REALWorld Law

Real estate finance

Order of payment

In what order are creditors paid on a debtor's insolvency, and if more than one creditor holds the same security interest over the same real estate asset, how is that situation resolved?

Angola

Angola

The Angolan Civil Code sets forth that some credits are paid with preference over others.  There are two types of preferential credits: movable; and real estate.  

Preferential movable credits may be general, if they cover the value of all movables (eg credits emerging from an employment contract) or special, if they only cover the value of certain assets (eg state credits from taxes levied over donations).  Preferential real estate credits are always special (eg state or local authority credits from taxes levied over real estate property). General preferential movable credits do not prevail over a third party guarantee.  Between a special preferential movable credit and a third party’s right, the oldest credit prevails.  Preferential real estate credits always prevail over a third party’s rights to real estate property. When assets secured by a real guarantee are liquidated, creditors are paid immediately.  However, if there is a conflict between said credit and a preferential real estate credit or an older special preferential movable credit, the latter prevails.

Australia

Australia

Secured creditors will be paid in accordance with any agreed priority arrangements. If priority arrangements are not in place, the priority of payment will be governed by the priority rules set out in the Personal Property Securities Act 2009 (PPSA) in relation to personal property and generally in accordance with first in time principles in relation to land. As a general rule priority is based on the timing of the registration of security interests however this is subject to numerous exceptions and the priority provisions in the PPSA should always be carefully considered.

Generally, unsecured creditors rank in priority behind secured creditors and will share in any available proceeds pari passu; however, this is subject to various exceptions set out in the Corporations Act 2001 and the PPSA. Before unsecured creditors are entitled to their share of available proceeds, various expenses of liquidators or administrators must be paid (such expenses will include expenses incurred in realizing assets, remuneration and rent) as well as the insolvent company’s employee wages, superannuation, leave entitlements and redundancy payments.

In addition, some employee entitlements (such as wages, superannuation, leave of absence and retrenchment entitlements) will have priority over a security interest in circulating assets (a class of assets which in the course of the borrower’s business changes from time to time and which may be disposed of without consent of the lender).

Belgium

Belgium

Once the borrower goes into bankruptcy, the mortgagees or creditors will be paid off according to their rank and the timing of the registration of their respective secured interests. However, all mortgage securities registered on the same day are creditors of equal rank and will be paid off pro rata.

As between the holder of a pledge over the business and a mortgagee, where both creditors have an interest in the same security (ie fixtures in a building), the one whose interest was registered first will take priority over the other, even if this is a matter of hours and minutes, as is the case in determining priority between all holders of a pledge over the business.

Unsecured creditors rank behind secured creditors and rank equally between themselves. Belgian law also provides for certain legal privileges for certain types of creditor (for instance certain administrative bodies, unpaid seller's privilege or tenant's privilege in relation to moveable assets located in the leased premises).

Bosnia-Herzegovina

Bosnia-Herzegovina

Bankruptcy creditors are classified according to the nature of their claim. The creditors with a subordinate right to payment may have their claims paid only after the creditors with greater priority have had their claims paid in full. Creditors with equal priority have their claims paid pro rata. Claims incurred during period of preliminary administration which neither the interim trustee nor the bankruptcy trustee was able to pay have priority over any other claims against the bankruptcy trustee.

Creditors with general payment priority are creditors who, at the time of the opening of bankruptcy proceedings, had proven claim against the debtor. Bankruptcy creditors with lower payment priority include those who have claims in the form of an interest incurred after the opening of the bankruptcy proceedings and the costs of particular creditors incurred during their participation in the proceedings.

Canada

Canada

Creditors holding registered mortgages or hypothecs will generally be paid in priority based on the timing of registration of their security interests. Generally, unsecured creditors rank in priority behind secured creditors who have properly registered their interests.

China

China

For unregistered mortgages, if the same property is mortgaged to multiple creditors, their claims in the property are prioritized in accordance with the order of the first effective day of each mortgage contract (or the underlying loan contract). If the first effective day of those contracts is the same, their claims in the property are prioritized in light of the proportion of the creditors' rights.

For registered mortgages, if the same property is mortgaged to multiple creditors, their claims in the property are prioritized in light of the sequence of registration. If the sequence of registration is the same, their claims are prioritized in light of the proportion of the mortgagees' rights.

Generally, registered mortgages will have priority over those that are not registered.

Croatia

Croatia

Secured creditors of an insolvent debtor (razlučni vjerovnici), have the right to commence enforcement proceedings over the secured asset to recover the debt. Secured creditors are paid in the order corresponding to the ranking of their security over the property.

