Optimizing English and American Security Interests

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C. Rights in Insolvency Proceedings

Both English and American insolvency laws generally yield to and enforce the non-insolvency rights of security interest holders. (186) The creditor's "secured claim" is defined in the United States as the amount of the debt owed to the creditor that is secured by collateral. (187) Any excess over the value of the collateral is treated as an unsecured claim and will rank pro-rata with the claims of other unsecured creditors. (188) English law takes the same approach. A creditor has a "secured claim" for purposes of insolvency law "to the extent that [the creditor] holds any security for the debt ... over any property of the person by whom the debt is owed." (189) If the creditor "realizes [its] security [it] may prove for the balance of [its] debt, after deducting the amount realized" (190) for which it will rank pro-rata along with the unsecured creditors, (191)

Both systems, however, also modify those rights in some respects. In this section, we compare the functions of English fixed charges and American security interests in connection with insolvency proceedings. Although general differences in the insolvency procedures of the two countries may indirectly affect secured creditor recoveries, we confine our discussion to differences that directly affect secured creditor recoveries.

In the United States, three proceedings are commonly employed by business debtors: (1) Chapter 7 (liquidation), (2) Chapter 11 (reorganization), and (3) Chapter 13 (debt adjustment). We omit Chapter 13 debt adjustment from our comparison, because only individuals (natural persons) can file under Chapter 13.

In England, four proceedings are commonly employed by business debtors: (1) Winding-up (liquidation), (2) Administration (reorganization), (3) Administrative Receivership (reorganization), and (4) Bankruptcy (distribution of bankrupt's estate and discharge), (192) We omit Administrative Receivership from our comparison, because recent legislation has sharply curtailed its use. (193) We also omit Bankruptcy from our comparison, because a bankruptcy order can only be made against individuals (natural persons). (194)

Thus, following Segal, (195) we make essentially two comparisons. The first is of liquidation under American Chapter 7 with English Winding-up. The second is of reorganization under American Chapter 11 with English Administration.

In theory, floating charges crystallize upon the commencement of an insolvency proceeding and so become fixed charges. But for purposes of insolvency proceedings, the metamorphosis seems to make little difference. The Insolvency Act defines a floating charge as a charge that was a floating charge at the time of its creation, (196) and continues to treat the floating charge differently in many respects. Accordingly, in this section we compare the insolvency treatment of charges that were created as fixed charges with American security interests. The comparison of charges that were created as floating charges with American security interests is the subject of Part IV.C. below. There are, nevertheless, many respects in which floating charges are treated the same as fixed charges. For economy of presentation, we mention some of them here.

The insolvency treatment of English fixed charges is highly similar to the insolvency treatment of American security interests. We describe the similarities in subsection 1 before we turn to the differences in subsection 2.

1. Similarities in Treatment

Initiation. Secured creditors commonly initiate English insolvency proceedings. (197) They seldom do so directly in the United States. In the United States, unsecured creditors--which include secured creditors for the amounts by which their claims exceed the amounts of their collateral--have the legal right to initiate "involuntary" insolvency cases. (198) But American law is hostile toward direct creditor-initiation. …