. Claims in the first category basically correspond to estate claims and superior claims in bankruptcy proceedings. Claims in the second category basically correspond to ordinary bankruptcy claims and subordinated bankruptcy claims in bankruptcy proceedings. The first category is superior to the second category.

The priority of shareholders is the lowest both in bankruptcy proceedings and special liquidation proceedings. Japanese law does not have a rule of equitable subordination.

Denmark Small Flag Denmark

The order of priority of the creditors is governed by the Danish Insolvency Act.

According to the order of priority, costs and fees related to the administration of the estate are covered first.

Next costs related to a vain restructuring attempt or vain attempts at an over-all arrangement with the debtor’s creditors prior to the insolvency are covered.
Employees’ claims are covered next.

Next claims are covered that concern duty on goods that are subject to duty, eg alcoholic and tobacco goods.

Next, the unsecured creditors are covered, eg an ordinary receivable based on an invoice, tax and VAT claims etc.

Finally, claims for interest after the issue of the insolvency order, gifts and fines are covered.
Creditors that hold a charge or another type of security over the debtor’s as-sets are covered separately as the proceeds from the sale of the charged asset go directly to the secured creditor.

Australia Small Flag Australia

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.

Cayman Islands Small Flag Cayman Islands

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.

Switzerland Small Flag Switzerland

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.

Germany Small Flag Germany

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:

  1. interest accrued after insolvency proceedings have been opened;
  2. costs incurred in asserting claims in the insolvency proceedings;
  3. fines and penalties in criminal and administrative proceedings;
  4. claims to gifts promised by the debtor; and
  5. 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.

Mexico Small Flag Mexico

The proceeds obtained from the liquidation of the assets of the insolvent entity will be applied to make payments to creditors in the following order of priority:

First, labor claims for salaries and severance for the calendar year immediately preceding the insolvency judgment (the “Insolvency Judgement”).

Second, claims derived from financing incurred for the management of the estate of the insolvent entity or financing that is indispensable to maintain the ordinary operations of the company and the necessary liquidity during the insolvency proceeding (“DIP Financing”), in each case, as approved by the Mediator or by the Insolvency Court.

Third, liabilities and obligations of the estate of the insolvent entity (i.e. management costs, fees and expenses incurred after the Insolvency Judgment is issued).

Fourth, costs and expenses derived from judicial and extrajudicial proceedings for the benefit of the insolvency estate.

Fifth, amounts paid to secured creditors as described below.

Sixth, labor claims (different than those described in first paragraph) and tax claims.

Seventh, claims of creditors that qualify as “privileged” under Mexican commercial laws (e.g. creditors that are entitled to retain an asset until payment is made), but only to the extent of the value of the respective privilege.

Eighth, claims of unsecured creditors.

Ninth, claims of (a) subordinated creditors, and (b) creditors that are related parties of the insolvent entity (“Subordinated Creditors”).

Notwithstanding the foregoing, claims of secured creditors would be paid on a “super-priority” basis up to the amount of the respective collateral, and only the following claims would have priority over the amount of such collateral:

First, labor claims for salaries and severance for the calendar year preceding the issuance of the Insolvency Judgment.

Second, litigation expenses related for the defense or recovery of secured assets.

Third, necessary expenses for the repair, maintenance and disposition of the secured assets.

British Virgin Islands Small Flag British Virgin Islands

In general, the following priorities apply:

  1. Set-off: An unsecured creditor may be able to take advantage of statutory set-off provisions where there is mutuality between credits and/or debts to the extent that there are any funds of the debtor’s in its hands. In addition, netting agreements continue to be enforceable, save in cases of fraud or misrepresentation.
  2. Secured creditors: secured creditors can enforce against their collateral notwithstanding the supervening liquidation, and may also add interest to their security, subject to the note at 3 below.
  3. The costs and expenses of the liquidation: this includes the liquidator’s remuneration (sanctioned, if necessary). If the assets of the company that are not subject to any security interest are insufficient to pay the liquidator’s costs and expenses and the preferential claims, those claims take priority over any floating charge and will be paid out of the assets subject to the floating charge. Any remaining assets may be applied towards satisfying the floating-charge-holder’s claim: section 208 IA.
  4. Preferential creditors: this class comprises—

