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

• Author: Anto Kasak
• Pages: 112-121

112 JURIDICA INTERNATIONAL 28/2019

Anto Kasak

Mag. iur.

Attorney-at-Law

Partner, Kasak & Missik Law Offi ce

Is Full Preference for

a Secured Claim in Insolvency

Proceedings Justifi 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