Czech Republic

Czech Republic

Secured creditors assert their claims by lodging a claim application in which they must refer to their security, detail the circumstances supporting their claim and attach relevant deeds. This applies equally to creditors who can justify their claims against the debtor solely from assets provided as security.

Secured creditors will be satisfied to the extent of their security from the liquidation of the asset, right, receivable or other property value securing their claim, unless stipulated otherwise by the Insolvency Act. The order of satisfaction is based on the time the pledge or collateral was created, unless agreed otherwise in writing by secured creditors.

If a review conducted pursuant to the Insolvency Act reveals that a registered secured claim entitles the creditor to a right to satisfaction by the realization of security for that registered claim to an extent lower than 50 percent of its value, or that the creditor's ranking is lower than that stated in the application, then that creditor's right is not be taken into account. However, this rule will not apply where the court's decision regarding the amount of the registered secured claim depends on the expert opinion or the court's discretion. The insolvency court may order any creditor who submits such a claim to pay the amount by which the value of the security stated in the application exceeded the amount actually ascertained to the secured creditors who submitted claims with security over the same asset.

Denmark

Denmark

The fundamental view of bankruptcy is that all creditors are to be treated equally according to the respective value of their claims. However, this general view is modified significantly as creditors are divided into six classes according to the nature of their claims.

The waterfall of creditor categories operates as follows:

  1. Bankruptcy costs and debt incurred during the bankruptcy
  2. Restructuring costs and debt incurred during the restructuring
  3. Compensation of employees
  4. Supplier claims in respect to certain taxes and duties
  5. Unsecured creditors’ claims, except for specifically subordinated claims
  6. Some interest claims, fines, gift promises etc

Claims in a higher class must be paid in full before creditors in a lower class can be paid. Creditors in the same class are treated equally.  

Bankruptcy proceedings allow for special rights and properly perfected security interests held by creditors.  The net proceeds of sale of the charged asset is distributed to the secured creditor in full.

When real estate is sold the lender will receive payment according to the priority stated in the Land Registry. 

France

France

Solutions may vary depending on the type of bankruptcy proceedings contemplated by the court.

Continuation of business under safeguard procedure, accelerated safeguard procedure or reorganization proceedings (procédure de sauvegarde, de sauvegarde accélérée ou de redressement judiciaire)

Where the debtor's business is continued, the creditor may have to grant the debtor extended terms of payment and/or agree to a write-off of the debts. Assets will remain frozen and enforcement prohibited. As a result, creditors will not be able to enforce their security interests while the plan is in effect, provided that the debtor complies with its terms.

Partial or total sale of the business further to reorganization proceedings (procédure de redressement judiciaire)

Where the entire business of the debtor or a substantial part of it is sold, all creditors are discharged by a distribution of the proceeds of the sale price in accordance with the secured/unsecured nature of their debts. This distribution clears all charges and security over the assets, except the security taken to secure financing of the secured assets. For the purposes of payment, post-bankruptcy creditors have priority over pre-bankruptcy creditors, whether secured or unsecured, except with respect to court fees, expenses linked to the proceedings and employees' wages which carry preferential rights. Mortgagees will be paid amongst themselves according to their rank (which depends on the timing of registration of the mortgage).

Liquidation of the company further to liquidation proceedings (procédure de liquidation judiciaire)

The purpose of the liquidation of the company is to realize the assets at the best price and distribute the proceeds to the creditors in accordance with their priority ranking. In a liquidation of the debtor, all debts become due (but individual actions remain stayed in most cases). Security interests are enforced by the liquidator and proceeds are distributed to the creditors in accordance with the priority order provided by law.

Preferential creditors may supersede secured creditors, except for certain pledges which feature a right to retain possession of the asset (droit de rétention) and for creditors benefiting from a transfer of ownership of assets as security (such as a Dailly assignment of receivables).

Germany

Germany

Once formal insolvency proceedings are opened by the court, the insolvency administrator takes full control of the business of the insolvent company. Creditors are asked to lodge their claims against the company and to inform the administrator of their security interests over the company’s assets.

German insolvency law differentiates between preferential creditors, secured creditors, unsecured creditors and subordinated creditors.

As a general rule, the claims of preferential creditors are paid undiscounted and directly from the insolvency estate – unless the estate has insufficient funds to cover even these claims. Any payments or distributions of proceeds to the other creditors are made:

  • First to secured creditors
  • Secondly to unsecured creditors, and
  • Lastly to subordinated creditors

Within the group of secured creditors, each creditor receives the net realization proceeds of the sale of the assets over which the creditor held a security interest. In the unlikely event that several creditors hold equal-ranking security over the same asset the proceeds are split in equal shares.