    i) the wages and salary of present and past employees in respect of the period of six months immediately before the commencement of liquidation up to US $10,000;

    ii) accrued holiday pay in respect of the period before the commencement of liquidation up to US $10,000;

    iii) any amount due by the debtor to the BVI Social Security Board in respect of employees’ contributions deducted from the employee and in respect of employers’ contributions payable for six months immediately before the commencement of the liquidation;

    iv) any amount due in respect of pension contributions or medical-insurance contributions payable in the period of twelve months immediately before the commencement of the liquidation, including amounts deducted from employees, up to the amount of US $5,000 per employee;

    v) sums due to the government of the Virgin Islands in respect of any tax, duty (including stamp duty), licence fee, or permit, up to the total amount of US $50,000; and

    vi) sums due to the Financial Services Commission in respect of any fee or penalty up to the total amount of US $20,000.

    Preferential claims rank equally between themselves, and if the assets of the company are insufficient to pay them all in full, they are paid rateably.

  5. All other unsecured creditors’ claims.
  6. Subordinated claims: a creditor may acknowledge or agree that in the event of a shortfall of assets he will accept a lower priority in respect of a debt than that which he would otherwise have under the IA, that acknowledgment or agreement takes effect.
  7. Post-commencement interest: any creditor in a liquidation is entitled to claim interest on its debt in respect of the period after the commencement of the liquidation. Payment of post-commencement interest will be made out of any surplus that remains after all claims in the liquidation have been paid in full before being applied for any other purpose.
  8. Members: Any surplus remaining after paying the costs and expenses of liquidation and the claims and interest must be distributed among the members of the company in accordance with their rights under the company’s memorandum and articles of association. If the company has preferential shares and ordinary shares, distribution among members will reflect this.

Bermuda Small Flag Bermuda

Debts which are secured by a mortgage or fixed charge will be satisfied from the proceeds of sale of the property secured (rule 73 Companies (Winding-Up) Rules 1982). The liquidator, however, will review the security and monitor the sale process since any excess amount a secured creditor recovers will be payable to the liquidation estate for distribution to stakeholders. If the proceeds from the sale of the property do not fully satisfy the debt secured, the creditor will be an unsecured creditor for the remainder of the debt.

Creditors and shareholders are paid in the following priority:

  1. Costs of insolvency proceedings: costs and expenses incurred in the company's winding-up, including the liquidator's remuneration.
  2. Sums due to employees under their employment contracts.
  3. Preferred payments, including:
    a. unpaid taxes;
    b. contributions to occupational pension schemes; and
    c. liability for worker’s compensation.
  4. Debts secured by a floating charge.
  5. Unsecured debts.
  6. Debts due to shareholders in their capacity as shareholders.
  7. Any residual value or equity after all valid creditor claims have been satisfied in full will be returned to shareholders pari passu according to their shareholdings.

Each category must be paid in full before payment of creditors in the subsequent category. Creditors in the same category rank equally among themselves but a company can enter into an agreement with its creditors, prior to the commencement of a liquidation, under which certain debts are contractually subordinated to other debts.

Greece Small Flag Greece

After deducting judicial costs, the expenses for the administration of the insolvency estate, which include the temporary and final remuneration of the bankruptcy trustee and of any creditor group credits, in general, any sale proceeds will be distributed between creditors based on the type of privilege they enjoy.

Namely the following priority of payments applies during bankruptcy proceedings:

General privileges
a. The claims from the financing of the debtor’s business of whatever nature, made in order to ensure the continuation of its activities and of its payments, its rescue and the maintaining or increase of its property based on the rehabilitation agreement or the reorganization plan. The claims of persons who, based on the rehabilitation agreement have contributed goods or services towards the purpose of continuing the activity of the business and the payments, also have the same privilege for the value of goods or the services they have contributed. Also, the same privilege enjoy the claims from financing of any nature, provision of goods and services to the debtor’s business, given for the purposes of the rehabilitation of restructuring plan and arising at the time period of the negotiations for the conclusion of rehabilitation agreement, which may be up to a maximum six months from the date of filing of the ratification application. Such privileges exist irrespective of the ratification or not of the rehabilitation agreement, provided that the purposes of the financing or of the provisions of goods or services and the relevant priority were expressly provided for in the rehabilitation agreement or in contracts concluded at that time. To be noted that such privileges are not granted to shareholders or partners for their contributions in cash or in kind in the context of a capital increase of the debtor (the New Money Claims).

