
Bankruptcy proceedings are often seen as complex and lengthy. Their main goal is the collective debt collection for all creditors of the bankrupt debtor. However, not all creditors are in the same position within this system. Some have special rights giving them priority in collection. Among these, secured creditors with a right of separate debt collection particularly stand out. But what makes this specific entitlement so important in the storm of bankruptcy? Understanding this concept is crucial for all participants.
The right of separate debt collection is defined as a creditor’s right to separate settlement. This settlement arises from the value of a specific asset of the bankrupt debtor. Their specific right exists on this asset. This right gives the creditor a significantly stronger position in bankruptcy proceedings. A secured creditor with this right is a person with a lien or similar settlement right. This right must be registered in a public register, such as a land register or ship register.
The term also includes creditors whose liens are not registered, but under certain conditions. This includes fiduciary creditors and those with a right of retention. An asset subject to a right of separate debt collection is formally part of the bankruptcy estate. However, this asset is encumbered by the right of a third party, the secured creditor. This means the asset is not freely available to collect debts for all creditors equally. This specific right ensures the creditor’s claim is settled before others. Settlement is made from the value of the specific collateral.
This position of secured creditors creates a certain hierarchy within bankruptcy proceedings. Although bankruptcy aims for collective settlement, the right of separate debt collection deviates from equal treatment for all creditors. The law thereby recognizes and protects stronger rights acquired before bankruptcy. This is crucial for the credit market and legal certainty. Furthermore, transparency and enforceability of many forms of this right are linked to public registers. Registration is fundamental to protecting these rights. Losing this settlement advantage is possible. This occurs if it’s unregistered and the trustee didn’t know, or shouldn’t have known, about it.
The primary regulation governing the right of separate debt collection in Croatia is the Bankruptcy Act (SZ). This act details the rights and obligations of secured creditors. It also defines the procedure for liquidating assets encumbered by these rights. Several key articles of the SZ are fundamental to understanding this concept. Article 149 of the SZ defines secured creditors whose rights are registered in public books. Article 150 of the SZ regulates the position of fiduciary secured creditors. They also have this status.
Other lienholders, whose rights may not be registered, are covered in Article 151 of the SZ. Article 152 of the SZ equates certain creditors, like those with a right of retention, with secured creditors. Articles 247 to 256 of the SZ are particularly important. They detail the procedure for liquidating assets subject to such a right. This detailed regulation indicates the legislator’s awareness of the need to balance interests. The interests of secured creditors and the general bankruptcy estate are balanced.
In practice, we encounter various examples of such secured rights. The best-known example is a mortgage. This is a lien on real estate. A bank that granted a housing loan secured by a mortgage is a typical secured creditor. Liens can also exist on movable property. Examples include machinery or vehicles, if the right is registered or the item is delivered to the creditor. Fiduciary transfer of ownership for security is another form. The creditor formally becomes the owner, but only to secure the claim. Rights to settlement can also exist on other rights registered in public books. This includes ships, aircraft, or intellectual property. Judicial and notarial security for claims can also create a right of separate debt collection. The wide range of securities leading to this status shows system flexibility.
The key right arising from this institute is the right to separate (distinct) settlement. A secured creditor’s debt is collected from the value of the asset on which they have their specific secured claim. This occurs before other bankruptcy creditors’ debts are collected. This right includes settlement of the principal, accrued interest, and procedural costs. The secured creditor also has the right to demand liquidation of the asset serving as security for their claim.
The Bankruptcy Act also protects secured creditors in other ways. The bankruptcy trustee must provide information upon the secured creditor’s request. This information concerns the condition of movable property or claims the creditor can liquidate. Before the trustee disposes of an asset subject to this right, they must notify the secured creditor. The creditor can then suggest a more favorable liquidation method. If the trustee unduly delays liquidation, the secured creditor may be entitled to interest. This interest is paid from the bankruptcy estate under certain conditions.
Secured creditors also have certain obligations. They must inform the bankruptcy trustee about their specific entitlement. They must state the legal basis and the part of the assets the right pertains to. To collect an unsecured portion from the general estate, they must file a claim. This is like other bankruptcy creditors. It is important to note that secured creditors’ rights are not absolute. They can be limited by a restructuring plan. However, creditors must not be placed in a worse position than if there were no plan. Their rights are not merely passive. They include active elements like demanding liquidation.
The settlement procedure for secured creditors is specific and follows established rules. The bankruptcy trustee is primarily responsible for liquidating assets encumbered by a right of separate debt collection. An exception exists if the secured creditor initiated enforcement proceedings before bankruptcy. Liquidation methods depend on the asset type. Real estate, ships, and aircraft are sold via electronic public auction. The Financial Agency (FINA) conducts the auction. Enforcement procedure rules apply, with certain specifics. An example is minimum auction prices.
Movable property and rights can be liquidated in various ways. This includes electronic public auction, public tender, or direct agreement. The bankruptcy trustee decides, sometimes with court approval. Upon opening bankruptcy proceedings, enforcement actions initiated by secured creditors are generally suspended. The bankruptcy court then takes over the sale. If real estate enforcement has already begun, it may continue in that proceeding. A centralized liquidation process aims for efficiency but carries risks, like lower prices.
The order of settlement from the realized amount (proceeds) is strictly defined. First, costs of identifying the asset subject to the secured right are covered. Then, its liquidation costs are paid. A lump sum is often charged for these costs. This might be 10% of proceeds, or actual costs per Article 254 SZ. Only then is the secured creditor’s claim settled, including principal, interest, and costs. If multiple secured creditors exist on the same asset, they are settled by priority. Any surplus funds enter the general bankruptcy estate.
What if the sale price doesn’t cover the entire claim? If the debtor is personally liable, the secured creditor becomes an ordinary creditor for the unsecured part. Their debt is then collected from the general bankruptcy estate, proportionally with other bankruptcy creditors. This is an important “safety net,” but it depends on the debtor’s personal liability.
Assets encumbered by such a right are formally considered part of the debtor’s bankruptcy estate. However, the key difference is that these assets are not fully available to collect debts for all bankruptcy creditors equally. This specific entitlement directly reduces the bankruptcy estate available for creditors of lower priority. The amount paid to the secured creditor leaves the asset pool. This pool would otherwise be shared among all creditors.
Only surplus after full settlement of the secured creditor, including costs, enters the general estate. If no surplus exists, or it’s negligible, other unsecured creditors get nothing from that asset’s value. This has significant implications for all participants in the bankruptcy proceedings. For the debtor, significant secured rights reduce assets. These assets could be for a plan or settling unsecured debts. For other, unsecured creditors, any such right on the debtor’s assets reduces their chances of settlement. It practically “reserves” part of the assets exclusively for secured creditors. Thus, unsecured creditors also want encumbered assets liquidated at the best price. The bankruptcy trustee, on the other hand, must carefully consider all existing secured entitlements. Their duty is to correctly conduct liquidation and subsequent distribution of funds to avoid personal liability. This specific right of separate debt collection is thus a legal mechanism. It balances protecting secured claims (vital for credit markets) with equal creditor treatment in bankruptcy. Proper understanding of this concept and its consequences is essential for navigating complex bankruptcy proceedings. Transparency about these rights (e.g., via a public table) is crucial for all creditors.
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