Hong Kong, SAR

Hong Kong, SAR

The priority of security interests is determined by a complex set of rules that provide that the order of priorities is largely based upon the date of creation of the security. A summary of the priority order in respect of the key real estate security instruments is as follows:

Fixed charge versus floating charge?

  • A fixed charge (a charge over a specific asset or assets) will have priority over a floating charge even if it is created after the floating charge where notice of the existence of the floating charge has been given in an appropriate legal way.
  • Even if a floating charge (a charge over a class of assets which in the course of the borrower's business changes from time to time and which may be disposed of without consent of the lender) is crystalized into a fixed charge upon the occurrence of certain events stipulated in the agreement (eg insolvency/creation of second security) if the fixed charge has been acquired without notice of the specific crystallization clause, it still enjoys priority.

Fixed charge versus fixed charge?

  • Fixed charges rank in priority according to the date of their creation and registration (although where the charge is over land, the Land Registry rules take precedence and generally provide that, subject to certain exceptions, priority is determined by the order of registration at the Land Registry.)

Floating charge versus floating charge?

  • Floating charges rank in priority according to the date of their creation and registration.

The holder of a fixed charge is entitled to the whole of the proceeds of sale of that asset less the cost of realization.

There are certain prior claims which apply to proceeds of realization of a floating charge. These include:

  • The costs of preserving and realising the assets
  • The receiver's remuneration and the proper costs and expenses of the receivership
  • The debts which are preferential in receivership

Unsecured creditors rank behind secured creditors and rank equally between themselves. However, preferential creditors, which are a special group of unsecured creditors such as employees and governmental departments, rank ahead of floating charge holders where the assets are insufficient to satisfy their claims (eg unpaid wages).

The order for distribution can be summarized as follows:

Assets subject to fixed charges (or mortgages)

  1. The cost of preserving and realising the assets; and receiver's remuneration and the costs and expenses of the receivership
  2. The chargee

If there is a surplus after payment of the amounts due as above, the surplus forms part of the free assets available for the general creditors.

Assets available to unsecured (general) creditors ('free assets')

  1. Costs and expenses of the liquidation (including the remuneration of the liquidator as allowed under section 196 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance).
  2. Amounts owing to employees
  3. Statutory debts due to the government (eg rates and taxes)
  4. If the company is a bank, then persons holding deposits (up to the amount of HK$500,000 per depositor)
  5. If the company is an insurer, then amounts owing to insured persons claiming under an insurance contract against the insurer
  6. A landlord who sought to take control of the debtor's goods in settlement of unpaid rent within three months before the date of the winding up order (to the extent of such goods)
  7. Ordinary creditors
  8. Return of capital to contributories entitled thereto
  9. Payment of surplus to contributories entitled thereto

Assets subject to a floating charge

Prima facie, such assets are not available to the general creditors, however if the free assets available to the general creditors are not enough to satisfy the claims of the preferential creditors under section 265(1) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32), then the assets subject to a floating charge would be available to meet those claims of preferential creditors in priority to the charge.

  1. Costs of preserving and realising the assets; and receiver's remuneration and costs and expenses of the receivership, including costs and expenses of discharging statutory duty to pay the preferential creditors
  2. Claims of preferential creditors referred to under points 2-5 above (in relation to the order for distribution of 'free assets'), in the statutory order noted above
  3. Floating Chargee

If there is a surplus after payment of the amounts due to the charge, the surplus forms part of the free assets available for the general creditors.

Hungary

Hungary

If a mortgaged or pledged asset is sold during the liquidation proceedings, after the deduction of certain costs and the liquidator's fees, the remainder of the sale proceeds shall be applied for discharge of the claim secured by such asset, with priority over other or unsecured creditors. In the event that there is more than one mortgage or pledge over the same security asset, the order of priority is determined by the date of their creation.

Furthermore, only those creditors' claims can be satisfied in the liquidation proceedings which have been registered by the liquidator (late registration will result in a disadvantageous position in the distribution order and, most probably, result in the final loss of the claim).

Ireland

Ireland

In relation to Irish incorporated companies, the order of payments on insolvency is set out in the Companies Acts. Assets subject to fixed security fall outside the insolvency process which in effect means that the fixed security holder has direct recourse to those assets and the proceeds of realization.

