"L'enfer, C'est Les Autres": Evolving Approaches to the Treatment of Security Rights in Cross-Border Insolvency

I. PRELIMINARY: SECURITY AND PRIORITY This paper addresses some contemporary issues concerning the approach to the so-called Great Priority generated by in rem security rights over a debtor's property. This is an institution that, in various forms, is embodied in the insolvency laws of many (indeed, most) countries whereby it is possible for a creditor to acquire a proprietary interest in assets which would otherwise have formed part of the estate available for distribution among the general body of creditors in the event of the debtor's insolvency. Then, upon the occasion of the debtor's default the secured creditor is able to look to the assets comprised within the security as a means of satisfying its claim against the insolvent debtor. It is thus one of the coveted characteristics of a security right; properly so called because it retains its efficacy during, and indeed in spite of, any formal insolvency proceedings that the debtor may undergo. If this were not the case, the commercial purpose of such security would be greatly diminished, and would somewhat resemble an umbrella that is capable of opening only when the sun is shining, but incapable of doing so when rain is falling (the more appropriate term for such an implement being a parasol). While it is certainly the case that some systems of insolvency law, or some types of proceeding within such systems, may impose restrictions on the secured creditor's freedom to exercise its security rights while the proceeding is running its course,1 the economic advantage represented by the creditor's duly vested proprietary rights over the assets in question constitutes a datum which has to be respected, and thus adequately safeguarded, throughout the subsequent course of the process.2 A. The distinction between and secured creditors In considering the various ways in which certain creditors are able to enjoy a relative priority in the process of distribution of a debtor's estate, there is a crucial distinction to be made between the type of priority conferred upon so-called preferential claims under a given system of insolvency law and the priority enjoyed by a secured creditor. In the former case, the system in question has actively imposed a discriminatory regime of administering the debtor's property for the benefit of certain categories of claimant so as to create an exception to the principle at pari passu treatment of the claims of all creditors as a single body.3 Instead, there is substituted a sequential application of that principle under which the defined categories of claimant are entitled to receive payment in full in a prescribed order of priority before other, less privileged, categories of claimant are eligible to receive any payment at all.4 Such a practice represents the outcome of a policy choice on the part of the authorities by whom the distributional rules of that system are given legislative effect at any given time, and the categories of claims may be periodically revised in the light of changes to the prevailing policy.5 In principle, however, such categories of claims, as are sanctioned by the law in force at any given time, represent a manifestation of the public policy of the state in question. This becomes a factor that is likely to color the approach by the courts of that country when reviewing any request to authorize the transmission of assets from their own jurisdiction to that of a different state under whose insolvency law the said assets will be subject to a different order of distribution. Just such an issue of or discriminatory treatment was encountered by the English courts in each of the successive stages of the HIH Case!1 Fundamentally, the question in that case concerned the consequences of divergent practices of two sovereign legal systems regarding the treatment of the assets available for distribution among the general body of creditors.7 This involved a consideration of the point at which the divergent practice of the one system would be considered irreconcilable with the public policy of the other. …