b. The claims of employees and claims for fees, expenses and compensation for lawyers remunerated with a fixed periodic payment, provided that these have ensued within the last two years prior to the declaration of insolvency. Employees’ claims for dismissal compensations services, claims of the State for VAT and withholding and imposed taxes with surcharges of any nature and accrued interest encumbering such and claims for social security contributions.

c. Claims of farmers or agricultural co-ops from the sale of agricultural products, if these arose during the last year prior to the declaration of insolvency.

d. Claims of the State and local government bodies for all causes, together with surcharges and accrued

Special Privileges
Also the GIC provides for special privileges for secured creditors and claims having a lien over a certain movable or immovable object or over a quantity of money are ranked in the following order:

a. Claims for expenses incurred for maintaining the property in the last six months before the declaration of bankruptcy.

b. Claims for capital with interest of the two (2) last years for which there is a pledge or a mortgage or a prenotice of mortgage, in case of real property.

In case of the sale of the business as a whole (articles 135 et seq.), if there are special privileged creditors over individual items of the debtor's estate, these are ranked specifically for the amount of the part that corresponds to the transferred item over which a special lien exists, the value of which is taken into account for their ranking.

General privileges and special privileges will be satisfied in case of concurrent claims as follows:

The general privileges claims are satisfied up to one third of the sale proceeds that has to be distributed to creditors and the two thirds are given to satisfy the special privileges for asset maintenance and secured claims.

The claim of the higher rank is preferred over the claim of a lower rank and if claims are of the same rank, they are satisfied pro rata.

If, apart from the general and special privilege claims there are non-privileged claims, then, following the full satisfaction of the “New Money claims”, general privileges claims are satisfied up to sixty five percent (65%), special privileges claims up to twenty five percent (25%) and the non-privileged claims are satisfied up to ten percent (10%) of the amount of the insolvency sale proceeds that have to be distributed to creditors pro rata. If there are special privilege claims and non-privileged claims, then the first are satisfied up to ninety percent (90%) and the second up to ten percent (10%) of the amount of the insolvency sale proceeds, which has to be distributed to the creditors pari passu. If there are general privilege claims and non-privileged claims, then following the full satisfaction of the New Money Claims, the remaining general privilege claims are satisfied to a percentage up to seventy percent (70%) of the proceeds of the insolvency sale that has to be distributed to creditors, while the non-preferred creditors are satisfied by the remaining percentage pari passu.

Moreover the following should be noted regarding the applicable creditors classification:
In case the business is sold as a whole, if there are special privileged creditors (i.e. pledgees or mortgagees) over specific assets of the debtor's total assets, these are ranked specifically for the amount that corresponds to the value of the asset.

If the proceeds from the sale of an immovable, are distributed before the proceeds from the sale of movables, or simultaneously, mortgage creditors, who have not been fully satisfied from the value of the immovable property, concur as to the remaining balance with the unsecured creditors, in any distribution with the latter, provided that the claims of privileged creditors have been verified.

If before the distribution of the price of an immovable, cash distributions are made from the movable property or from a quantity of money, the general privileged or mortgage creditors whose claims have been verified, concur to these for the full amount of their credits. In this case, if the general privileged creditors or the mortgage creditors are ranked in the price of an immovable for the entirety of their claims and have received such amounts, the unsecured group is substituted in their place by the amounts they may have received from the movable property or a quantity of money.

If the general privileged or mortgage creditors are ranked in the price of the immovable property for only a part of their claims, they are ranked for the remainder as unsecured with the other creditors. In case the general privileged or mortgage creditors have received more than their final share, the unsecured creditors are substituted in their place for the amount received in excess of their final share. Those of the general privileged creditors or mortgage creditors, who are not ranked beneficially in the price, are considered unsecured creditors.

Singapore Small Flag Singapore

Secured creditors stand outside the liquidation, and their entitlement to realise their security is unaffected by the appointment of a liquidator. If the security is inadequate, they may prove as unsecured creditors for the balance.

Certain debts as set out in section 328 of the Companies Act have priority over a floating-charge holder and unsecured creditors. If there are insufficient assets to pay any class of preferred debts, the debts within the class abate in equal proportions. Thereafter, the debts attributable to subsequent classes and other unsecured creditors will not be paid.