The order of payments is (generally) as follows:

  • Fees and costs of an examiner (where one was appointed)
  • Costs and expenses of the liquidation
  • Preferential creditors
  • Floating charge holders
  • Unsecured creditors

Personal insolvencies in Ireland are subject to the Bankruptcy Act (which was amended by the Personal Insolvency Act, 2012). The Act represented a radical overhaul and modernization of Ireland’s personal insolvency law. The Personal Insolvency (Amendment) Act, 2015 has made a number of further significant amendments. With regards to the term of bankruptcy, the Act sets a new default term of one year from the date of adjudication. Among other things, it assists cooperative debtors while also providing sanctions with significantly extended terms where debtors seek to abuse the process. Consequently, future attempts by Irish citizens to declare bankruptcy in other jurisdictions may in certain cases be cause for suspicion amongst creditors.

Italy

Italy

Creditors are equally entitled to be satisfied over the assets of the debtor, with the exception of the rightful claims of pre-emption, ie liens, pledges and mortgages. In particular, creditors who have liens over real estate assets are preferred to mortgagees if the law does not state otherwise. The Italian Civil Code establishes that liens may be:

  • general liens over the debtor’s movables (for example employee salaries and rights, professional remunerations due in the last two years, commissions on sales due to agents and state taxes), or
  • special liens over the debtor’s specific movables or real estate assets.

In an insolvency procedure, claims generally rank in the following order:

administrative claims (crediti prededucibili) which are generally debts incurred after insolvency proceedings were filed (eg receiver's fees, claims accrued in occasion or in function of the proceedings)

  • holders of general or special liens
  • secured creditors
  • other secured creditors
  • unsecured creditors, and
  • subordinated creditors, to the extent that subordination rights are enforceable.
Japan

Japan

The order of priorities of security interests is largely based upon the date of (perfection of) creation of the security, though such order of priorities can be exchanged by agreement.

In the case of a public auction, the order of priorities of payment is, in general:

  1. expenses for common benefits (procedural costs);
  2. tax and public dues;
  3. secured claims; and
  4. unsecured claims.

As mentioned above, unsecured creditors rank behind secured creditors and rank equally among themselves (the pari passu principle).

Netherlands

Netherlands

As a general rule, creditors rank equally and on this basis they have recourse to all of the debtor’s assets. However, the distribution of a debtor’s property in bankruptcy deviates from this general principle of law. Ordinary claims may be, and often are, in practice subordinated if other claims have the benefit of a preferred ranking.

A creditor’s preferred ranking (voorrang) may be based only on:

  • A right of pledge
  • A right of mortgage
  • A privilege
  • Other grounds stipulated by Dutch law

Of these four categories, only a mortgage right and a right of pledge are referred to as security rights. A privilege is a right that is created by statute (and cannot be created by contract).

Among creditors with a right of pledge over the same assets, the second right of pledge will rank behind the first right of pledge. However, exceptions to this rule may apply, depending on the circumstances of the particular case and the nature of the pledges.

The tax authorities are (usually) important creditors and hold a general privilege which ranks behind a possessory pledge over moveable assets and a mortgage. However, in particular the beneficiary of a non-possessory pledge over moveable assets can see its rights frustrated by means of a seizure by the tax authorities of pledged assets located on the premises of the debtor (bodemzaken). Moreover, Dutch tax law stipulates that the pledgee must first inform the Dutch tax authorities before it seeks to exercise its right of pledge on the assets located at the premises of the debtor, in which case the Dutch tax authorities will probably seize the pledged assets (and thus frustrate the rights of the pledgee). The Dutch tax authorities have a term of seven days to do this, after unused expiration of this period the pledgee can enforce its rights anyway.

Among creditors holding a privilege, those who have a privilege over specific property are preferred over creditors holding a general privilege (over all property of the debtor). Where several creditors have a specific privilege in respect of the same asset, their ranking is equal.

An example of a preferred position based on ‘other grounds provided by law’ is the right of retention. A right of retention can be exercised by a creditor, for example a building contractor, with respect to immovable property as well as movable property.

The priority of security interests is determined by a complex set of rules stipulating that the order of priorities is based on the date of creation of the security right. A distinction must, however, be made between mortgage rights and pre-judgment executory attachments (beslag) and their interrelationship. A pre-judgment executory attachment involves a district court order which gives the attaching party the right to sell the property by means of an auction.

Whereas an older mortgage right always has priority over more recently created mortgage rights (unless a change of ranking order has been agreed on between all parties), this does not fully apply to attachments. Outside of insolvency, the first attaching party is entitled to sell the property but must share the net proceeds with the other attaching parties because the principle of equality of creditors applies in the case of attachment. This means that all attaching parties have equal rights. This rule is, however, set aside if a mortgage right is created between the dates on which attachments are levied. In that case, the parties that first levied attachment will, in terms of the order of payment, have priority over a mortgage right created later and attachments levied later. All attachments on the borrower's property are automatically cancelled upon the borrower's insolvency.

