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Order of creditor and shareholder/contributory ranking on a debtor's insolvency.
Subject to the rights of secured creditors, the assets of a company in liquidation are applied in the following order:
Any remaining surplus is distributed to the shareholders.
The ranking of creditors and shareholders are as follows:
Subject to the rights of secured creditors who have a prior claim to them, the assets of a company in liquidation are applied in the following order of priority:
The appropriate legal ranking for creditors in civil and commercial matters is as follows:
Debts rank in the following order:
The general principles are:
These post-petition claims must be paid when they fall due. If not, they rank ahead of both secured and unsecured pre-filing claims in liquidation:
Shareholders do not receive any repayment of their capital investment, unless a surplus remains after all the creditors have been paid in full (which is extremely rare).
In liquidation (as opposed to insolvency) proceedings, certain pre-filing claims rank pari passu with the post-petition claims set out in the fourth bullet point above (for example, claims secured by a mortgage or by a lien over movables with a retention right and claims secured by a pledge on equipment).
Certain types of secured creditors (essentially creditors that were transferred ownership or title to the secured assets) do not rank in the waterfall since they benefit from a possession right and will in practice rank ahead of all other creditors. This is notably the case for creditors benefiting from a retention right (for example, French share pledges) or from a trust agreement (fiducie) over the secured asset.
On a company's insolvency creditors will rank in the following order of priority:
Secured creditors assets do not form part of the body of assets available for distribution to creditors on liquidation.
Secured creditors in respect of immovable property are entitled to be repaid as a preference from the realisation of the property to which the security relates, in order of the date of registration of the bond.
Secured creditors with a security interest in intangible movable assets are entitled to the proceeds of sale of the collateral, which must be applied in a specified order.
Désastre. In this procedure, the following ranking applies:
Secured creditors who have a security interest in intangible movable property are entitled to the proceeds of sale (or application of cash and similar security) in respect of the collateral. The secured party must apply the proceeds of sale in a certain order of priority.
As between secured creditors, the priority of repayment is determined by the date of the hypothec or security interest agreement, subject to any contractual subordination.
A set-off creditor has certain priority under mandatory set-off or contractual set-off rules.
The statutory order of priorities does not mention security by pledge or foreign security.
Creditors' winding up. The order of priority is generally the same as for a désastre.
In general, the ranking of different creditors on an insolvency is as follows (excluding creditors secured under the Collateral Act, who may realise their security notwithstanding the insolvency proceedings):
For a company:
Liquidators. Costs and expenses incurred by the liquidators, and the remuneration of the liquidators.
Applicant. The costs incurred by the applicant for the winding up order.
Employees. Accrued salary, retrenchment benefits, ex gratia payments, work injury compensation, contributions payable by the employer relating to employees’ superannuation or provident funds, remuneration instead of vacation leave.
Tax authorities. Any taxes assessed and any GST due before the commencement of the winding-up or assessed before the expiry of the time period for proving debts.
Floating charge holders. Paid up to the amount realised from the assets secured by the floating charge.
Unsecured creditors. Creditors who do not possess a security over the debtor’s assets.
Shareholders. Entitled to any surplus, in accordance with the rights attached to their shares.
Secured creditors. Unaffected by the liquidation process.
Third parties who provide rescue financing. Debts arising from rescue financing to a company through a scheme of arrangement or judicial management may have super-priority over the company’s creditors or be secured by a security interest.
Conversion from business rescue to liquidation proceedings:
In rehabilitation proceedings:
Except for common interest claims, the relative priority rule applies.
In bankruptcy proceedings:
Secured claims are satisfied outside of and without being subject to the bankruptcy proceeding.
Creditors holding a pledge, mortgage, or right of retention over a debtor's property before the beginning of the bankruptcy procedure will have an exemption right and will not be influenced by the bankruptcy.