Is Full Preference for a Secured Claim in Insolvency Proceedings Justified?

Author:Anto Kasak
Pages:112-121
 
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112 JURIDICA INTERNATIONAL 28/2019
Anto Kasak
Mag. iur.
Attorney-at-Law
Partner, Kasak & Missik Law Of ce
Is Full Preference for
a Secured Claim in Insolvency
Proceedings Justi ed?
1. Introduction
Credit is the cornerstone of the economy, because credit develops the economy. The more credit there
is, the more an economy grows. The World Bank has supported this opinion, declaring that capital and
credit are the lifeblood of the modern economy.*1 Security instruments raise credit and thereby develop the
economy. This argument is based on the assumption that lenders will issue more credit if credit is protected
by security. The World Bank found also that secured transactions are of fundamental importance in a well-
functioning market economy.*2 The purpose of the security is to protect the investment. In other words, the
interests of the security-holder are safely protected up to the value of the encumbered assets. Furthermore,
if the debtor goes into bankruptcy, the claim of the security-holder is preferred to those of other, unse-
cured creditors. The secured creditor will receive the proceeds from the sale of the encumbered assets. As
Prof. Reinhard Bork has noted, all cross-border insolvency laws respect giving preference to secured claims
over unsecured ones.*3 Therefore, preference for secured claims protects the instrument of security, which
instrument is needed for healthy development of the economy. According to § 153 (1) and (2) of the Bank-
ruptcy Act of Estonia*4, a secured claim is to be preferred over unsecured claims to the extent of the value of
the encumbered assets, less the limited amount allocated to cover the payments related to the bankruptcy
proceedings under § 146 (1) of the same act of law. Financing the payments related to the insolvency pro-
ceedings from the proceeds from the sale of encumbered assets is another topic and beyond the scope of this
article. In any case, taking into consideration that this exception is minor (in some cases, the funds allocated
for this purpose might even not cover the costs of enforcement related to the encumbered assets), one can
state that secured creditors have full priority over unsecured creditors in Estonia.
Legal scholars, among them professors LoPucki, Warren, Klee, Cantlie, Ziegel, Symes, and Finch,
have published several papers questioning whether the security-holder indeed should be fully preferred in
World Bank. ‘Principles for E ective Insolvency and Creditor/Debtor Regimes’, available at http://pubdocs.worldbank.
org/en//ICR-Principles-Insolvency-Creditor-Debtor-Regimes-.pdf (most recently accessed on
..), p. .
Ibid., p. .
R. Bork. Principles of Cross-Border Insolvency Law. Cambridge: Intersentia , p. . – DOI: https://doi.
org/./.
Pankrotiseadus (Bankruptcy Act). – RT I , ,  (in Estonian).
https://doi.org/10.12697/JI.2019.28.13

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