If the first mortgagee forecloses on the real estate and there are several creditors, the first mortgagee can petition the court in preliminary relief proceedings to grant it first recourse to the net proceeds resulting from the auction. This request must be approved before the date on which the purchase price and the related costs are paid by the new owner of the real estate. If such a request is not filed or is not granted, a proposal regarding payment of the net proceeds will be made to all creditors. If the parties do not agree on this proposal, the district court will be asked to list the creditors in order of priority, and consequently the net proceeds can be transferred to the creditors in order of priority.

Nigeria

Nigeria

The order of priorities is as follows:

  • creditors secured by way of a fixed charge on any property shall have priority over a floating or ambulatory charge even if created after the floating charge. (Except where the terms of the prior floating charge says otherwise and the holder of the fixed charge is aware of same.);
  • Preferential creditors;
  • Creditors secured by way of a floating charge will rank in priority according to the date of their creation;
  • Subordinated creditors (depending on the terms of the contract); and
  • Unsecured creditors.

It is worthy of mention that where the security interest created is registrable at the Corporate Affairs Commission, as stipulated by the Companies and Allied Matters Act 2020, the registration of such security interest gives the secured creditor priority over any other subsequent interest on the security assets by a creditor or a duly appointed liquidator of the company.

Norway

Norway

The priority of security interests is, as a main rule, determined by the date of perfection of the security (normally either by way of notification or registration).

The holder of a perfected security interest is entitled to the whole of the proceeds of sale of that asset without deductions other than the cost of realization.

The Norwegian Liens Act (panteloven) provides for a statutory, preferential lien in favour of the bankruptcy estate as security for the necessary costs of the bankruptcy proceedings. A security interest is created in any pledged asset belonging to the debtor at the time of commencement of the bankruptcy proceedings and other assets pledged as security for the obligations of the debtor at that time. The lien amounts to 5% of the value of the asset, but is limited to 700 times the court fee (the court fee is NOK1,223 from 1 January 2022) for each asset registered in an asset register (eg real property, ships, aircraft). The lien is preferential to other statutory liens and all other encumbrances on the asset and can only be used to cover the necessary costs if no other (unencumbered) assets are available to cover these costs.

In the event of bankruptcy, certain unsecured claims have legal priority such as the salary claims of employees and taxes.

Unsecured creditors rank behind secured creditors and rank equally between themselves (the pari passu principle).

Poland

Poland

Every creditor wishing to participate in the insolvency proceedings is obliged to report his claim to the judge commissioner within the time limit specified in the decision on the declaration of bankruptcy. After the declaration of bankruptcy, the trustee proceeds with the liquidation of the bankruptcy estate. The creditors are satisfied from the funds of the bankruptcy estate, consisting of all of the bankrupt’s assets. Their claims are divided into five categories and are satisfied according to the ascending order of those categories.

The claims secured over real estate such as a mortgage do not fall under these categories and are not satisfied from the funds of the bankruptcy estate. Pursuant to the Insolvency Law, the claims upon the sale of the properties over which they are secured, turn into the right to be satisfied from the proceeds of sale, in accordance with the priority they have. This means that with an exception to some obligations specified by the statute such as alimonies or minimum remuneration, the claims secured over real estate will be satisfied first and thus the creditors’ interest will be secured up to the value of the properties they encumber.

Portugal

Portugal

In cases of insolvency the creditors with privileged credits such as salaries (in case of the insolvent’s workers, taxes and social security contributions) and also debts towards the Treasury and the State benefit from first ranking.

Furthermore, it should be notice that if a lender finances the debtor restructuring process within the PER, its credits do benefit from a first ranking regarding other third parties’ credits, though ranking after the privileged credits of workers, Treasury and Social Security.

Mortgages are next to be repaid. If there is more than one mortgagee holding a mortgage over the same property, the first mortgagee will be paid first and the remaining mortgagees will be paid according to their respective dates of registration.

Romania

Romania

Secured creditors are entitled to preferential treatment when the amounts received from the sale of the secured assets in liquidation proceedings are distributed. The order of distribution is as follows:

a. expenses related to the insolvency proceedings and the sale of assets. In this respect, there might be a risk that the remaining amount may not cover the entire value of the secured claim. Thus, the portion of the claim that has not been settled following liquidation proceedings becomes unsecured and will be paid, following the regular order;

b. the secured creditor’s claim; and

c. rest of the creditors according to the general rules.

