Special Treatment of the Floating Charge in Insolvency Proceedings

Author:Anto Kasak

In cases of insolvency, the security-holder is preferred to other creditors with respect to the outcome of sale of the object of the security. The article considers whether the preferential treatment of secured claims is justified. The situation is more complex in the case of the floating charge, because the object of the floating charge differs from that of other charges. The author maintains... (see full summary)

Anto Kasak
Mag. iur.
Partner, Kasak & Missik Law Of ce
Special Treatment of the
Floating Charge in Insolvency
1. Introduction
The principle of pari passu, or equal treatment of the creditors in insolvency proceedings, is widely rec-
ognised in many countries. This is one of the key objectives for insolvency proceedings. The World Bank
has found that ‘[t]hough country approaches vary, effective insolvency systems should aim to provide for
equitable treatment of similarly situated creditors, including similarly situated foreign and domestic credi-
tors’.*1 This principle means that the creditors relevant to the insolvency proceedings should be treated
equally in equal situations. Exceptions from the principle are as common as application of the principle
itself, however. In most countries, a pledge-holder is preferred to other creditors with respect to the out-
come of sale of the object of the pledge. This means that the outcome of the sold object of the pledge is not
distributed among all creditors but received by the pledge-holder for the pledged object. Some authors go
even further and say that this does not constitute a true exception to the pari passu principle, because the
pledged object should not be part of the insolvency estate and satisfaction of the secured creditors should be
regulated outside the realm of insolvency proceedings.*2 Nevertheless, business and society depend on an
adequate system of credit and it is, therefore, necessary to ensure the adequate protection of secured credi-
tors, to keep them lending. Consequently, the author considers it of utmost importance to avoid allowing
other creditors to obtain dividends from the pledge sale before the secured creditor does.
The situation is more complex in the case of the oating charge, since it covers movable property of the
debtor up to the amount of the charge. The author maintains that the oating charge is an easy, convenient,
and exible way to secure a claim while both protecting the creditor’s interests and allowing the debtor to
sell his property where necessary. On the other side, the oating charge covers almost all movable property
of the debtor, which is sold in full to cover the claim. In such cases, the unsecured creditors end up left with
nothing. Such a situation may amount to the unequal treatment of unsecured creditors. For this reason, the
author concludes that, in contrast to regular secured creditors, less preferential treatment of the oating-
charge holders may be justi ed. The author suggests creating a system for distributing a fair amount of
money to the unsecured creditors on the account of the oating-charge holder’s fund.
1 World Bank. Principles and Guidelines for Effective Insolvency and Creditor Rights Systems. 2001, p. 76. Available at http://
www.worldbank.org/ifa/ipg_eng.pdf (most recently accessed on 23.3.2015).
2 R.M. Goode. Principles of Corporate Insolvency Law, second edition. London: Sweet & Maxwell 1997, p. 152.

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