(EUROPEAN AND INTERNATIONAL BUSINESS LAW) THIRD PARTIES’ RIGHTS IN REM UNDER EIR: Master thesis Supervisor of the Master Thesis: Prof. Dr. Rimvydas… [613957]

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MYKOLAS ROMERIS UNIVERSITY
FACULTY OF LAW
DEPARTMENT OF BUSINESS LAW

CRACIUN DUMITRITA
(EUROPEAN AND INTERNATIONAL BUSINESS LAW)

THIRD PARTIES’ RIGHTS IN REM UNDER EIR:
Master thesis

Supervisor of the Master Thesis:
Prof. Dr. Rimvydas Norkus

Vilnius 2017

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Table of contents

LIST OF ABBREVIATIONS ………………………….. ………………………….. ………………………….. … 3
INTRODUCTION ………………………….. ………………………….. ………………………….. ………………… 4
Chapter 1. Application of artic le 5 of European Insolvency Regulation ………………………….. 9
1.1 General notions regarding European Insolvency Regulation ………………………….. ……… 9
1.1.1 The scope of EIR analyzed through comparison with EIR Recast ……………………… 10
1.1.2 Cross -border insolven cy under EIR ………………………….. ………………………….. .. 16
1.2 Third parties’ rights in rem as an exception from lex concursus ………………………….. .. 20
1.2.1 Rights in rem under insolvency law ………………………….. ………………………….. …….. 21
1.2.2 Rights in rem under property law ………………………….. ………………………….. …….. 25
1.2.3 Application of art. 8 of EIR Recast ………………………….. ………………………….. … 30
Chapter 2. Application of UNICTRAL and international insolvency regulation in t he area
of third parties’ rights in rem ………………………….. ………………………….. ………………………….. . 35
2.1 Comparison between EIR and UNICTRAL regarding third parties’ rights in rem ……. 37
2.1.1 The role of UNICTRAL regarding insolvency matters ………………………….. ….. 38
2.1.2. Better protection of secured creditors – EIR or UNICTRAL? ………………………….. 41
2.2 Collateral securities located in non -EU Member States ………………………….. ………… 58
2.2.1 International regulation of insolvency proceedings for secured creditors …… 58
2.2.2 Comparison between Moldova and Lithuania ………………………….. ………………… 62
CONCLUSIONS ………………………….. ………………………….. ………………………….. ………………… 68
RECOMMENDATIONS ………………………….. ………………………….. ………………………….. …….. 70
LIST OF BIBLIOGRAPHY ………………………….. ………………………….. ………………………….. … 71
ABSTRACT ………………………….. ………………………….. ………………………….. ………………………. 73
SUMMARY ………………………….. ………………………….. ………………………….. ……………………….. 74
ANNEX 1 ………………………….. ………………………….. ………………………….. ………………………….. . 75
DECLARATION OF HONESTY ………………………….. ………………………….. …………………….. 77

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List of abbreviations

EIR- European Insolvency Regulation
UNICTRAL – United Nations Commission on International Trade L aw
MS- Member State
EU-European Union
COMI -Center of Main Interests
BREXIT -British Exit
ECJ-European Court of Justice

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Introduction

Statement topic . Business world among EU MS is mainly b ased on multinational companies that
merge in order to get profit, to diversify the products and services, to gain a leader position into
the market, in few words, to face competition. In order to achieve this goals, many companies get
financial collateral support – lenders that own money. But, in many cases business may fall down
and companies are not being able to pay their debts at fall due, so they become subject to
insolvency proceedings . The main concern of European legislation is COMI (Centre of Main
Interest) meaning the brain or b usiness activity in one MS, the state where main insolvency
proceedings are opened. COMI is a vital element for the application of the most effective law for
secured creditors. That’s why European Insolvency Reg ulation was created to determine the
conduct of cross -border insolvency proceeding s within the European Community . Finally, after
many years of negotiations among Member States, a uniform set of private international law rules
regarding applicable law, jurisdiction and rec ognition of foreign judgements, has been established
in order to reduce the risk of opportunistic behavior, to assure cross -border efficiency an d legal
certainty.
In my work, third party’s rights in rem will be analyzed from the perspective of the Recast
of European Insolvency Regulation. O n 20 May 2015 the European Parliament approved the new
European Insolvency Regulation (EIR) which mainly regards a clearer definition of insolvency
proceedings, a better application and interpretation in the Regulation. The recast of fers a second
chance for debtor; a more organized coordination of insolvency opening between creditors against
same debtor ; a balance between insolven cy administrator a nd protection of local creditor; as well
as an interconnection between national registers. I t makes the opening of secondary p roceedings
coordinated with the interests of local creditors and the objectives of the main proceedings, and
accordingly, strengthens the main insolvency practitioner’s rol e in this regard, because he will
have the opportunity to apply for refusal or postponement of the opening of secon dary proceedings,
while the court of the establishment will be in a position to be aware of any rescue or reorganization
options explored by the main insolvency practit ioner. Regarding national registers, they will be
interconnected with each other through the Europea n e-Justice portal. In this way will be protected
rights of claim of foreign creditors and avoid opening parallel proceedings, as their right to lodge
claims will be facilitated by a standard form. There has been less focus on rights in rem tha t may
have been granted in favor of bank lenders and other secured creditors.
So regarding third party’s rights in rem , in my work i would like to bring into discussion;
 what is a right in rem according to art. 5;

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 where are secured assets located and the importance of the issue;
 are rights in rem affected by some kind of security enforcement stay provided
under the main proceedings;
 Inter -creditor agreements regarding ranking ;
 the applicable law and applicability in time under art. 5
The content of art. 5 of European Insolvency Regulation provides that “the opening of insolvency
proceedings shall not affect the rights in rem of creditors or third parties in respect of tangible or
intangible, moveable or immoveable assets (both specific assets and collections of indefinite assets
as a whole which change from time to time) belonging to the debtor which are situated within the
territory of another Member State at the time of the o pening of proceedings. ”1 The aim is to protect
secured creditors with rights such as mortgages or pledges, that offere d finance to a debtor. Lex
concursus, which regards that assets of debtor that belongs to main proceedi ngs, to the i nsolvency
estate from which o bligations are being discharged, does not affec t rights in rem. “Article 5 is only
applicable to rights which are in existence at the time of the opening of insolvency proceedings.
In the event that these rights have been created after the opening of proceedings, Article 4 of EIR
is fully applicable. According to Virgos -Schmitt an concern of art.5 is to protect the trade in the
Member State where the assets are situated and the legal certainty of the rights over them and to
improve credit system and wealth. ”2 “Article 5 immunizes rights in rem from the effects of
insolvency proceedings , but only where the secured assets are located in a Member State other
than the one in which either main or secondary proceedings are commenced .”3 The term belonging
covers legal ownership, economi c ownership and property rights that according to the applicable
law, belongs to the insolvency estate. The question what rights in rem and the law is to determine
whether a right is to be regarded as a right in rem for these purposes, is covered by art. 5 .”
According to article 5(3 ) a right which is entered in a public register and is enforceable against
third parties shall be considered to be a right in rem. ”4 According to Virgos -Schmitt Report the
applicable law is the national one, where assets are loca ted. “A right in rem basically has two
characteristics;
 its direct and immediate relationship with the asset to which it relates, which remains linked
until the debt has been satisfied;

1 Council Regulation No. 1346/2000 of 29 May 2000 on insolvency proceedings, Article 5.
2 Virgos -Schmit Report on the Convention of Insolvency Proceedings, paras. 96 -97.
3 Jennifer Mar shall – Allen & Overy (England), Article 5 (Rights in rem) , para 16, April 6 2011, http://www.eir –
reform.eu/uploads/PDF/Jennifer_Marshall.pdf ( accessed on May 1, 2017) and Virgos -Schmit Report, para,95.
4 Jennifer Marshall – Allen & Overy (England), Article 5 (Rights in rem), para 13 , April 6 2011, http://www.eir –
reform.eu/uploads/PDF/Jennifer_Marshall.pdf (accessed on May 1, 2017).

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 and the absolute nature of the allocation of the right to the holder. In other words, the person
who holds aright in rem can enforce it against anyone who interferes with his right without
his consent. Such rights are used to claim property over assets. "5
Regarding where are the secured assets located, the importance is the presence of the assets in an
EU MS or a third country. In order to be applied EIR, the assets should be located in a MS . Another
requirement is the law applicable in dependence of the nature of the relevant assets, stated in article
2(g) o EIR.” Article 2( g) of the EIR gives some guidance as to where certain types of assets are
located for the purposes of the EIR: (a) in the case of tangible property, the assets will be located
in the Member State within which the property is situated; (b) in the case of pr operty and rights
where ownership or entitlement must be entered in a public register, those assets will be situated
in the Member State under whose authority the register is kept; and (c) in the case of claims, the
claim will be situated in the Member Sta te where the third party required to meet the claim has its
centre of main interests .”6 If an asset is located in a third State, the effects of the opening of main
proceedings wil l not be determined by art.5, but will be applicable lex concursus, according to
private internationa l law provisions. “If assets are under lex situs in one MS and main proceedings
are carried out in another MS, there is a possibility of opening secondary proceedings (EIR, recital
25, 4 line) if one of the affected assets is an establishment. Lex situs will be considered the law
governing the opening of secondary proceedings. affected by national law ”7. However , opening
secondary proceedings can give the possibility of abuse of the debtor, by transferring the assets
that belongs to third parties’ rights in rem. Some minor protection is offered in EIR art. 5(4).
“In relation to a stay of enforcement of security rights, stated in art. 25 EIR, does not
derogate from the underlying security interest but merely postpones the right to enforce. There is
a debat e regarding the issue, since recital 25 states that the proprietor of the right in rem should be
able to continue to assert his right to segregation or separate settlement of the collateral s ”ecurity.
Due to this, a s ecured creditor ca n enforce his right notwithstanding moratorium which might arise
pursuant to the main proceedings. ”8
“Regarding inter-creditor agreement s betwee n the secured creditors, provide s that, if the
junior creditors recei ve any payments before the senior creditors have been paid in full, the junior
creditors have to hand over the amount received. Article 4(2) of the EIR states that the law of the
state of the opening of main proceedings will govern the question of when and how distributions

5 Jennifer Marshall – Allen & Overy (England), Article 5 (Rights in rem), para 14 , April 6 2011, http://www.eir –
reform.eu/uploads/PDF/Jennifer_Marshall.pdf (accessed on May 1, 2017).
6 Jennifer Marshall – Allen & Overy (England), Ar ticle 5 (Rights in rem), para 17 , April 6 2011, http://www.eir –
reform.eu/uploads/PDF/Jennifer_Marshall.pdf (accessed on May 1, 2017).
7 Virgos -Schmit Report, para 98.
8 Jennifer Marshall – Allen & Overy (England), Articl e 5 (Rights in rem), para 23 -24, April 6 2011, http://www.eir –
reform.eu/uploads/PDF/Jennifer_Marshall.pdf (accessed on May 1, 2017).