If the secured creditors have been paid or the debtor’s assets are not secured or mortgaged, Romanian insolvency law provides that the following payment order be applied:

  • expenses related to the insolvency proceedings and the sale of assets;
  • financings granted to the debtor during the observation period in order to continue its operation, with the approval of the creditor' meeting;
  • salaries and other receivables arising from labour relations;
  • receivables resulting from the continuation of the debtor's activity after the opening of the insolvency proceedings, damages which may be requested by the debtor's co-contractors in case of unilateral termination of the agreements to which they were parties and receivables of third party purchasers in good faith which return to the debtor the assets or their equivalent value after the annulment of the corresponding transfer agreements;
  • claims for payment of taxes;
  • receivables due to third parties who have legal responsibilities for the support of others and receivables which are judicially approved for the care of the debtor (if he is a natural person) and his family;
  • banking unsecured credits, with the related expenses and interest, receivables resulting from product deliveries, service provision or other works and rent;
  • other unsecured receivables; and
  • subordinated receivables, in the following order of preference:

a. the receivables of shareholders holding at least 10% of the share capital; and

b. receivables arising from gratuitous acts, eg donations.

Creditors in any one of the above categories, receive payment pro rata, and those from the lower ranking categories are paid only once liabilities to preferred secured creditors are fully paid off.

Slovak Republic

Slovak Republic

The assets of the debtor in insolvency proceedings constitute the "estate" which can be either:

  • General estate, or
  • Separate estate

The number of separate estates depends on the number of secured creditors.

An established claim of a secured creditor will be satisfied from the proceeds of the sale of the assets which comprise the separate estate, following any required deduction from that estate of other assets. Where a secured claim of a secured creditor cannot be satisfied in full in this way, the outstanding part of the claim will be treated as unsecured.

Unsecured claims will be satisfied from the proceeds of the realisation of the assets constituting the general estate that remains in existence after the claims against the estate linked to the inventory items of the assets constituting the general estate have been deducted. Where unsecured claims cannot be satisfied in full, they will be satisfied proportionately according to their value.

The proceeds of a debtor's estate will either be distributed on a deduction basis (ie the claims of creditors are satisfied every time a certain asset is realised), or by means of an "end distribution" (ie the distribution of the realised proceeds occurs once all the assets have been realised).

If more than one creditor holds the same security interest over the same real estate, then the order of payment will be dealt with in accordance with the order set out in the mortgage registered with the Cadastral Registry. Therefore, the mortgage of the mortgagee first registered with the Cadastral Registry will be satisfied first from the proceeds of the sale.

Spain

Spain

If an agreement with the creditors has been reached, payments will be governed by that agreement (but such agreements do not affect creditors with in rem security (such as mortgages or pledges) if they do not consent to it.

If there is no agreement with the creditors, the first creditors to be paid are those holding créditos contra la masa, basically the creditors owed wages in respect of the 30-day period leading up to the declaration of insolvency and those becoming payable during the insolvency proceedings as well as legal and judicial fees, the fees of the insolvency administrators, etc. The créditos contra la masa cannot be paid with assets over which in rem security has been taken.

The next creditors to be paid are creditors with a special privilege, in the order established by law and, if applicable, pro rata. Creditors with special privilege are basically creditors with security over specific assets. Creditors with a special privilege are paid out of the assets over which the security was taken. If there are multiple forms of security over the same asset, the priority between creditors depends on the date their security was created.

Once the créditos contra la masa have been paid and the assets subject to security in rem have been deducted from the assets of the company, creditors with a 'general' privilege are paid. These creditors are generally public authorities (in relation to unpaid taxes and employer’s contributions to national insurance) and creditors owed wages other than créditos contra la masa, subject to certain economic limits.

Subsequently, 'ordinary' creditors are paid and, if there is any surplus, creditors holding debt which is subordinated by the law are finally paid

Sweden

Sweden

Swedish law provides for a statutory order of priority of claims. In the event of bankruptcy each claim which is secured by a mortgage or other fixed security, will, to the extent they are sufficient, be satisfied by payment out of the proceeds from the sale of the assets subject to the mortgage or other security. Where there are proceeds remaining after the secured claims have been satisfied, the balance will be distributed to the unsecured and unsubordinated creditors in accordance with the Swedish rules of priority.

The Swedish rules dealing with priority in bankruptcy (preferential rights) are set out in the Rights of Priority Act (Förmånsrättslagen). A preferential right may be specific or general. Specific rights relate to a specific asset or assets while general priority relates to all of the assets of the bankrupt estate. Claims with specific priority are met from the realization of the relevant asset(s) prior to any claims with general priority being satisfied. Claims without any right of priority are met only if all claims with specific and general priority have been satisfied.

