Enforcement of Security Interests in Insolvency Proceedings

Status of Mortgage After the Commencement of the Insolvency Proceedings

Among the insolvency proceedings, many jurisdictions distinguish the liquidation- type and the reorganisation-type. The goal of the liquidation-type procedure is to maximise the amount of debtor’s asset (estate) that can be distributed to creditors. Under this type of procedure, a secured claim usually retains the priority that it enjoys in the absence of the commencement of the insolvency proceedings. On the other hand, the reorganisation-type procedure has the prevailing goal of restructuring the debtor’s business to maintain its going concern value, which is considered as larger than the liquidation value. While the goal will be in the benefit of the whole group of creditors, the individual interest of a secured creditor could be compromised.

Generally speaking, the insolvency law of the reorganisation-type provides that the exercise of the security interest must be suspended (“stayed”), either automatically or by the court order after the commencement of the procedure and that the restructuring plan could request a secured claim to be modified in the amount of interests and/or principal, though its priority vis-a-vis non-secured claims is generally or necessarily respected. The plan will be voted by the creditors, usually in classes of secured and non-secured creditors. For example, in Finland, while the mortgagee enjoys the “separatist” position in the liquidation-type bankruptcy procedure, its exercise of right is stayed by the commencement of reorganisation procedure. Italy also distinguishes the general insolvency proceedings for liquidation and extraordinary receivership for reorganisation. While the mortgagee is, in principle, not preempted under the general insolvency proceedings, once the extraordinary receivership is opened, the mortgagee’s exercise is restrained. The Japanese law is similar in that both of the two reorganisation-type laws, the Civil Rehabilitation Act and Corporate Reorganisation Act, authorise the court to issue an order for stay of exercise of security interests and subject the secured claims to the rehabilitation or reorganisation plan. These two laws further provide that, if the secured object is indispensable to the continuation of the insolvent debtor’s business, the debtor (under the Civil Rehabilitation Act) or trustee (under both Acts) may file a petition with the court, seeking that the security interests be extinguished by paying the amount equivalent to the present value of the secured object.126

A more creditor-friendly approach is adopted in England. Like other jurisdictions, the liquidation and administration are distinguished and the enforcement of interests over assets is subject to consent of the administrator under the administration. However, even under the administration, due consideration will be given to the

See Chaps. 12, 16 and 17.

interest of the secured creditor in balancing with the interests of other creditors. As a result, it is anticipated that a leave to enforce should normally be granted.[1]

In contrast, Portugal’s new Insolvency and Recovery Code of 2004 (CIRE) has integrated the procedures of bankruptcy (liquidation) and restructure (recovery). Under the integrated “insolvency” procedure, the emphasis is placed more on reorganisation of the insolvent debtor and the exercise of rights is restrained.[2]

Among the various jurisdictions, the United States is unique. Chapter 11 of the Bankruptcy Code of 1978 provides for a reorganisation-type procedure. The exercise of any security interest is automatically stayed upon the commencement of the procedure[3] and the reorganisation plan could impair the right of secured credi- tors.[4] However, the Bankruptcy Code has incorporated special rules to protect the equipment security interests. Section 1110 of the Bankruptcy Code for aircraft (and vessels) and section 1168 for railway rolling stock, in a close resemblance to Alternative A under the three Protocols of the Cape Town Convention, provides that a secured party with a security interest in, or a lessor or conditional vendor of, equipment can enforce its rights or remedies notwithstanding the commencement of the bankruptcy procedure, unless the trustee agrees to perform all obligations of the debtor and cures any default within 60 days (see Sect. 2.1.4). The uniqueness of the United States law lies in the idea to give special status only to the security interest of equipment finance (asset-based finance), as distinguished from the general security interest.

  • [1] See Chap. 4. It notes that the “creditor-friendly approach” of English insolvency law was wellrecognised by rating agencies in enabling the British Airways to place Enhanced Equipment TrustCertificates (EETC) in the US market even before becoming a Party to the Cape Town Convention.
  • [2] See Chap. 19.
  • [3] 11 USC §362.
  • [4] See 11 USC §1123 (a)(3).
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