Special Treatment of the Floating Charge in Insolvency Proceedings

• Author: Anto Kasak
• Pages: 70-77

Anto Kasak

Mag. iur.

Attorney-at-Law

Partner, Kasak & Missik Law Off‌i ce

Special Treatment of the

Floating Charge in Insolvency

Proceedings

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 f‌l oating charge, since it covers movable property of the

debtor up to the amount of the charge. The author maintains that the f‌l oating charge is an easy, convenient,

and f‌l 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 f‌l 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 f‌l oating-

charge holders may be justif‌i ed. The author suggests creating a system for distributing a fair amount of

money to the unsecured creditors on the account of the f‌l 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.

70 JURIDICA INTERNATIONAL 23/2015

http://dx.doi.org/10.12697/JI.2015.23.08