Mortgage security created over a property provides the holder of a mortgage certificate with a specific preferential right. Where there are several holders of mortgage security, they will receive proceeds in accordance with the ranking as between the mortgage certificates (determined in relation by the point in time they were issued).

Thailand

Thailand

Creditors are paid in the order in which security has been perfected, including cases in which a creditor holds the same security interest over the same real estate asset. The enforcement shall be in respective orders of date and time which the creditor's right thereof has been legally registered.

United Arab Emirates - Abu Dhabi

United Arab Emirates - Abu Dhabi

If a debtor is insolvent, secured creditors are paid before unsecured creditors, and if there is more than one secured creditor over the same real estate asset then the creditor with the higher ranking will have priority. Under the Mortgage Law, the ranking of a registered mortgage relative to other registered mortgages is determined by date of registration and the serial number provided by the DUPM at time of registration (meaning a registered mortgage will have priority over another mortgage which is subsequently registered over the same real estate). If several secured parties register their mortgages over the same real estate at the same time, those creditors are to be regarded as being of equal rank upon distribution once the real estate is sold.

It is worth noting that the Bankruptcy Law sets out the order of priority of  payment of certain categories of debt owing by an insolvent entity in a bankruptcy procedure. Such categories of debt include:

  • in a PCP or restructuring (in order of priority):
  • trustee fees and expenses;
  • costs, fees and expenses incurred during bankruptcy; and
  • unsecured super-priority new financing; and
  • upon bankruptcy and dissolution / liquidation (in order of priority):
  • trustee fees and expenses;
  • secured debt;
  • preferred debt; and
  • general unsecured debt.

The categories of preferred debts which are paid prior to the claims of general unsecured creditors  include (in order of priority):

  • debt owed on account of judicial fees, trustee fees, expert fees and any expenses for serving the common interest of the creditors in reserving and liquidating the debtor’s estate;
  • certain sums due to employees (including end-of-service gratuity, wages and salaries payable on a regular basis for up to three months);
  • debt owed due to any court judgement;
  • amounts due to government agencies;
  • fees agreed between the debtor and an expert appointed by the debtor (including legal fees) subject to court estimate (sua sponte or on the basis of a creditor challenge); and
  • certain fees incurred by trustees in accordance with the Bankruptcy Law.
United Arab Emirates - Dubai

United Arab Emirates - Dubai

If a debtor is insolvent, secured creditors are paid before unsecured creditors, and if there is more than one secured creditor over the same real estate asset then the creditor with the higher ranking will have priority. Under the Mortgage Law, the ranking of a registered mortgage relative to other registered mortgages is determined by the serial number provided by the DLD at time of registration (which is interpreted to mean a registered mortgage will have priority over another mortgage which is subsequently registered over the same real estate). If several secured parties register their mortgages over the same real estate at the same time, those creditors are to be regarded as being of equal rank upon distribution once the real estate is sold.

It is worth noting that the Bankruptcy Law sets out the order of priority of payment of certain categories of debt owing by an insolvent entity in a bankruptcy procedure. Such categories of debt include:

  • in a PCP or restructuring (in order of priority):
    • trustee fees and expenses;
    • costs, fees and expenses incurred during bankruptcy; and
    • unsecured super-priority new financing; and
  • upon bankruptcy and dissolution / liquidation (in order of priority):
    • trustee fees and expenses incurred in respect of the sale of the secured assets;
    • secured debt;
    • preferred debt; and
    • general unsecured debt.

The categories of preferred debts which are paid prior to the claims of general unsecured creditors  include (in order of priority):

  • debt owed on account of judicial fees, trustee fees, expert fees and any expenses for serving the common interest of the creditors in reserving and liquidating the debtor’s estate;
  • certain sums due to employees (including end-of-service gratuity, wages and salaries payable on a regular basis for up to three months);
  • debt owed due to any court judgement;
  • amounts due to government agencies;
  • fees agreed between the debtor and an expert appointed by the debtor (including legal fees) subject to court estimate (sua sponte or on the basis of a creditor challenge); and
  • certain fees incurred by trustees in accordance with the Bankruptcy Law.
UK - England and Wales UK - England and Wales

UK - England and Wales

The priority of security interests is determined by a complex set of rules that provide that the order of priorities is largely based upon the date of creation of the security. A summary of the priority order in respect of the key real estate security instruments is as follows:

  • A fixed charge will have priority over a floating charge even if created after the floating charge.
  • Fixed charges rank in priority according to the date of their creation (although where the charge is over land, the Land Registry rules take precedence and provide that priority is determined by the order of registration at the Land Registry. Also, where a charge relates to a 'chose in action' (basically a contractual right or debt) priority is governed by the date of giving notice to the other contracting party).
  • Floating charges rank in priority according to the date of their creation.