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of proceeds will take place. This law will also determine the ranking and treatment of claims in
the insolvency proceedings , preferential claims. As well as whether a secured creditor that has
obtained partial satisfaction of its claim, either through the exercise of a right in rem or by way of
set-off, may make a claim in the insolvency proceedings for the balance of its claim. ”9 Issues
concerning different rules regarding the ranking of secured claims under the law of the state of the
opening of proceedings and the law of the member state where the secured assets are located, will
be further discussed .
“Article 43 of the EIR states that the provisions of the EIR shall apply only to insolvency
proceedings opened after EIR entry into force and acts done by a debtor before the entry into force
of this Regulation shall continue to be governed by the law which was applicable to them at the
time they were done .”10
Finally, the aim of the topic is an evaluation of currently chang ing situation, taking into
account The Recast of Insolvency Regulation, in order to clarify the situation of third party rights
in rem and the lacks of the legal framework.
Relevance of the topic : This topic is important as it regard the new Europe an Insolvency
Regulation (EIR) that offers some changes towards debtor ‘ s more control over assets and
jurisdiction that is much more precise and clear. The EIR Recast regulates rights in rem of secured
creditors that protect their holders against the risk of insolvency of the debtor and the interference
of third parties. As well have a very important function with regard to the granting of credit and
obtaining capital investment in EU. The Regulation imposes only an obligation to respect third
parties’ rig hts in rem over assets located within the territory of a State different from the State of
the opening of proceedings .
Aim: To make a research regarding the importance and application of European Union
Insolvency Regulation in the matter of protection of rights in rem of the secured creditors over
assets located in MS and regarding the protect ion of the trade in the MS where the assets are
situated and the legal certainty of the rights over them.

Objectives : – Comparison between EIR and EIR Recast ;
– Research of principles of universality and territoriality;
-Define and establish the effects of rights in rem according to EIR and
property law;

9 Jennifer Marshall – Allen & Overy (England), Article 5 (Rights in rem), p aras. 27, 29, April 6 2011, http://www.eir –
reform.eu/uploads/PDF/Jennifer_Marshall.pdf (accessed on May 1, 2017).
10 Jennifer Marshall – Allen & Overy (England), Article 5 (Rights in rem), para 31, April 6 2011, http://www.eir –
reform.eu/uploads/PDF/Jennifer_Marshall.pdf (accessed on May 1, 2017).

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-Making a comparat ive analyze of the securi ty rights according to EIR and
UNICTRAL;
– Making a comparative analyze of security rights between Lithuania and
Moldova.
Review of the literature : My work is based on various researchers scientifically works
relevant to the topic of third -party rights in rem as Benja min, J. Interests in Securities; A
Proprietary Law Analysis of the International Securities Markets; Bergstr öm, C. Eisenberg, T.
Sundgren, S. On the Design of Efficient Priority Rules for Secured Cr editors: Empirical Evidence
from a Change in Law. 2004; Bhandari , J. S. Weiss, L.A. Corporate Bankruptcy. Economic and
Legal Perspective s; Black's Law Dictionary 9th ed; Clarke, A. Kohler, P. Property Law –
Comment ary and Materials Law in Context; Drobnig , U. Snijders, H. J. Zippro, E.J. Divergences
of Property Law, an Obstacle to the Internal market?; Finch, V. Security, Insolvency and Risk:
Who Pays the Price? ; Fleisig, H. Safavian, M. De la Pena, N. Reforming Collateral Laws To
Expand Access to Financ e; Goode, R. Principles of Corporate Insolvency Law; the analysis of
legal acts as Council Regulation 1346/200011 and of practical cases of the Court of Justice of
European Union.
The structure of the master thesis : The master thesis is divided in two chapt ers, sub -chapters,
sections and subsections. First chapter is called Application of article 5 of EIR, where I will
analyze the relevance of rights in rem of the creditors in cross -border situations related to the
Regulation and the Recast. In this chap ter, are defined rights in rem under insolvency law and
property law; are studied issues as localization of assets -subjects to security rights , exercise of
credito r rights and ranking agreements; principles of universality and territoriality; reorganization
of debtor’s business.
Second cha pter, regards comparison between EI R and UNICTRAL Model Law as to
understand how security rights located in third -party states and affected by insolvency proceedings
can be protected and enforced. As well, is made a comparison between Lithuania and Moldova’s
legal framework in the area of security rights and their protection when insolvency proceedings
are opened.
The expected results of the research will be situated and discussed in conclusions with the linked
recomm endations towards my topic entitled “Third parties ‘rights in rem under EIR”.

11 Council Regulation No. 1346/2 000 of 29 May 2000 on insolvency proceedings, Article 5.

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Chapter 1. Application of article 5 of European Insolvency
Regulation

In this chapter, I would like to present a legal research of European cross -border insolvency
regulation, specifically an analysis of art. 5 of European Insolvency Regulation. The chapter is
divided in two subchapters: “General notions regarding EIR ” and “Third parties’ rights in rem as
an exception from lex concursus ”. The first subchapter’s role is to confirm the relevance of EIR
focusing on main notions as insolvency and cross -border transactions that operate inside EU .
Moreover, the main reference of research is the EIR Re cast, since I will accomplish a comparative
analysis between EIR and EIR Recast. EIR Recast offers more modern approaches of
communication between states regarding insolvency, therefore, we can observe efficacy and
weaknesses of EIR. The results of this analysis regard ing the improvements and disadvantages of
EIR Recast will be presented in the section „Conclusions and Recommendations ”. My work will
be focused on the applicable law, since in the first subchapter I will bring into discussion the no tion
of lex fori concur sus as a consequence of universality concept and in the second subchapter, I will
present lex situs as the law applicable to third parties rights in rem, as an effect of territoriality
concept . In this subchapter, are defined rights in rem, classification of securities, localization of
assets -subjects to rights in rem , the applicable law, exercise of credito r rights and ranking
agreements. The second subchapter is the main part of my work since I am highlighting the
question how secured cred itors are protected under EIR and if this exception indeed benefits the
debtor and the creditors of insolvency proceedings. This scientific gap of my thesis and the result
from a legal perspective will be presented in the section “Conclusions and Recommend ations”.

Subchapte r 1.1. General notions regarding European Insolvency Regulation

To apply and interpret EIR we should take into account the general principles of
Community law and the law of freedoms that could improve the cooperation system between states
in the area of insolvency . EIR regards just cross -border insolvency proceedings opened in case
when assets belonging to insolvency estate are located in more than one MS. The main fundament
of cross -border insolvency in an international sph ere is cooperation between states . The regime
introduced by EIR must be underst ood in the light of cooperation. If there is a level of conformity
between Regulation framework and cooperation that would enhance the functioning of internal
market, the cooper ation would be the base of efficient cross -border insolvency proceedings. This

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kind of cooperation should be exercised within the scope of Community law and the principle of
supremacy, in order to achieve Community’ s objectives of European integration and economic
growth.
“The necessity of a European Insolvency Regulation arose as a consequence of disparities
of insolvency laws and private international rules of MS, creating a distortion of economic
relationships between them. Therefore, the unpredictable and unfair insolvency proceedings,
affected the desire of private parties to get involved in cross -border transactions . On an overall
idea, the differences between cross -border insolvency affects in main part interstate trade and
economic gro wth of EU. The EIR scope is to harmonize MS insolvency legislations and to
maintain the economic European market developed ”12.
The subchapter is divided in two subsections “The scope of EIR analyzed through
comparison with EIR Recast” and “Cross -border in solvency under EIR”.

Subsection 1.1.1. The scope of EIR analyzed through comparison with EIR Recast

“To understand the scope and role of EIR we should take a look into the background of
EIR, specifically the Brussels Convention from 1968 and Brussels I. These conventions regulate
issues related to jurisdiction and recognition and enforcement of judgements from other EU states,
but nothing regarding bankruptcy, winding -up proceedings of insolvent companies, judicial
arrangements, compositions and analogous proceedings. European Court of Justice has established
that judicial decisions in order to be excluded from regulation of Brussels Convention must be
closely conn ected to insolvency proceedings . Brussels I even if does not apply to insolvency
proceedings, is applicable to the winding up of solvent companies. The EC Convention was
converted into Regulation, with an amendment of art.5 regarding floating charges and with a
ratification of all MS and by offering power to ECJ to interpret the act without an exp ress
provision. The Regulation came into force on 31 May, 2002 ”13.
The scope of EIR regards issues as opening main and secondary insolvency proceedings,
the applicable law and recognition and enforcement of these proceedings in all MS. The main
objectives are: an effective internal market function and to avoid possibilities for forum shopping,
meaning that debtor can transfer assets and judicial proceedings from one MS to another. EIR is
applicable only if COMI (Center of Main Interests) is located in a EU Member State and main
insolvency proceedings are opened in that state. Therefore, the law of that state or lex concursus
is extended to all debtor’s assets on a worldwide basis inside EU. In non -European countries

12 Jona Israel, European Cross -Border Insolvency Regulation, (Antwerpen -Oxford: Intersentia, 2005), 1 -4
13 Roy Goode, Principles of Corporate Insolvency Law , (London: Sweet and Maxwell Limited, 2005), 564-565.

