All creditors are equal, but some creditors are more equal than others

Les biens du débiteur sont le gage commun de ses créanciers, et le prix s’en distribue entre eux par contribution, à moins qu’il n’y ait entre les créanciers des causes légitimes de préférence

Article 8 Belgian Loi Hypothécaire (art. 2093 French Civil Code) contains the basic principle of paritas creditorum. All creditors have an equal right to payment and the proceeds of the debtor’s estate shall be distributed in proportion to the size of their claims. The principle of equality is, however, not absolute. Secured and preferred creditors jump the queue, and are paid before ordinary creditors. The pari passu principle still is a bedrock principle of insolvency law. In reality, however, the rule has gradually become the exception (read about the pari passu myth, here). Ordinary creditors are left with peanuts once secured and preferred creditors are paid. All creditors are equal, but some creditors are more equal than others, indeed.

In its recent Private Equity Insurance Group judgment (C‑156/15, read here), the Court of Justice clarified the relationship between the (exceptions to the) pari passu principle and article 20 of the Charter of Fundamental Rights of the European Union, according to which everyone is equal before the law. The case concerned the right of the taker of financial collateral to enforce the collateral, notwithstanding the commencement of insolvency proceedings in respect of the collateral provider, under Directive 2002/47/EC on financial collateral arrangements. This right confers a valuable advantage on (the holder of) financial collateral by comparison with other types of security which fall outside the scope of the directive.

According to the Court, a difference in treatment is justified if it is based on an objective and reasonable criterion, that is, if the difference relates to a legally permitted aim pursued by the legislation in question, and it is proportionate to the aim pursued by the treatment. The special regime for financial collateral meets each of the criteria set out by the Court. As such, the exception to the pari passu principle does not breach the principle of equal treatment.

The more general question that remains to be answered concerns the balance between rule and exception. In order to reinforce the pari passu principle, the exceptions to it need to be reined in.

Author: Arie Van Hoe

Lawyer (NautaDutilh), voluntary scientific collaborator (University of Antwerp)

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