Any residual assets of the company remaining after payment of all secured, preferred and unsecured creditors will be divided amongst the company’s shareholders. Where there are preference shares, their entitlements or preferences will be honoured in accordance with the terms of their issue as set out in the memorandum and articles of association of the company. Finally, the ordinary shareholders will participate equally in all remaining assets.

United Kingdom Small Flag United Kingdom

On the insolvency of a debtor, proceeds from the realisation of assets must be distributed by an insolvency practitioner, in simple terms, as follows: firstly, to fixed charge holders; secondly, in payment of the administrator/liquidator’s fees and expenses; thirdly, to preferred creditors; fourthly, to floating charge holders; fifthly, to unsecured creditors; sixthly, as interest on all unsecured debts post-liquidation and finally to the shareholders.

Preferred creditors include certain employee claims and contributions to pension schemes. In addition, a “prescribed part” of the proceeds from realising the assets covered by a floating charge must be set aside and made available to satisfy unsecured debts. This is 50% of the first £10,000 of net floating charge realisations plus 20% of anything thereafter, up to a cap of £600,000.

There is no concept of equitable subordination in England and Wales.

Indonesia Small Flag Indonesia

The Bankruptcy Law recognizes 3 (three) types of creditor, ie preferred creditors, secured creditors, and unsecured creditors:

a. Preferred Creditors (Kreditur Preferen) are creditors prioritized by law. Preferred creditors are entitled to payment in full from the bankruptcy estate. Preferred claims are tax claims and post-bankruptcy/delay of payment claims, including among others, the fees of the receiver/administrator, fees of experts appointed by the Supervisory Judge, and the wages of the employees of the bankrupt’s debtor.

b. Secured Creditors (Kreditor Separatis). These are creditors who hold security rights (eg fiduciary security, land mortgage, hypothec or other security rights) over some or all of the debtor’s assets.

c. Unsecured Creditors (Kreditor Konkuren). These are ranked as follows:

  • Specific statutory preferred creditors whose preference relates only to specific assets;
  • General statutory priority creditors; and
  • Non-preferred unsecured creditors.

Under the Bankruptcy Law, employees may “resign” from the bankrupt debtor or be terminated by the appointed receiver. If the employer is declared bankrupt, to terminate their employment, the employer (ie bankrupt debtor) must serve them 45 calendar days prior notice, which triggers payment of a severance package to each employee depending on their term of service. The severance package will follow the provisions under the Law No. 13 of 2003 on the Employment.

In the bankruptcy proceedings, the claims are ranked: 1. Secured Creditors and 2. Unsecured Creditors. Preferred Creditors are not ranked because their entitlement is guaranteed by law. The Bankruptcy Law is silent on equitable subordination as is recognized in other jurisdictions, in which the court can reorganize the creditor’s debt in the light of any inequitable conduct. However, if Secured Creditors can prove that a portion of the debt that they are owed might not be settled by the proceeds from the sale of the secured objects, for the remaining outstanding debt they can be treated as Unsecured Creditors.

France Small Flag France

Insolvency proceedings are concluded with distribution of the company value to the different claimholders in the selected assets of the debtor. The value distribution follows a predetermined rank order. Creditors’ ranking is, however, very complex to describe since it will depend on many factors. However, the priority rules of claims payment are generally the following: (i) employee-related claims (AGS – Association pour la gestion du régime de garantie des créances de salariés) benefit from a preferential status (“superprivilège des salariés”); (ii) costs of the insolvency proceedings; (iii) post-petition claim benefit from a statutory privilege (“new money” priority); (iv) claims secured through security interests over immovable property, specific security interests over movable property, in particular security interests to which a lien (droit de retention) is attached; (v) claims that have arisen after the judgment opening the insolvency proceeding and which are necessary to conduct the proceeding, and all other claims according to existing priority rules.

During liquidation proceedings, claims secured by a mortgage, by a pledge with retention of title or by a registered lien over property, plan or equipment, rank ahead of post-petition claim.