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recognition of lex concursus, especially o f liquidator’s powers is under jurisdiction and courts of
that states. Regarding rights in rem, the regulation is applied with limits, but same conflict rules
should apply if assets object of rights in rem are situated in a non -European country.
“In orde r that EIR could be applied are necessary some conditions as:
 opening of insolvency proceedings;
 proceedings should be collective;
 proceedings should entail the total or partial divestment of debtor and the appointment of
a liquidator, meaning that it regards collective proceedings that ensures assets to pass from
debtor possession to insolvency estate administered by the liquidator ;
 proceedings must be opened in a MS; outside EU would not apply EIR ;
 at the time of the opening, COMI must be located in one of MS , meaning that the relevant
time is that of opening the insolvency proceedings, moment in which COMI should be in
a MS and even if the company was incorporated in another state, EIR applies ;
 the debtor is not an institution excluded from Regulat ion. Excluded institutions ae the ones
holding funds for third parties, as credit institutions, insurance undertakings and collective
investment undertakings, where the State has the power to intervene offered14.”
“ As Regarding opening insolvency proceedin gs condition , these proceedings must be listed in
Annex A of EIR and must be characterized as insolvency proceeding s under national law, which
may be different. ”15. “EIR Recast presents some changes into this area regarding pre -insolvency
proceedings as proceedings opened for the restructuring and rehabilitation of financially distressed
debtors in order to continue their business, even at the first stage of insolvency and leaving the
debtor fully or partially in control of his assets and affairs; proceedings that adjusts the debt by
reducing the amount of the debt or extending the period of payment for consumers and self –
employed debtors ; proceedings that ensures the restructuring of debtor’s business by implementing
a temporary moratorium for enforcement of claims belonging to individual creditors ; proceedings
that ensures the publicity of proceedings so that creditors could lodge theirs claims , at the same
time ensur ing the collective estate of proceedings and the possibility for creditors to go against
chosen jurisdiction; proceedings that, under the law of some Member States, allows interim and
provisional proceedings before a court confirms continuation of non -interim proceedings and
proceedings opened to prevent future insolvency, even if the debtor faces non -financial
difficulties .”16

14 Council regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings , recital (9).
15 Goode, Principles of Corporate I nsolvency Law , 568.
16 http://bobwessels.nl/wp/wp -content/uploads/2015/09/EIR -Recast -Aug-2015 -Technical -note.pdf (accessed on
March 16, 2017).

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“Collective proceedings are described in Annex A of EIR, as winding -up proceedings,
which regards collection, realization and distr ibution of assets and proceedings opened for
restructuring and reorganization of debtor’s business. Annex A of EIR establishes the voluntary
liquidation, compulsory liquidation, voluntary arrangements under insolvency legislation
administration liquidation by court order or without a court order . The latest represents a change
made to Annex A by including in administration , appointments made by filling pres cribed
documents with the court. No regulation regarding appointment of a p rovisional liquidator is
mentioned in Annex A, therefore does not constitute a collective proceeding. Art. 29 of EIR makes
a reference to a temporary liquidator appointed till secondary proceedings are opened in order to
safeguard assets by applying to the court of another MS where assets are situated to request
measures to secure and preserve the assets object of secondary proceedings.
Winding -up proceedings according to article 2(1) of EIR means insolvency proceedings
that involves realizing the assets o f the debtor, including where the proceedin gs where closed by
a restructuring plan or other measure terminating the insolvency or closed by reason of
insufficiency of the assets. According to Annex B, winding -up proceedings regards voluntary
winding -up, co mpulsory winding -up and through administration. T here is a certain discussion
regarding the notion of court as meaning “the judicial body or any other competent body of a MS
empowered to open insolvency proceedings or to take decisions in course of such pr oceedings”17,
since it looks like the Regulation concerns only matters of compulsory winding -up. Nevertheless,
the notion of court is freely interpreted in Recital 10 of EIR “Insolvency proceedings do not
necessarily involve the intervention of a judicial a uthority; the expression “court” in this
Regulation should be given a broad meaning and include a person or body empowered to open
insolvency proceedings”18. The voluntary winding -up is made by passing a cre ditor resolution for
winding up. T he court in this case has the responsibility of confirm the winding up by qualifying
the winding up proceeding in accordance with EIR.”19
There are uncertainties found by insolvency, legal practi tioners, courts and business
practitioners , which EIR Recast r eformed. The need for a reform in the field of European
insolvency has led to the drafting of a new Regulation: EIR Recast that will entry into force on 26
June 2017. The EIR Recast is based on a Heidelberg -Luxembourg -Vienna Report accompanied
by a proposa l for adaptation of the Regulation presented by the European C ommission. The
proposal represents facts discussed in the said report, based on discussions and consultations with
a group of experts and an appraisal of the effects on existing EU policy .

17 Council regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings, art.2(d).
18Council regulation (EC) No 1346/200 0 of 29 May 2000 on insolvency proceedings , recital (10).
19 Goode, Principles of Corporate Insolvency Law, 568 -560.

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“The main issues covered by EIR recast are:
 the lack of certain insolvency proceedings as pre -insolvency, hybrid, some personal
proceedings .
EIR recast lists all national names of insolvency proceedings, all insolvency names of
insolvency practiti oners, al l repealed Regulations and establishes a correlation table of articles
between EIR and EIR Recast;
 the problems of COMI as creating difficulties for debtor and allowing forum shopping .
EIR recast presents a possibility for judicial review of the rule s of i nternational jurisdiction20.
“Also the presumptions regarding COMI are much more clear, since in the case of a company
or legal person, the place of the registered office shall be presumed to be the COMI in the
absence of proof to the contrary. This presump tion shall only apply if the registered office has
not been moved to another Member State within a period of 3 months prior to the request for
the opening of insolvency proceedings. The same “suspect period” applies to professionals that
exercise an indepe ndent business or professional activity. The COMI shall be presumed to be
that individual’s principal place of business in the absence of proof to the contrary. In the case
of any other individual, the COMI shall be presumed to be the place of the individu al’s habitual
residence in the absence of proof to the contrary. This presumption shall only apply if the
habitual residence has not been moved to another Member State within a period of 6 months
prior to the request for the opening of insolvency proceedin gs”21;
 opening secondary proceedings resulted an obstacle for in solvency estate administration.
“EIR Recast offers the next solutions for an effective administration: abolishing the winding –
up requirement for secondary proceedings; a court may refuse opening of secondary
proceedings if this is not necessary to protect the interests of local creditors; improving
cooperation between main and secondary proceedings though extending the present
cooperation requirements between liquidators to the courts invo lved and to insolvency
practitioners and courts ”22. “Regarding the possibi lity for a seized cour t to open secondary
proceedings or to refuse or postpone such opening, is allowed in the next cases:

20 Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency
proceedings (recast), art. 4 -5.
21 Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency
proceedings (recast), art. 3, sec.1, 3rd and 4rd line.
22 Council regulation (EC) No 1346/2000 of 29 May 2000 on i nsolvency proceedings, art.31.

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the insolvency practitioner in main proceedings has the poss ibility to give an undertaking
to local creditors that they will be treated as if secondary proceedings had been opened; the
court temporarily stays the opening of secondary proceedings ”23;
 no publication information regarding opening of insolvency proceedi ngs necessary for
lodging of claims.
“EIR Recast regulates the establishment and interconnection of insolvency registers ;
determines that the costs of establishing and interconnecting these registers are to be financed
by the EU ; provides rules for access to the information via the system of interconnection and
for the publication in another Member States of a decision opening an insolvency proceeding
and the decision appointing the insolvency practitioner. ”24 ” EIR Recast provides that lodging
claims in the insolvency proceedings can be made by any means of communication, which are
accepted by the law of the State of opening of such proceedings, made through a standard
claims form and the minimum period for lodging by foreign credi tors is 30 days following
publication in insolvency register of state of opening .”25;
 EIR recast extends the cooperation between cross -border insolvency practitioners and
courts26. “Therefore, insolvency practitioners and courts can enter into agreements in order
to coordinate insolvency proceedings opened in more than one MS against the same deb tor
or members of the same group of companies , if these rules are compatible with each of the
proceedings . Insolvency practitioners and the c ourts cooperate and commu nicate with each
other as those involved in main and secondary proceedi ngs relating to the same debtor and
should never go against the interests of the credi tors in each of the proceedings ”27;
 EIR does not regulate insolvency of groups of companies.
EIR Recast regulates this issue in Chapter V “Insolvency proceedings of members of a group
of companies”. “EIR Recast introduces procedural rules on the coordination of the insolvency
proceedings of members of a group of companies, in order to ensure effic iency of the
coordination and the respect of each group member's separate legal personality ”28. “If there is
a sole COMI of the group of companies, then the seized court can open insolvency proceedings

23 Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency
proceedings (recast), art.36, art.38.
24 Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency
proceedings (re cast, art.24 -28.
25Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency
proceedings (recast ), art.53 -55.
26 Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvenc y
proceedings (recast), art. 42 -43.
27Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency
proceedings (recast ), recitals 49 -50.
28Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency
proceedings (recast ), recital 54.