The holder of a fixed charge is entitled to the whole of the proceeds of sale of that asset without deductions other than the cost of realization.

There are certain prior claims which apply to proceeds of realization of a floating charge. These include:

  • the costs of the insolvency process which are met from the sales proceeds;
  • preferential debts: subject to certain limits, employees have a claim for unpaid wages and, from 1 December 2020, the UK Government will be reintroducing as a preferential debt Crown Preference which relates to certain unpaid taxes being collected on behalf of the Government by the relevant insolvent company such as VAT & PAYE (pay as you earn) and there will be no cap on those Crown Preference claims ; and
  • the prescribed part; 50% of the first £10,000 realized and 20% of the proceeds after that up to a maximum of £800,000 is set aside for unsecured creditors.

Unsecured creditors (which will include the UK Government for debts other than those falling within the Crown Preference categories) rank behind secured creditors and rank equally between themselves (the pari passu principle).

UK - Scotland

UK - Scotland

Standard securities rank in priority to each other by reference to their dates of registration in the Land Register (or Sasine Register) unless varied by a separate agreement (Ranking Agreement) but all Standard Securities that are (or were) registered at the Land Register of Scotland or Sasine Register prior to the attachment of any floating charges granted by the debtor will rank ahead of such floating charges (regardless of the date of registration of such floating charges) unless varied by express agreement.

In the absence of separate agreement or negative pledge, the first-ranking creditor enjoys priority only to the extent of advances made (or future advances contracted to be made) before it receives notice of the existence of the later standard security, together with interest and expenses.

Standard security holders are entitled to as much of the net proceeds of sale as is required to satisfy the debt (save where there is a postponed second standard security which has been notified to the prior ranking securing holder).

There are certain prior claims which apply to proceeds of realization of a floating charge. These include:

  • Costs of the insolvency process;
  • Preferential debts - subject to certain limits, employees have a claim for unpaid wages;
  • Secondary preferential debts — certain debts owed to HMRC (ie VAT, PAYE, employee national insurance contributions, construction industry scheme deductions and student loan repayments). This is in respect of insolvencies commencing on or after 1 December 2020;
  • The prescribed part; 50% of the first £10,000 realized and 20% of the proceeds after that up to a maximum of £800,000 (£600,000 if the floating charge was created before 6 April 2020) is set aside for unsecured creditors; and
  • Floating charge creditors.

Unsecured creditors rank equally between themselves.

Administrators of incorporated companies may sell real estate subject to a floating charge and have a limited ability, with the consent of the court, to sell real estate secured by way of a standard security where the standard security holder is not prepared to consent to this. In each case, the price achieved may be less than that required to repay the secured debt in full.

A receiver may also seek the authority of the court to sell at less than the secured debt in certain circumstances, where the standard security holder is not prepared to consent to this.

Ukraine

Ukraine

The property granted as a collateral under relevant security agreement is used solely for the enforcement of the relevant security and satisfaction of claims of the relevant lender, who holds such security.

If more than one creditor holds the security interest over the real estate asset, creditors who hold a first-ranking interest under a security agreement will receive the enforcement proceeds/ be entitled to acquire the title to the collateral as a result of enforcement before those creditors who hold second-ranking security interests over the same asset.

United States

United States

Following the commencement of insolvency proceedings, creditors of the bankrupt debtor will be paid-off in the order of their lien priority. The principle of ‘prior in time, prior in right’ determines the order of priority, unless a subsequent creditor fits within the protection of the local recording statute or the creditors have otherwise agreed pursuant to a separate agreement. In a ‘notice’ jurisdiction, a subsequent creditor has priority if it does not have notice of the prior interest. In a ‘race’ jurisdiction, a subsequent creditor has priority if its lien has been recorded first. In a ‘race-notice’ jurisdiction, a subsequent creditor has priority if its lien has been recorded first and such creditor has no notice of any prior interest.

Zimbabwe

Zimbabwe

According to section 89 of The  Insolvency Act [Chapter 6:07], preference is given to creditors who prove their claim before the court has given judgement concerning the repossession and sequestration of an estate. A creditor of an insolvent estate who intentionally delays proving his claim until the court has given judgment in those proceedings may not be entitled to share in the distribution of any money or the proceeds of any property recovered as a result of those proceedings.

However, when two creditors’ security interests conflict, the creditor who financed the property gets preferential rights. Furthermore, secured creditors are given first priority before tax and all other claims. To secure the property, the creditor would also have to take physical control of it.