Israel Small Flag Israel

The priority among creditors and stakeholders upon insolvency of a company is as follows:

  • Liquidation and/or receivership costs. Liquidation and receivership costs are deducted first from the proceeds of the debtor's assets.
  • First-ranking tax charges. The tax authorities has, by statute, a first-ranking charge over certain assets, in order to secure the collection of certain tax debts, mainly with regard to real estate transactions.
  • Holders of Fixed charges. If there is more than one duly-perfected security interest over the same asset, they rank according to their date of registration or creation (see Question 1, Formalities).
  • Statutory preference creditors. The following creditors are prioritized by statute (Article 354 of the Companies Ordinance):

    employees, with respect to unpaid wages up to a certain amount; tax authorities, with respect to tax debts other than first-ranking tax charges (see above, First-ranking tax charges) that became due in the one-year period immediately prior to start of the insolvency proceedings; and landlords, with respect to certain rent payments, as well as other creditors that are prioritized by law. [NOTE: consider: “as well as other creditors that are prioritized by the Companies Ordinance” or “by the Companies Ordinance and other statutes” – as applicable]
  • Floating charge holders. If a floating charge crystallises and becomes a fixed charge before the start of the insolvency proceedings, the creditor is considered a fixed charge holder with respect to the assets caught by the floating charge, and is treated accordingly (see above, Fixed charge holders).
  • Unsecured creditors. All unsecured creditors rank equally. Any remaining funds are distributed pro rata according to their respective debts.
  • Shareholders. If a company is in debt to its shareholders, the court can, under certain circumstances, decide that the shareholder creditors rank last, after unsecured creditors. Absent such court decision, shareholders are considered unsecured creditors, unless they have a duly perfected security interest, in which case they are secured creditors.

The Netherlands Small Flag The Netherlands

In bankruptcy, the assets of the bankrupt will form the bankruptcy estate, from which the trustee will make distributions to the creditors, pursuant to their statutory ranking. Below is a summary of the ranking of claims in a Dutch bankruptcy.

  • Secured creditors: Secured creditors are in principle not affected by a bankruptcy insofar it concerns their recourse on the asset which is secured for their benefit.
  • Estate and preferred creditors: Before the ordinary creditors, certain preferred creditors (designated by law) will be paid out of the bankruptcy estate in full (insofar possible). These preferred creditors include the Dutch Tax Authorities, any employees of the relevant entity and the trustee himself for his salary.
  • Ordinary creditors: Claims of creditors rank pari passu, except for the estate, preferred and subordinated claims. This means that these ordinary creditors will be paid out of the available funds in the bankruptcy estate (after estate and preferred creditors are paid out), pro rata to the amount of their claim.
  • Subordinated creditors: Whether a certain claim is subordinated will have to follow from the relevant agreement from which the claim follows. Subordinated claims will be paid after ordinary claims are fully paid. We do not have equitable subordination in the Netherlands, although there has been recent discussion on this.
  • Providers of equity: If all creditors are paid in full and there are remaining funds in the bankruptcy estate, these will be distributed to equity providers of the entity. Clearly, any distribution to equity providers is very rare.

Luxembourg Small Flag Luxembourg

In general, the priority of preferential rights in the bankruptcy is as follows (without limitation):

  • legal expenses incurred after the opening of an insolvency proceeding in the interest of all the creditors;
  • certain employee claims;
  • social security contributions (part to be paid by the employees);
  • claims in favour of Luxembourg tax authorities;
  • social security contributions (part to be paid by the employer); and
  • contributions to professional associations.

Shareholders are treated as subordinated creditors unless they have other contractual arrangements in place as creditors. Luxembourg law does not recognise the concept of equitable subordination.

Belgium Small Flag Belgium

The general principle of a bankruptcy is that all creditors must be treated equally (paritas creditorum); proceeds of the bankruptcy estate will be distributed to the creditors pari passu. This principle does not apply to three groups of creditors: creditors of the bankruptcy estate (e.g. the trustee’s fees, claims that relate to the performance of existing agreements), creditors with special preferences (e.g. mortgagees and pledgees), and creditors with general preferences (e.g. employees, tax debts, social security debts).

There is no equitable subordination. Few courts have, however, decided to subordinate a creditor’s claim if unlawful conduct by such creditor is established.

Argentina Small Flag Argentina

The law provides the following categories: credits with special preferences, credits with general preferences and common credits with no preference.

Beyond those categories, the law establishes that expenses related to preservation of the assets as well as expenses and fees of the court’s officers should be paid when due and at any moment and with preference even over the ones with special preference.

