Privileges amongst creditors

Sep 2, 2016News & Analysis

Enforcement agents often make a mistake with the application of Art.136 Obligations and Contracts Act (OCA) governing the privileges in cases of more than one creditor. More precisely, these are the cases where satisfaction of two or more creditors has taken place, and the debtor assets have turned out to be insufficient to gratify all creditors within the forcible execution.

When the proceeds in forcible execution are inadequate the following question arises – in what order the creditors and their claims should be gratified. This order is partly governed by Art.136, s.3: “claims secured by a pledge or mortgage – out of the value of the pledged or mortgaged properties”. The legal implication of this article, however, is commonly mistaken by enforcement agents.

According to Art.136, s.3 OCA a privilege is only guaranteed to a creditor who has real security upon a piece of tangible debtor asset. This law provision does not provide privilege to an unsecured creditor over the other creditors within the forcible execution, even if the unsecured creditor has provided his claim as security to his/her own creditors. Thus, when one of the unsecured creditors within forcible execution sets up a pledge over his claim in favor of a third party (who is actually creditor of the creditor) and then assigns his claim to the pledgee, this does not mean that the new creditor (and his/her claim) is secured by law. Or, to sum up, the pledge on unsecured claim in favour of a third party within forcible execution against the debtor does not provide any privilege over the other creditors within the execution, but it institutes privilege in favour of this third party over the rest of the creditors of the pledger.

Defending the opposite belief would be an infringement of the main principle of the law: No one can transfer a right to another that he has not himself (Nemo plus iuris transfere (ad alium) potest quam ipse habet).