Secondary claim in international financial law

Author: Shen Daming Compiler/Nationality:
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Publishing Date: 2002-06-01
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(5) The Dutch Bankruptcy Law Article 53 allows mutual offsetting of claims in bankruptcy proceedings. Offset is not mandatory, and subordinated creditors can waive it. It is also possible to consider that the fact that a claim has been subordinated constitutes a waiver of the right to offset. If the subordinated claim is conditioned on full payment of the senior claim and the debtor is insolvent, the value of the subordinated claim will be zero, thus making offset impossible.
(6) Transfer-style subordinated claim relationships If the subordinated creditor is only subordinate to one senior creditor and not to all other creditors of the common debtor, then contractual subordinated claim relationships cannot achieve this goal. Other methods must be used, namely, the subordinated creditor transfers the distribution amount under the subordinated claim to the senior creditor until the senior claim is fully paid. One method is: the subordinated creditor pledges a security interest in the subordinated claim in favor of the senior creditor to secure the senior claim. Trust transfers can be used here. Such transfers do not require registration. Another method is: to stipulate for the subordinated creditor that in the event of bankruptcy of the common debtor, the subordinated creditor shall transfer the bankruptcy distribution amount and other income received to the senior creditor. Under Dutch law, the subordinated creditor is obligated to pay an amount equal to the amount received to the senior debtor. If the subordinated debtor becomes bankrupt, the income under the subordinated claim will fall into the bankruptcy estate of the subordinated creditor, and the senior creditor will be considered a general creditor of the subordinated creditor in terms of the amount owed to him.
(7) Trustee of the subordinated claim bondholder Dutch law does not provide for the appointment of a trustee or other representative to hold the income of a subordinated claim for a class of bondholders and transfer the income to the senior creditor. As a result, under transfer-style subordinated claim relationships, the senior creditor would have to pursue each subordinated creditor for the income. If there are many subordinated lenders, this is difficult to achieve.
(8) Secured claims In principle, there is no reason to oppose two creditors holding a security interest in the same property, with one security interest ranking after the other among the secured creditors. If the subordinated creditor enters bankruptcy proceedings or fails to act as agreed, whether the order can be maintained depends on the type of property.
(9) Change of priority in preferential rights The registration system for immovable property, aircraft, and ships specifies the order of registration, i.e., the priority is determined by the date of registration with the registration authority by the secured creditor. This order cannot be changed. The new Dutch Civil Code allows changes: the subordinated creditor may also agree to transfer the amount received to the senior creditor.
(10) Enforcement rights of subordinated creditors If a default occurs under the subordinated claim, the secured subordinated creditor is often entitled to apply to the court to sell the asset, despite objections from the senior creditor. However, the senior creditor will be paid first from the proceeds of the sale if he holds a higher priority. If he does not hold a higher priority, the transfer payment obligation can solve this problem. An agreement between the senior creditor and the subordinated creditor stipulating that the subordinated creditor cannot exercise the right of sale without the consent of the senior creditor will be valid.
(11) Trustee of security interests The position of the trustee of security interests is similar to that of a bond trustee.
(12) Taxation The subordinated claim is, in principle, treated as a general claim, especially regarding the deduction of interest for the debtor. Interest is different from dividends. However, in certain circumstances, especially when the creditor is also a shareholder, the subordinated claim can be treated as a shareholder, and in such cases, the payment of interest can be considered as the payment of dividends.
Chapter 5: Belgian Law
(1) Contractual subordinated claim relationships The contract establishing the subordinated claim relationship remains valid even if the subordinated creditor, the subordinated creditor, and the debtor, or the debtor, become bankrupt. Article 8 of the 1851 Priority and Security Law states: "The debtor's assets are a common guarantee for his creditors. The proceeds from the sale of these assets will be distributed in proportion to their claims, unless there are legitimate reasons for priority among the creditors." The principle of freedom of contract allows a creditor to waive the statutory right to enjoy equal treatment. The waiver may be for the benefit of one or more specific creditors, or as a unilateral obligation or as a contract with the debtor. For the benefit of all other creditors of the debtor, the following examples of subordinated claims under Belgian law can be cited. According to Article 1252 of the Belgian Civil Code and Article 538 of the 1851 Bankruptcy Law, secured creditors can, even if they have received partial payment from the guarantor or the co-debtor of the debtor, still claim the full amount of their claim from the debtor's assets. Only when the secured creditor has received full payment from the guarantor or by other means are the payers, i.e., the guarantor or the co-debtor, entitled to enjoy the normal effects of subrogation.
1. Test standards for insolvency The subordinated claim will be calculated as a liability when determining whether the debtor is insolvent. In the general settlement process after the bankruptcy proceedings begin, the voting rights of the subordinated claim are based on the subordinated claim as a claim, meaning that the subordinated claim is not different from other unsecured creditors. The directors of the debtor's company must not ignore the subordinated claim when the company continues to bear liabilities. The director may be personally liable under the rules of fraudulent transactions. Establishing a subordinated claim relationship can prevent bankruptcy. A typical example is the operation of a company without issuing shares, relying on limited capital and large loans and debts to controlling company shareholders or other members of the same group. Although the losses of such a company exceed its capital, as long as these creditors agree to place their claims after other creditors, bankruptcy can be avoided by the court.
2. Change of subordinated claim relationships If the subordinated creditor agrees with the debtor to place the subordinated creditor's claim after other non-agreed parties' creditors, in normal circumstances, the subordinated creditor and the debtor can withdraw the subordinated claim relationship between them without the consent of the senior creditor. However, if the subordination of the subordinated creditor is based on an agreement "for the benefit of a senior creditor as a third party," i.e., an "agreement for the benefit of others," the subordinated creditor may not agree to change the subordinated claim relationship without the consent of the senior creditor, even if the senior creditor's acceptance of the above agreement is inferred from the circumstances.
3. Offset When both the debtor and the subordinated creditor are solvent, whether the subordinated claim relationship can be defeated by offset depends on the agreement establishing the subordinated claim relationship, which can solve the issue under circumstances not stipulated by law. Under the general principles of contract law, one party can effectively waive the benefit of offset. Regarding offset in bankruptcy proceedings, Article 444 of the 1851 Bankruptcy Law states: "Since the bankruptcy judgment is made, the bankrupt is no longer legally entitled to manage all his assets, even the assets he may obtain in the bankruptcy proceedings. All payments made by the bankrupt and to the bankrupt after the judgment are invalid." For the implementation of this rule, offset is a method of mutual payment. Therefore, bankruptcy prevents the bankrupt from offsetting claims and rights with the other party. As an exception, even after bankruptcy begins, offset is allowed between closely related claims and liabilities, such as claims and liabilities arising from the same contract.