Having said that, the rank of preferences is as follows:

Credits with special preferences

  • Credits for expenses related to the construction, improvement and maintenance of certain assets of the debtor.
  • Labour credits for salaries due to the employee for six months and for severance and other labour credits over existing stock, raw materials and machinery located in the place where the employee works.
  • Credits for taxes on property and assets over those assets.
  • Credits secured with mortgage, pledge or warrants over the assets that guarantee those credits and credits with bonds secured with special or floating guarantee.
  • Credits for sums owed to a withholding party retaining property of the debtor.
  • Credits secured with naval or aeronautical mortgages.

The preference can be extended to the interests for 2 years of the principal in credits secured with mortgages and pledges and for certain labour credits.

Credits with general preferences

  • Labour credits (credits for six months salaries, severance payments and indemnification for health claims due to the employee) including interests accrued during two years.
  • Credits for amounts due to the social security system.
  • If the debtor is an individual: credits for funeral expenses, illness related expenses of their last six months of life and other amounts due.
  • Credits for taxes.
  • Credits for amounts due on credit bills accepted up to AR$ 20,000 (USD 1,250 approx.) in each case.

After paying special and general credits, common credits with no preferences as well as subordinated credits shall be paid.

United States Small Flag United States

The U.S. Bankruptcy Code provides for an absolute priority scheme by which creditors are paid before shareholders in accordance with their respective priorities under applicable law. Similarly situated creditors are grouped together and entitled to their pro rata distribution of a debtor’s property depending on the size of each creditor’s claim. As a general matter, secured creditors with blanket liens are entitled to a recovery before unsecured creditors, and unsecured creditors are entitled to a recovery before shareholders. However, certain provisions of the U.S. Bankruptcy Code provide for special protections for certain creditors. For example, section 1110 of the U.S. Bankruptcy Code allows aircraft financiers to repossess their collateral without the need to lift the automatic stay if the debtor does not agree to perform all of its obligations before 60 days from the bankruptcy filing date. Additionally, various safe harbor provisions in the U.S. Bankruptcy Code (i.e., sections 555, 556, and 559 through 562 of the U.S. Bankruptcy Code) protect derivative contract counterparties, allowing them to exercise setoff rights and liquidate or terminate such contracts postpetition without the need to lift the automatic stay.

Certain stakeholders that would otherwise only be entitled to a general unsecured claim are entitled to priority payment pursuant to section 507(a) of the U.S. Bankruptcy Code. Included in these priorities are claims related to (a) administrative expenses that fall under section 503(b) of the U.S. Bankruptcy Code, which sets forth expenses that are required to administer the bankruptcy case itself, (b) employee wages earned in the 180 days prior to a bankruptcy filing (up to a statutorily imposed cap), (c) unpaid contributions to employee benefit plans during the 180 days prior to a bankruptcy filing, and (d) certain prepetition taxes. Additionally, the U.S. Bankruptcy Code provides for certain “superpriority” claims that come before payment of other priority claims set forth in 507(a), such as claims on account of postpetition financing or claims for failure to provide adequate protection.

A debtor must also satisfy a number of statutorily imposed requirements before it may reject a collective bargaining agreement with one of its unions or avoid payment of retiree and pension benefits. In particular, sections 1113 and 1114 of the U.S. Bankruptcy Code generally provide, among other things, that before modifying or rejecting any collective bargaining agreement or modifying or terminating any retiree obligations, a debtor must demonstrate that it has made a proposal to the affected union representative or retiree committee, that the union representative or retiree committee has refused to accept the modifications without good cause, and that the balance of the equities favors such modifications.