15
in a single jurisdiction and designate an insolvency pr actitioner in all concerned
proceedings ”29. “30
To sum up, EIR importance is certain. To maintain a n EU market integrated is necessary
that businesses across EU have access to the EU market and have freedom to operate inside EU.
To obtain that freedom is necessary a unified system of laws that regulates insolvency matters.
Therefore, the national rules of international private law should be subject to Community Law and
under control of European Court of Justice. EIR Recast offers larger possibilities for rehabilitation
and rescue of debtor; offers rules as to avoid forum shopping; ensures a more effective
coordination between main and secondary proceedings; creates a more effective framework of
cooper ation between courts and insolvency practitioners; brings a reform in the area of company
group insolvency proceedings : and ensures coordination between MS insolvency registers. A ll
these improvements are incentive s towards a larger investment in Europe. However, EIR Recast
regulates some issues that are too complex. For example, there is no clarity regarding which
proceedings are for winding -up and for restructuring, since they are mixed. Also, the EIR condemn
just a bad form of forum shopping, somehow all ows generally forum shopping. The definition of
local creditor is incomplete. According to EIR Recast, article 3 (4), the creditor is the “creditor
whose claim arises from or is in connection with the operation of an establishment situated within
the terr itory of the Member State where the opening of territorial proceedings is requested.” But,
it should also include the location of CO MI of the local creditor . The habitual residence, domicile
or registered office should be in the place where the establishme nt is located. There is also an
uncertainty in the area of company group coordination. T he new Regulation states the main
insolvency proceedings will be opened in the state where COMI of the group is situated. At the
same time, it states the presumption th at COMI should not be changed three mont hs prior opening
of insolvency proceedings. It is interesting if it will be considered foum shopping if in the “suspect
period” the COMI will be transferred to another company from the group. A change in the
regulat ion area is brought by BREXIT, since the regulation was drafted before BREXT. Therefore,
the effects of EIR Recast will be retained over England regarding European transactions. Also,
there will be uncertainty as cooperation between England insolvency prac titioners and EU courts
and vice versa. An option could be a Treaty regulating European matters between EU and England
and bilateral agreements between England and European MS. But the private international
regulation, in the absence of a common recognitio n system insolvency proceedings, could lead to
a risk of competing insolvency proceedings.

29 Idem, recital 53.
30 http://bobwessels.nl/wp/wp -content/uploads/2015/09/EIR -Recast -Aug-2015 -Technica l-note.pdf ( accessed on
March 15, 2017).

16

Subsection 1.1.2. Cross -border insolvency under EIR

The main issues of cross -border insolvency are efficient deployment and distribution of
assets to creditors, based on the rules of territoriality and universality. These two notions of
deployment and equitable distribution will be further explained, but fo r the moment, we should
understand what is cross -border insolvency and the legal question that creates regarding the
opposition between territoriality and universality.
“Cross -border insolvency occurs when debtor’s assets or liabilities are situated in tw o or
more MS states and are subject to jurisdiction of those states, creating a conflict of interests. This
conflict is generated by the interest of all creditors to get payed when insolvency proceedings are
opened. Therefore, states involved should decid e under what circumstances should exercise their
jurisdiction, what actions should be taken regarding the assets located under their territoriality and
what law to apply. Also, states should take posit ion concerning insolvency proceedings opened
abroad, th e recognition possibilities for those proceedings and the effects of that recognition over
the territorial proceedings. This issues are governed by two main rules which are universality,
meaning that the insol vency proceedings opened in the state where is COMI, are af fected by the
law of that state. The law is lex concursus, which governs all assets and liabilities of the debtor,
regardless where are situated. The second rule is territoriality, meaning that the effects of
insolvency proceedings are limited to one state , governed by lex situs or lex secun dus. The main
concern of courts and insolvency legislators is to create a cooperation between territoriality and
universality, by reconciling the opposing interests of these two conceptions. Universality allo ws
collective proceedings, creating an efficient, less complicated and time cost insolvency
proceedings system, but in contrast is less receptive to state and local creditors legitimate rights.
Territoriality allows protection of local creditors against th e risk of not having the debts repaid,
but at the same time goes against the efficiency of collective proceedings ”31.
“The insolvency estate is considered as a “common pool ”32, where all creditors have the
right to fish half of the fish , not the entire qua ntity, since will remain nothing left for other
fisherman. So, a cooperation between cre ditors in order to recover each of them their debts from
the half of the quantity of assets will enhance the common pool or the insolvency estate value.
This regards th e possibility for the debtor for going concern or continue the business for a longer
period of time and to develop insolvency administration, in order to ensure a future payment to the
creditors of the remaining debts, the other half of the insolvency esta te. Therefore, by using the

31 Jona Israel, European Cross -Border Insolvency Regulation, (Antwerpen -Oxford: Intersentia, 2005), 11 -12.
32 Jackson, The logic and limits of bankruptcy law, (Block -Lieb, 1986), 337.

17
rules of common pool, will be possible to an optimization of deployment . That means the
determination of insolvency estate value and its realization and distribution that means repairing
the suffered loss for each creditor. The narrow, economic meaning of deployment is wealth –
maximization for single creditor, a debt -collection method used for creditors interest only that
would yield the highest return for creditors. The economic perspective of insolvency law gives no
preference f or business continuation or reorganization. The broader perspective regards the
problem of financial distress, that focuses more on reorganization of the business. That means that
the main parties affected are not just the creditors with an enforceable claim under non -insolvency
law, but also employees, suppliers with certain interest in continuing the b usiness, the interest of
the society regarding employment policies, economic infra -structure and regional development.
Therefore, deployment may achieve a socially optimal result without highest satisfaction for the
creditors. Distribution is based on the principle paritas creditorum, which means that creditors are
situated on t he same level and distribution of the realized value should be equitable. The two
description, economic and open -ended , is relevant for distribution too. From economic point of
view, individual distribution and a high return for each creditor is not possible, since insolvency
proceedings are opened as collective, not individual. Nevertheless, paritas creditorum allows
redistribution, as levels individual creditors with claim s under no n-insolvency law. Under this
principle, redistribution is cheap and effective as levels unsecured creditors. From open -ended
point of view, distribution is a necessary element of insolvency law, since each creditor ranking
gets specific treatment, in depen dence of the ability to create a risk of insolvency, to have an impact
over insolvency or demand a collateral security. Normally, employees and creditors that may offer
financial support, as extending a credit may be afforded some priority in insolvency
proceedings ”33.
“The principle of territoriality is based on public order or state sovereignty and territorial
limits . Collective proceedings are possible to be enforced and coordinated on a national level. O n
an international level, it demands the acceptan ce from other jurisdictions. During territorial
proceedings, this acceptance lacks and local creditors are able to satisfy as many debts as possible.
These creditors are situated in a positional advantage, because of the information they possess or
the pos sibility to seek recourse to assets on an individual basis . Therefore, secured creditors are
situated in this position, as they have the right on the assets situated in different jurisdictions, as
they are collateral securities for debts payment .”34
“The p rinciple of universality regards two main points, the unique forum and the unique
law-lex fori concursus. From deployment point of view, the unique court maintains the insolvency

33 Israel, European Cross -Border Insolvency Regulation , 14-19.
34 Israel, European Cross -Border Insolvency Regulation , 29.

18
estate intact and under control, with less administrative costs. From distrib ution point of view is
inequitable, as all insolvency claims filling, time -bars for filling, publication of judgement
commencing proceedings and notification of creditors shall be made in in one court, under lex fori.
This is unfair for foreign creditors t hat supports much more expanses than local ones. The lex
concursus governs all aspects of insolvency proceedings, insolvency estate value and distribution
of dividends to creditors . As I have mentioned before about optimal deployment, is lex concursus
the one who governs the economic or open -ended perspective. Also, distribution schemes,
preferential claims are governed by lex concursus. The universality is opposite to states
jurisdictions and somehow to legitimate expectations of creditors, that expe cts that rules of local
insolvency proceedings could be applied. These expectations have no legal ground, as the
universal forum is predictable and creditors should analyze lex fori and its effects. ”35
“No universality and territoriality are enough to sati sfy foreign creditors and states
interests. Nevertheless, the most efficient solution is cooperation between jurisdictions. To this
regard, a solution is brought by Comitas Europea or Community Law that brings two ideas, the
first is application of one jur isdiction under universality and second is application of national
jurisdiction under territoriality. The man point is cooperation in order to reconcile the different
jurisdictions and to eliminate inter -state trade obstacles. ”36
“EIR Recast regulates cros s-border recognition of insolvency proceedings in art. (17)
which states that any judgement regarding insolvency proceedings shall be recognized in all
European MS. Also, t he debtor’s COMI is defined as “the place where the debtor conducts the
administrati on of its interests on a regular basis and is ascertainable by third partie s”37.The main
scope of EIR Recast is to slow the tendency of forum shopping. Regarding secondary insolvency
proceedings, EIR Recast brings a change towards winding -up proceedings stated in Annex B of
EIR that are excluded from secondary proceedings, as it was an obstacle for restructuring the
groups of companies and divisions from EU. Also, interim measures are taken by court with the
purpose of safeguard of ass ets for creditors ‘i nterests. These measures are: debtor’s divestment
total or partial of assets and appointment of an insolvency practitioner ; court’s control over assets
at creditors’ request or by own initiative; stay of individual creditor’s claim for negotiations
between creditors and debtor. EIR brings a new legal institution as synthetic proceedings, which
means that the main proceedings insolvency practitioner may give effect to realization and

35Israel, European Cro ss-Border Insolvency Regulation, 31 -34.
36 Israel, European Cross -border Insolvency Regulation , 325 -326.
37 Regulation (EU) 2015/848 of the Europe an Parliament and of the Council of 20 May 2015 on insolve ncy
proceedings (recast), art.3, sec. 1.

19
distribution of assets for local creditors, similar to the effect that woul d occur if secondary
insolvency proceedings would be opened ”.38
To sum up, in this subchapter I pursued to outline the importance of cooperation between
universality and territoriality, based on an analysis of EIR and EIR Recast, so that all secured
credit ors rights would be satisfied and debtor’s business rescue would be possible. According to
Virgos -Schmit Report, secondary proceedings have as auxiliary function , the protection of secured
creditors. Therefore, possessors of secured rights in rem will not be affected by main insolvency
proceedings, instead they will be subject to local proceedings, as a stay to lodge local claims or to
start local restructuring pro ceedings. “The major obstacle would be restructuring under ma in
proceedings. A negative point for European economic integration, is that immunity of secured
creditors from main insolvency proceedings would decrease incentives to use secured credit by
debto rs.”39 As a principle of Community Law all secondary legislation should be in accordance
with EU values and principles, therefore MS have less freedom regarding conflicts of interests in
cross -border insolvency, since their cooperation in this area should have as main objective the
economic integration of European market. Nor universality, nor territoriality principle responds
to creditors inquiries and concerns of foreign states, as effective deployment and distribution
requires cooperation of all jurisdi ctions under one law and court. A t the same time, states can apply
their jur isdiction as a consequence of sovereignty rule in order to protect local creditors ’ legitimate
interests. Territoriality principle that governs opening of secondary proceedings is the main aspect
of this subchapter since protects collateral security rights by opening secondary proceedings in the
state where the collateral is situated. Therefore, secondary proceedings protect local creditors
interests and facilitate cross -border pro ceedings when the insolvency estate is too complex to be
administered by a unique liquidator and proceedings. Secondary proceedings have less cooperation
role as regards application of national law. The rigidity of these proceedings have been diminished
by EIR Recast that abolished the liquidation proceedings from opening secondary proceedings, as
it was an obstacle for the business reorganization of the debtor. EIR failed to regulate protection
of secured creditors when there is a stay or moratorium in lod ging their claims, since EIR does not
specifies the position of secured creditors when liquidation is stopped and is a risk for the
insolvency estate to be damaged. Therefore, EIR Recast extends its regulation in the area of stay
of liquidation proceedings . The cooperation and coordination was limited by EIR to insolvency
practitioners, meanwhile EIR Recast offers a communication at insolvency practitioner – court

38 Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency
proceedings (recast) , art. 36.
39 Reinhard Bork, Kristin Van Zwieten, Commentary on the European Insolvency Regulation, (UK:Oxford University
Press, 2016), 37 -38.

20
level . In terms of cooperation, we can consider Comitas Europea as a solution that provides
cooperation between MS courts, as the courts are able to require help regarding insolvency matters
from other courts that would respond in good faith. An effective cooperation will ensure protection
of third parties rights in rem, by opening secondary proc eedin gs governed by lex situs in
conformity with Community Law, respecting the rules of collective deployment and distribution
of debtor’s assets.

Subchapter 1.2. Third parties ’ rights in rem as an exception from lex concursus

As an exception from the general rule mentioned in article 4 of EIR, rights in rem of third parties
regards assets independent from application of lex concursus and universality rule, explained in
subchapter I “The scope of EIR analyzed in comparison with EIR Recast”. Article 5 of EIR has as
purpose the immunization of these rights against the opening of main insolvency proceedings,
when COMI and the assets object of rights in rem are located in different MS. Article 5 of EIR
states :
“1. The opening of insolvency proce edings shall not affect the right in rem of creditors or third
parties in respect of tangible or intangible, moveable or immoveable assets -both specific assets
and collection of indefinite assets as a whole which change from time to time -belonging to the
debtor which are situated within the territory of another MS at the time of the opening of
proceedings.
2. The rights referred to in paragraph 1 shall in particular mean:
(a) the right to dispose of assets or have them disposed of and to obtain satisfaction from the
proceeds of or income from those assets, in particular by virtue of a lien or a mortgage;
(b) the exclusive right to have a claim met, in particular a right guaranteed by a lien in respect of
the claim or by assignment of the claim by way of a gu arantee;
(c) the right to demand the assets from, and/or to require restitution by, anyone having possession
or use of them contrary to the wishes of the party so entitled;
(d) a right in rem to the beneficial use of assets .
3. The right, recorded in a pub lic register and enforceable against third parties, under which a right
in rem within the meaning of paragraph 1 may be obtained, shall be considered a right in rem.
4. Paragraph 1 shall not preclude actions for voidness, voidability or unenforceability as referred
to in Article 4(2)(m)”40.

40 Council regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings, art.5.

21
Based on this article, this subchapter will co ntain responses to questions as what rights in rem are,
how does the location of assets matters, in which way rights in rem may be affected by moratorium
of enforcement of security under main proceedings, the applicable law, inter -creditor arrangements
and the novelty is the regulation of rights in rem of third parties under EIR Recast.
The premise of article 5 is that rights in rem are rights created befo re opening insolvency
proceedings by the debtor over his property in the benefit of a creditor, as a security or a guarantee
of the repayment of debt. Therefore, the creditor has the right to enforce the secured property
before unsecured or lower ranked cr editors and to participate in obtaining the repayment of its
debt. In cross -border transactions, the issue appears as a conflict of laws, since the security or
rights in rem are created over assets located in another MS than the state where main insolvency
proceedings are opened and the law of the later state does not apply on those assets.
Another importance of right s in rem is the commercial one as secured lending ensures
financial help for companies and individuals. If lenders offer money on basis of a valid security
governed by national law, they can enforce the security in the event of insolvency of debtor without
being unsecure that in case in the debtor have its insolvency proceedings opened in another state,
will have its security unenforceable. Th erefore, based on Recital 64, there is a commercial
certainty, as the lender will lend only when rights created over assets under the law of a MS, will
be enforceable in case of insolvency of the debtor and opening of main insolven cy proceedings in
another state than the one where assets are located. In the case Lutz v Bau erle 41(Annex 1) the
owner of rights in rem had the right of separation of its secured asset from insolvency estate and
the right to enforce the asset and to realize it as to satisfy the s ecured claim42.
The subchapter is divided in three subsections: “Rights in rem under insolvency law”;
“Rights in rem under property law” and “Application of article 8 of EIR Recast”.

Subsect ion 1 .2.1. R ights in rem under insolvency law

Rights in rem regards property rights, that under EIR should accomplish two conditions: to
be recognized as rights in rem under lex situs or the applicable law where assets are situated and
to be recognized under the purpose of the Convention with characte ristics stated in art. 5(2) – “The
rights referred to in paragraph 1 shall in particular mean:

41 Case C -557/13 Lutz v Bauerle ECLI:EU:C: 2015:227, [2015] BC C 413.
42 Virgos -Schmit Report, para.95 and Council regulation (EC) No 1346/2000 of 29 May 2000 on insolvency
proceedings , Recital 64.

22
(a) the right to dispose of assets or have them disposed of and to obtain satisfaction from the
proceeds of or income from those assets, in particular by virtue o f a lien or a mortgage;
(b) the exclusive right to have a claim met, in particular a right guaranteed by a lien in respect of
the claim or by assignment of the claim by way of a guarantee;
(c) the right to demand the assets from, and/or to require restitution by, anyone having possession
or use of them contrary to the wishes of the party so entitled;
(d) a right in rem to the beneficial use of assets ”43.
The Regulation purpose by art. 5(2) is to complement the scope of lex situs, not to substitute
the national law . Therefore, a right in rem is a property right to a tangible, intangible asset, opposed
of personal right to an asset. Rights in rem are ownership with an interest of the debtor over the
asset, a security interest, possession u nder a lease, mortgage, trust, fixed or floating charge, transfer
of future property or id entified or identifiable assets . To turn to art. 5 is necessary that the debtor
had an interest in the asset under lex causae and the asset is part of the insolvency estate under lex
concursus that determines the assets that form part of debtor ‘estate. The protection offered to third
parties does not extend to actions for avoidance and unenforceability of transactions detrimental
to creditors according to art. 5(4) re gulated by lex concursus under art. 4(m) .
According to Virgos -Schmit Report, “rights in rem should have a direct and immediate
relationship with the asset and the owner can enforce the right against third parties, a characteristic
that differ from persona l rights ”44. “For example, in case of rights in rem the owner can recover
the goods from a good -faith buyer that purchased the goods subsequently, the owner can enforce
against claims made by unsecured creditors or in case of successive securities, by accor ding first
in time interest than later interest ”45. If the debtor possesses a full and unqualified ownership than
is considered that he has no interest on the asset. However, it is sufficing if is a limited interest.
Art. 5(2) have as scope to harmonize differences t hat may exist among European MS. A right to
demand an asset from a person in possession may be a right in rem under French Law, or may be
a mere personal right under English Law, according to art. 5(1), but for sure, any of these cases
could f all under art.5(2) classification. According to art. 5(3), “The right recorded in a public
register and enforceable against third parties, under which a right in rem within the meaning of
paragraph 1 may be obtained, shall be considered a right in rem ”46. From this statement we can
analyze three existing elements: the existence of a right that is not a right in rem; right in rem
derives from the existing right; the existing right is registered and enforceable against third parties

43 Council regulation (EC) No 1346/2000 of 29 May 2000 o n insolvency proceedings, art.5, sec. 2.
44 Virgos -Schmit Report, Pa ra.103.
45 Goode, Principles of Corporate Insolvency Law , 602 -603.
46 Council regulation (EC) No 1346/2000 of 29 May 2000 on insol vency proceedings, art.5, sec. 3.