A bankruptcy court may, in limited circumstances subordinate one otherwise pari passu claim to another or recharacterize a debt claim as equity. Equitable subordination is statutorily provided for in section 510(c) of the U.S. Bankruptcy Code and is meant to remedy inequitable conduct by one party that results in injury to other creditors. In determining whether inequitable conduct should result in equitable subordination of a creditors claim courts will look to whether: (a) the claimant engaged in some type of inequitable conduct; (b) the misconduct resulted in injury to other creditors or conferred an unfair advantage on the claimant; and (c) equitable subordination would be inconsistent with the provisions of the U.S. Bankruptcy Code. Recharacterization on the other hand allows a bankruptcy court to recharacterize a debt claim as equity when the circumstances indicate that the debt transaction was actually an equity contribution. The factors that a bankruptcy court considers in deciding whether to recharacterize alleged debt as equity are as follows: (1) names given to instruments, if any, evidencing alleged indebtedness; (2) presence or absence of fixed maturity date and schedule of payments; (3) presence or absence of fixed rate of interest and interest payments; (4) source of repayments; (5) adequacy or inadequacy of debtor’s capitalization; (6) identity of interest between creditor and stockholder; (7) security, if any, for advances; (8) corporate debtor’s ability to obtain financing from outside lending institutions; (9) extent to which advances were subordinated to claims of outside creditors; (10) extent to which advances were used to acquire capital assets; and (11) presence or absence of sinking fund to provide repayments.

Poland Small Flag Poland

As a rule, creditors’ receivables are divided into four categories, and receivables in lower categories may not be satisfied from the general funds of the bankruptcy estate before all receivables in a higher category are fully satisfied. Within each category, each receivable is satisfied pro rata to the total value of receivables in that category. Preferential “first ranking” debts include, among other things, the costs of the bankruptcy proceedings, debts created by the bankruptcy trustee, social security claims and unpaid remuneration owed to employees. The most important change to the ranking of creditors’ debts starting from 1 January 2016 was to remove the preference for tax debts i.e. they are now in the same category as other non-preferred debts.

Claims secured with certain in rem security interests are satisfied within a separate class from the proceeds of the liquidation of the encumbered assets.

The relationships between various classes of creditors are often governed by intercreditor agreements. However, practice shows that Polish bankruptcy courts and relevant bankruptcy officers are rather reluctant to give effect to contractual subordination under such arrangements.

Receivables owed under loans or other similar transactions granted to the bankrupt entity by equity holders who have 10% or more of the votes within five years from the date of declaration of bankruptcy are to be satisfied in the last category of claims.

Ireland Small Flag Ireland

In an Irish corporate insolvency, proceeds are generally distributed in the following order:

  • if the receiver/liquidator is appointed to a company that has been in examinership, the fees, costs and expenses of the examiner will rank prior to all other claims, including those of a fixed charge holder;
  • the costs and expenses of the receiver/liquidator, including with respect to all taxes, including capital gains tax (“CGT”), arising on the sale of the fixed charge assets, rank ahead of the fixed charge holders;
  • the fixed charge holders are entitled to the net proceeds of the sale of the fixed charge assets (after the costs and expenses of the receiver) up to the value of the secured debt – any surplus debt can be claimed by the charge holder as an unsecured creditor;
  • if the receiver/liquidator is appointed to a company that has been in examinership, any liabilities of the company that have been certified by the examiner as having been necessarily incurred to enable the formulation of a Scheme of Arrangement with respect to the company will rank ahead of all creditors other than fixed charge holders;
  • certain social insurance deductions collected by the company from employees in respect of employees (known as “super-preferential creditors”) are considered to be held on trust for the Irish Revenue Commissioners;
  • the costs and expenses of the receiver/liquidator, including with respect to all taxes, including CGT, arising on the sale of the floating charge assets, rank ahead of preferential creditors and the floating charge holder; and
  • certain claims of statutorily preferred creditors will rank ahead of and be paid in priority to the floating charge holder, including (a) employees’ salaries and unpaid holiday entitlements, (b) unpaid taxes and employers' social insurance contributions, (c) pensions contributions and (d) commercial rates rank ahead of and paid in priority to the floating charge holder.

All claims in one category receive full payment before the balance is distributed to the creditors in the next category. When proceeds are insufficient to meet the claims of one category in full, payments for that category are distributed on a pro rata basis.

In a receivership, where there are secured creditors that have prior ranking security over some or all of the assets over which the receiver has been appointed, the receiver must apply the proceeds in accordance with the ranking of the debt, notwithstanding that he or she may have been appointed by a junior-ranking secured creditor.

Whilst creditors, including shareholders, may contractually agree to subordinate their debt claims to those of other creditors or classes of creditors, and such contracts will be enforced by the Irish Courts, Irish law does not have a concept of “equitable subordination” that would be imposed on any class of creditor, including a shareholder that is also a creditor.

Updated: September 11, 2017