23
before creation of right in rem. So there is a right in rem under Regulation through registration
even if is not recognized under national law. So, there are two situations. The first is when national
law recognizes right in rem, meaning that the registration of the right recognized under national
law may be a formality to enforce the right against third parties, but essential to create a right in
rem. The second situation is when under art. 5(3), the right in rem is created, meaning that the right
even if registered and enforceable against third parties, is not recognized a s a right in rem under
national law, but derives the right in rem. As an example of derived right in rem would be the
contract of land sale or grant of an option to buy land, as registration of the contract based on
conveyance ensures priority of possession against subsequent buyers.
Another issue regarding third parties’ rights in rem would be the location of assets.
Therefore, the main point is that assets must be located in a European MS, in order to apply EIR .
According to lex forum conflict of laws rules, the lex causae (law chosen by forum court from
diverse legislation to award a judgement) will be lex situs or the state where assets are situated .
According to art. 2(g), is offered a description of the insti tution of Member State where an asset is
situated:
 “tangible property regards to MS as the state in which territory is situat ed the tangible
assets. This category includes goods, titles to goods, negotiable instrument or securities
that can which ownership is transferred by physical delivery. A question that arises is when
the negotiable title is located in one country and the relevant asset is located in a different
country. This issue regards matters as control of third party over issue and visibility of
rights in rem over assets. So the author Goode of the book “Principles of Corporate
Insolvency Law” gives an example regarding the importance of control over assets. The
example is a situation when goods are located in a store in England, the warehouseman
issues a negotiable instrument regarding those goods in Switzerland, which is outside EU
and main proceedings are opened in France. In this case, art.5 does not apply, since the
control over assets is located in Switzerland. T he applicable law will be unde r French
conflict of law rules, since France is the state where main proceedings we opened ”47.
 “Property and rights possession of which must be entered in a public register regards MS
as the st ate where the register is kept. This poin t creates two misunderstandings. T he first
uncertainty is whether the scope of reg istration is to create rights or is to protect rights
created without registration. The second uncertainty is the relation between registered
rights, tangible property and claims rights of third parties. We can assume that registration
is a prerequisite to make rights enforceable against third parties and not as a prerequisite

47 Goode, Principles of Corporate Insolvency law , 606.

24
to create these rights. That is proved by the fact that registered securities can be shifted to
equity without bein g mentioned the name of the person who makes the change . As I have
mentioned before, except control, there is requirement of visibility of third parties’ rights,
indicated by the authority where the relevant register is administered. ”48
 “Claims, regards MS as the state where the third person entitled to that claim has its center
of main interests, determined in art. 3(1) of EIR . The location of COMI does not apply to
negotiable instruments and securities, as the claims regarding these assets will be under th e
law of MS where assets are located. Also, COMI does not apply to registered securities, as
underlying claims will be under the law of the state where the register is maintained.
Therefore, COMI of third party entitled to claim applies only to securities not recorded in
a public register, but possessed through an intermediary account to which only the account
holder and those authorized by him can have access. ”49
The applicable law, as mentioned above is considered lex situs. The law cannot be understood
from art. 5, as the article offers a conflict rule . Therefore, is the conflict of laws rules of the forum
that de cides the applicable law based on claimant’s right in rem, its nature and content. The
relevant time is co nsidered the opening of proceedings, since than is the moment when pre –
insolvency proceedings are being settled under national laws. Therefore, the applicable law will
be the law of the state where the asset was located at the moment of opening proceedings . If before
opening insolvency proceedings, the asset is moved in another states, then the applicable law will
become the law of the last state. The applicable law should benefit the most the secured creditors.
Issues regarding location of third parties’ r ights in rem in n on-EU country are not regulated
by EIR, since is not proper that a EU Regulation to establish rules for assets located outside EU.
“Nevertheless, rights in rem will be overseen by the law established by conflict of law rules of the
forum , lex concursus. ”50
To sum up, article 5 of EIR has as purpose protection of secured creditors that are entitled
to enforce their charged assets when the debtor is not able to fulfill the secured obligation of
payment. In order to apply article 5 of EIR, ther e are some requirements to be fulfilled. Rights in
rem must be recognized under lex situs and under article 5(2) of EIR. The debtor must have a
security interest over the charged asset under lex situs and the charged asset must be part of
insolvency estate . Rights in rem creates a direct and immediate relation between owner and asset,
so the owner can enforce the asset against third parties. The assets should belong to the debtor and
should be located in a European state at the moment when insolvency procee dings are opened. The

48Goode, Principles of Corporate Insolvency law , 607.
49Goode, Principles of Corporate Insolvency law , 608.
50 Goode, Principles of Corporate Insolvency Law , 608.

25
applicable law, based on conflict of law rules should be the law of the state where assets are
located, as being the most convenient law for secured creditors which can enforce their rights
without being affected by insolvency of the debtor and by diminishing the value of the charged
asset. The main purpose of article 5 of EIR is to ensure the credit flow and wealth into European
market, by offering protection to financing institutions which are the secured creditors. However,
is important to understand if article 5 affects a composition plan regulated by lex concursus in
order to rescue debtor’s business.

Subsection 1 .2.2. Rights in rem under property law

Security rights or right in rem are preferential rights offered to creditors over assets
belonging to debtor in order to satisfy its claim with priority over other creditors. Therefore, these
rights should be enforced independent from rights of other creditors or liquidation admin istrator .
Into this subsection I would like to discuss aspects like enforcement of security rights against third
parties, the ranking of creditors, especially when there is a common interest related to the asset
and transfer of secured claims. According t o the author Ulrich Drobnig, the real security rights are
any right or device created by the law or the debtor, that confers to the creditor, the right to recover
one or more assets from the estate of the debtor or to obtain a preferential payment out of t he
proceeds of these assets, in order to satisfy its claim against the debtor. The security rights offer a
preferential payment in the distribution of proceeds or the right to a collateral.
In case when the creditors enforce their claims at the same time against the debtor’s estate
or a particular asset, is considered concursus creditorum and is applied the principle of paritas
creditorum. The principle states equal treatment of creditors when they take recourse to the assets
and their repayment is partial . It is regulated by the majority of Civil Codes, expressing the idea
of equal footing with some exceptions as security rights or legal privileges. The principle also
means that transactions should not be detrimental for rights of other debtors . So, the debtor has a
certain freedom to prefer to satisfy a creditor’s claim against another creditor or to grant security
rights to a specific creditor, but without affect ing the right of recourse of ano ther creditor . Certain
pre-insolvency transactions can be challenged by the insolvency administrator which is able to
avoid security rights created before opening of insolvency proceedings within a certain time limit.
The equity is reasonable in the field of law of obligations . When there are many cre ditors, the debts
satisfaction cannot be acquired in full for all creditors, therefore they are considered in an equal
position. The law of obligation matches the anteriority rule from property law, meaning that a right
created earlier have preference than the later right. That concordance is based on the fact that the

26
creditor at the beginning has an individual right to claim (law on obligations) that converts into a
real right over the assets (property law). In case of insolvency, the estate of the debtor in a
“collective pool”, is an amount of assets that passes from debtor’s possession into liquidation
administration for winding -up and reorganiz ation proceedings.
All creditors position and entitlements are frizzed in collective proceedings, so the
compe tition between creditors stops, as well as the possibility to harm other creditors. The
entitlements are fixed in the moment of opening insolvency proceedings. Any security right or
instrument in the benefit of a particular creditor should not affect other creditors. In insolvency, in
order to have priority the debtor shall fill the security and take possession of its collateral.
According to UCC 9 -317, a security interest is subordinated to the rights of the trustee before
security interest in perfected or before the debtor fills a security agreement and a financing
statement. During insolvency stay proceedings, the holder of the security interest is not able to
perfects its right. Therefore, the trustee has rights over unperfected security right under UCC or
have the right to avoid the unperfected right under Bankruptcy Code of US. Parties may enforce
their rights outside insolvency rules, without the necessity of recourse of those rights under
insolvency law. The trustee can avoid an unperfected security r ight, for the amount of the claim as
a lien creditor and for the benefit of all unsecured creditors. As mentioned above, after opening of
insolvency proceedings, a secured creditor can not obtain a better ranking that would prejudice
other creditors. Once the insolvency proceedings are opened the fixation of positions stops the
competition between secured credit ors. The rule that secured creditors cannot strengthen their
position after opening of insolvency proceedings is proved by two examples from Dutch a nd
Belgium law, offered by the author Ulrich Drobnig. The first example is the conflict of competing
undisclosed pledges on movable property . Regarding subsequent pledges, a prior pledge has
priority than a later pledge. However, the conflict between pledg es is determined by the date when
an undisclosed pledge transforms into a public pledge by getting ownership over the asset,
therefore a pledge can win over prior pledges including security rights of third parties, as an
undisclosed pledge. When insolvency proceedings are opened, this change into the ranking of
creditors is not permitted. Another case regards subsequent pledges and the conflict between them
depends on the date of notification of the debtor, therefore a later pledge notified to the debtor ca n
defeat an earlier pledge, unless insolvency proceedings are opened. Again, a change in the ranking
of creditors in not allowed once that insolvency proceedings are opened.
The enforcement of security right shall be based on an efficient system of secured rights,
that has not to be aff ected by collective proceedings. Which means that the secured creditor has
the right to a priority payment and there is no obligation of participating to the costs of proceedings,
only if the creditor has received benefits fr om those costs. However, the creditor’s enforcement

27
has some limits, as a stay in satisfying its claim with the purpose of debtor’s business
reorganization.
“The rule of paritas creditorum can be breached when regards reorganization of debtor’s
business, s o the pre -insolvency ranking of creditors can be changed for that purpose, with some
difficulty in the field of security rights. The case from Belgian Cour de Cassation51 expresses such
situation as the debtor made voluntary payments distributed to some cre ditors without taking into
account the ranking of the creditors, with the purpose of restructuring the debt. Those creditors are
considered as non -preferential creditors. ”52
“Security rights as an exception is based on the right of the debtor to obtain cheap credit
by having the freedom to choose the creditors to whom to sell the assets or to use assets in order
to secure a debt owed to specific creditors and to offer those cre ditors preferential rights. Since the
rights are enforceable to third parties, there are limits imposed by property law. The rights should
be regulated by the relevant legal system, since it offers protection to third parties regarding the
effects of secur ity rights and are less costs for getting informed of existence of security rights. The
security right depends of the relevant security agreement. In civil law cases, if the mortgage
contra ct is canceled, the mortgage loses its effects. Third parties can c laim the nullity of a contract
in such circumstances as “ordre public ”. Nevertheless, the statutory provisions related to nullity of
a contract benefits third parties and other creditors are entitled to claim the invalidity of the
agreement when the statut ory provisions are breached. The affected parts can be the third parties
that possess a secured claim, since the recognition of contract invalidity will abolish the security
right of the third party as it never existed ”53.
“The power to dispose of the coll ateral regards entitlement of the grantor of security with
property rights. However, the secured creditors and the third parties with property rights have
different priority position. Therefore, i f the security is created in relation to a tangible, moveabl e
asset, the secured credit or with good faith is protected ”54. “Also, if the pledgee at the moment
taking the ownership of the collateral in possession of the debtor which is not the owner is in good
faith, he cannot be challenged by third parties. The protection is offered when the pledgee knew
he wasn’t dealing with the owner and he could assume that he is dealing with a representative of
the owner able to use the asset for security transactions. ”55 Also, the protection is offered to a

51 Cass b 31 May 2001, RW 2001 -2002, 596 note de Wilde.
52 Ulrich Drobnig, Henk J. Snijders, Erik -Jan Zippro, Divergences of Property Law, an Obstacle to the Internal
Market , (Munchen: European Law Publishers GmbH, 2006), 69 -75.
53 Chr Von Bar, Drobnig, The Interaction of Contract Law and Tort and Property Law in Europe (Munchen 2004),
352-353.

55 Cass b 21 March 2003, RW 2004 -05,1174; Cass b 12 February 2004, RW 2004 -05, 1179 note Storme.

28
creditor’s right of retention.56 The debtor’s property rights have some characteristics, as for
example, if the property right are conditional, than the security right based on that property right
depends on the same condition. If debtor’s property rights are avoided with r etrospective effects,
then is considered as the debtor had never the power to grant security rights. As exception from
the rule could be a mortgage granted by the co -owners of an undivided asset, that preserve its
effects, even if the asset is distributed or sold by auction. In jurisdictions like France or Belgium,
secured creditors are protected from invalidity of property rights. For example, the French
Supreme Court protects good -faith secured creditors that dialed with apparent owner, since if the
origi nal ownership is apparent, it means is invalid, but it does not affect security rights.
Rights in rem or security rights are justified and criticized at the same time. According to
the author U. Dobring statement , based on the debate ‘puzzle of secured de bt” the justification is
based on optimal allocation of monitoring costs that notifies positively the other creditors to
publicize adequately secured positions. According to the work “The unsecured creditor’s bargain”
by LoPucki, security rights are consid ered as a bargain for tort claimants and for uninformed
creditors and is in detriment for all creditors wealth. Anyway, the first argumentation is the winner,
since security rights are a source of cheap credit and are incentives to economic growth. Accordi ng
to German jurisprudence 57, if there is a disproportion between secured debts and charge d assets,
that creates a unbalance between creditors, than the debtor can demand for a discharge of the
assets.
The unsecured creditors are protected in different jurisdictions through “carve -out”, which
means that some of the assets are reserved to satisfy unsecured claims. In England, the
administrator prescribes a part of the “floating charge”, in Belgium the secured part of the assets
is expressly specified and is limited to 50% of the stocks, in France, unsecured creditors are
protected through “nantissement de commerce”.
One of the main characteristics of property law is the publicity of the rights, in order to be
enforceable against third parties, Also, third parties that can be affected by the rights have the right
of being informed. In case of immovable property, registration of security rights is obligatory. The
registration requirement determines enforceability against third parties and the ranking of all
creditors. Under Belgian or Dutch law, a registered mortgage is unaffected by competing securities
or prior mortgage that wasn’t registered. In case of moveable property, the ranking of security
rights depends on the perfection or filling of the right that determines priorities. The filing includes
publicity and depending on the collateral, it can be realized by filling, taking the ownership of the
collateral, taking “control” or even automatically. So the ranking depends on the moment of filling,

56 Cass fr 22 May 1962, D 1965, jur 58 note Rodiere.
57 BGH 27 November 1997, NJW 1998, 671; BGH 8 December 1998, NJW 1999, 940.

29
first righ t filled has priority over the last one. If in some European countries publicity of moveable
property is essential, in other countries as Germany, hidden security right are valuable. As an
example, the author Drobnig presents the transfer of ownership that avoids publicity and the
possibility to enlarge the effects of reservation of title. Also, assignment of claims is valid for third
parties from the moment of conclusion of the agreement between assignor and assignee and can
be used for transfer of securit y.
The conflict between security rights is resolved based on priority rule, since security rights
are real rights, therefore the priority rule of property law will be applied . The debtor uses the assets
in the state in which they are at the moment, becaus e in case that a security right was granted
before, the debtor will use the underlying asset for security in the charged state of the asset by the
past security right. In the absence of priority rule, the creditors are able to establish priorities
through individual agreement between creditors. The ranking of claims depends on their
appearance in time, so that a claim that arose earlier will have priority over the later one. The rule
is based of accomplishing what parties would do for themselves in rule’s absence. The rule is
available for past and present collaterals existent in debtor’s estate, granted or retained and
indifferent of when the secured claims are formed. So the priority rule for security rights would be
the moment of accomplishing the requir ement of filling, notification or registration, when the
owner of the security right takes control or the moment when agreement is concluded, in case of
non-possessory rights.
The conflict between the security right holder and third parties that acquires the charged
asset is determined by priority rule . The real security right, known as right in rem or droit de suite,
ensures the secured creditor with a recourse against third parties that acquires the asset. In French
and Belgium law, rights in rem regards immovable property or movable property that is registered.
Therefore, a mortgage holder and a creditor with company charge is able to enforce rights in rem
over the assets against third parties that acquired the immovable property or the company. A
secure d creditor that possesses the asset which is subject of pledge or a retention of title, is
protected from subsequent acquired rights by third parties. Regarding rights is rem created over
moveable property in possession of the debtor, is it possible to tra nsfer the ownership of a secured
asset to a third party that purchased the asset with good -faith. Therefore, the asset will be
discharged. The good -faith test depends on the system of publicity and the nature of the
transaction. A purchase made in the busi ness ordinary course establishes valid the good faith test .
To sum up, the real security rights are any right or device created by the law or the debtor,
that confers to the creditor, the right to recover one or more assets from the estate of the debtor or
to obtain a preferential payment out of the proceeds of these assets, in order to satisfy its claim
against the debtor. Another issue is the treatment of creditors when they have recourse at the same

30
time to the debtor’s estate. In this case is applied of paritas creditorum or the equal treatment of
creditors that will be partially paid from debtor’s estate. However, if the debtor offers preferential
rights to some creditors, this acts should not be detrimental for the rest of the creditors. When
insolven cy proceedings are collective, the competition between creditors stops and creditors
cannot use their priority to harm other creditors. During insolvency stay proceedings, the holder
of the security interest is not able to perfects its right. The rule of paritas creditorum can be
breached when a reorganization plan is created, so that pre -insolvency ranking can be modified in
order to obtain the rescue of debtor ‘business. Security rights are used to obtain cheap credit so
debtors have the freedom to choos e the creditors to whom to sell the assets or to use assets and to
offer them preferential rights. The secured creditors and the third parties with property rights have
different priority position. Therefore, if the security is created in relation to a tan gible, moveable
asset, the secured creditor with good faith is protected and will have priority over third parties.
Also, the secured creditor will have recourse asset over the charged asset acquired by a third party.
If the property right is conditional, then the security right based on that property right depends on
the same condition. So, if debtor’s property rights are avoided with retrospective effects, then is
considered as the debtor had never the power to grant security rights. Rights in rem are con sidered
important for economic growth and cheap credit, however is in detriment of other’s creditor
welfare. As the purpose is achieving an effective restructuring plan, financing is necessary,
therefore rights in rem are important. Anyway, unsecured credi tors are protected through carve –
outs or assets used to satisfy their claims. The priority rule for security rights would be the moment
of accomplishing the requirement of filling, notification or registration, when the owner of the
security right takes co ntrol or the moment when agreement is concluded, in case of non -possessory
rights. Therefore, property law is necessary as to decide over the ranking of secured creditors over
third parties and over unsecured creditors in insolvency proceedings and also, r egulates the
situation when the business restructuring is allowed through preferential rights offered to creditors
without affecting other creditors.

Subsection 1.2.2. Application of art. 8 of EIR Recast

EIR Recast, third parties’ ri ghts in rem is regulated by article 8, with the same scope of
protecting secured creditor s from the default of distressed debtor, by having the possibility of
recourse to its underlying collateral. Also, Recital 68 stat es that rights in rem are important f or
granting credit and support of EU trade, therefore, all EU jurisdiction should ensure validity and
enforceability of rights in rem. If EIR Recast wouldn’t apply, secured creditors would be affected

31
by legal uncertainty caused by differences between nati onal laws regarding the insolvency security
arrangement. Art.5 EIR and art.8 EIR Recast allows creditors to enforce their rights under the law
of the state where the charged assets are located, even if main proceedings have been opened. Art.
8(1) regulates floating charge, as is not common under civil jurisdiction, being more used in
English law.
Art.8 drafts two theories regarding applicable law : that rights in rem are already created and
conferred to secured creditors at the time when the proceeding are opened, as any rights in rem
created after opening are governed by lex concursus and that if the secured assets are located in
the MS where COMI is located, respectively where main insolvency proceedings are opened, then
the effects of proceedings regardin g rights in rem will be governed by lex concursus. Also art. 8
states that lex situs is not specified in art.8(1), as it is mentioned only the basis, legitimacy and
scope of rights in rem. Regarding the wording ‘shall not affect” rights in rem, there are t wo views
of its application: “the hard and fast” view and ‘the pure and simple view”.
The first view regards the situation when rights in r em of secured assets located in another MS
than the state where main insolvency proceedings are opened are totally i mmune from application
of any other jurisdiction than the one where secured assets are located. So, if the secured assets are
located in another MS than the state where is COMI or the state where is an establishment of the
debtor, then no insolvency procee dings will be opened in the state where are the assets located.
This situation in an incentive for forum s hopping, as the secured creditor s, prior to the opening of
insolvency proceedings or when insolvency is imminent, can force the debtor to move assets to
other MS than the MS where COMI or where an establishment is located , in order to grant its
collateral security58. The view has an advantage and that is a simplified administration. The main
insolvency practitioner is able to decide whether the rights in rem can be governed by lex situs or
whether secondary proceedings can be opened in the MS where assets are located, in order to
create cost -efficiency.
The second view “pure and simple” means that rights in rem are protected from main
insolvency proceedi ngs, but not necessarily that decisions and orders made under main insolvency
proceedings would not affect rights in rem. The view is in contradiction with the commercial scope
of art.8 that regards the interest of the secured creditor to enforce and reali ze the asset indifferent
of insolvency proceedings and with Virgos -Schmit Report that describes art.8 as a total exemption
from the effects of main insolvency proceedings without limits. Nevertheless, the view matches
the approach from Virgos -Schmit Report that rights in rem over assets located in one MS shouldn’t
be more affected by the jurisdiction of a MS than the jurisdiction of the MS where the assets are

58 Virgos -Schmit Report, para. 105.

32
located. That would mean, that lex situs can allow the sale of the secured asset by an insolvency
practitioner appointed the debtor, only if a reasonable part of the price will be afforded to the
secured creditor, holder of a right in rem over the underlying asset. In case that the MS where
assets are located is the state where secondary proceedings ar e opened, the main insolvency
practitioner is able to appoint by himself the insolvency practitioner allowed to make the sale of
the secured asset. An other example of application of this view is the registration of charges in
accordance with public registr ation under lex situs , under UK law . So if a secured creditor is able
to enforce and sell the charged asset before opening of secondary proceedings, then the most
appropriate thing is to register the charge in order to benefit of that enforcement against o ther
creditors. Otherwise, the main insolvency practitioner can start secondary insolvency proceedings
in detriment of the secured creditor, because of unregistered charge that would not be ascertainable
for third parties.
Therefore, art.8 does not specifi es lex situ s as the law applicable based o n confli ct of law. The
lex situs rule is established through jurisprudence, specifically the case Lutz and Bauerle, where
CJEU established that rights in rem should normally be governed by lex situs, and the case ERSTE
Bank Hungary59 (Annex1) where CJEU established that lex situs derogates from application of lex
concursus. As a conclusion to application of art.8, the view accepted is “pure and simple”, since
even if rights in rem are not affected by opening main pr oceedings, the surplus of rights after
enforcement of rights in rem and discharging secured debts will be part of insolvency estate and
governed by lex concursus.
Secured creditors may be obliged to make payments to other creditors as a requirement to
enforce its rights. This obligation is stated in UK insolvency act 1986, section 176A. Article 8
protects creditors from opening of main insolvency proceedings, but does not offer a better position
than unsecured creditors.
As regarding the reform that EIR Recast is presenting in the area of assets. Article 2(9) offers
a set of rules determining the place where the assets are situated. Therefore, for registered shares,
the applicable law will be the state where the Company has its registered office; for boo k entry
securities, the state where the relevant register or account is maintained ; for cash in bank accounts,
the state indicated by the bank’s international banking account number (IBAN) or the state where
central administration is located, in case that the account is held in a bank branch, the state where
the branch is located ; and for claims against third parties, in the state where the debtor has its
COMI. A literal application of these provisions could give rise to devaluation and fragmentation
of sec urity rights that depends on where the charged assets are located when insolvency

59 Case C -527/10 ERSTE Bank Hunga ry Nyrt v Magyar Allam [2012] ECR I -0000 ECLI:EU:C: 2012:417. Annex 1.

33
proceedings are being opened. It seems to depend upon the identity and COMI of customers of the
debtor company or the identity of the company that issues shares from time to time.
Another issue regulated by EIR Recast is the reorganization plan issued by main insolvency
proceedings liquidator that can adjust or modify security rights. This question is unlikely to arise
if the reorganization plan requires separate consent of s ecured and unsecured classes of creditors.
Otherwise, if the majority of the unsecured creditors would vote for composition plan, it could
affect the secured creditors, since the secured creditors wouldn’t agree to a discharge of its security
or reduction of the underlying debts, unless they are compensated. As a protection offered by EIR,
there is article 33 regarding public policy limitations on recognition of judgements , by the
protection is minimum and imposes a burden over courts to apply public policy on restructuring
plan. Depending on the nature and value of charged assets and if is convenient to open secondary
proceedings and to promote inter -dependent plans in each jurisdiction, that would offer the
creditors an advantage of participating in reorga nization plans as to protect their interests. A
method of protection is inter -creditors deed that regulates the ranking of secured creditors and
ensures that security rights are not undermined without the approval of secured creditors . The law
that governs inter-creditor deed is the domestic law that governs com position or reorganization
plan. If lex concursus allows modification of rights and obligations between secured creditors and
company, giving a commercial effect to such modification , then the inter -creditor deed would be
recognized. How ever, the modified rights wouldn’t be regulated by article 8.
Article 8(4) states that article 8(1) does not exclude actions for voidness, voidability and
unenforceability, as referred in article 7(2)(m). As regarding rights in rem, a transaction can be
made in the detriment of another creditor, if a security right over assets located in one MS is created
in the eve of opening main insolvency proceedings in another MS. In that case insolvency
administrator is able to di scard the security right created and to prevent a payment made to a
creditor or to recover a payment made to a creditor after opening insolvency proceedings. Based
on the case Lutz and Bauerle, the holder of the right must show that article 7(2)(m) is not applied
and the security right is valid under lex situs, since the hardening period is shorter under lex situs
than under lex concursus. Also the holder must show that even if lex situs and lex con cursus are
opened at the same time , the lex situs does not allow an avoidance action.
To sum up, t he EIR Recast does not bring significant changes in the area of security rights, as
its main purpose is recuing and rehabilitation of debtor’s business , focusing less on secured
creditors protection. The Regulation presents some limits to the exception. Therefore, i f assets are
not located in a MS , in this case lex concursus conflict of law rules determines the applicable law.
Another limit, is that after the enforcement of rights in rem the extra of l ocal assets that remains
are being regulated by lex concursus. Moreover, the exemption does not apply for new securities,

34
created after opening of main insolvency proceedings, therefore the new securities will be subject
to lex concursus. Despite the fact that rights in rem are immune from main insolvency proceedings,
the insolvency practitioner can abolish the right by paying the debt to secured creditor and the
secured creditor can be forced to pay for insolvency expanses, as for administration of insolve ncy
proceedings. The main uncertainty that EIR Recast does not regulate is that the secured creditor
can be affected by some main insolvency proceedings, as moratorium. The regulation purpose is
to extend the possibilities for business rescue of the debtor , including by imposing a stay on
opening secondary proceedings or on enforcement proceedings, that would make difficult for
secured creditor to get its collateral asset intact.60

60http://www.traverssmith.com/assets/pdf/legalbriefin gs/The_Recast_European_Insolvency_Regulation__impact_
on_di___.pdf (accessed on March 23, 2017)

35
Chapter 2. Application of UNICTRAL and international insolvency
regulation in the area of third parties ’ rights in rem

As to have a better understanding of the protection offered by EIR to secured transactions
and secured creditors, we should make an analysis of international regulation of secured rights.
In this chapter I will make a research of international regulation on insolvency matters based on
UNICTRAL legislation. My aim is to have a clear distinction between EIR and UNICTRAL
provisions regarding secured rights regulated by insolvency law, as to un derstand the cooperation
that occurs on a regional background like EU and broadly, on a global background. Also, I am
interested to discover which protection is more effective, EIR or UNICTRAL. This aspect will be
discussed in a separate subsection entitle d “Better protection of secured creditors – EIR or
UNICTRAL”. Moreover, I desire to bring a n innovation to the topic of secured rights under
insolvency law, by making a comparison betwee n Moldova, as a non -EU state and Lithuania, as
EU states. The comparati ve analysis will be presented in the subsection entitled “Compariso n
between Moldova and Lithuania”. The chapter will be divided in two subchapters: “ Comparison
between EIR and UNICTRAL regarding third parties’ rights in rem ” and “ Collateral securities
located in non -EU Member States ”. Each subchapter is divided in two subsections. The first is
divided in: “The role of UNICTRAL regarding insolvency matters ” and “ Better protection of
secured creditors – EIR or UNICTRAL ” and the second subchapter is divided in : “International
regulation of insolvency proceedings for secured creditors ” and “ Comparison bet ween Moldova,
Lithuania ”.
“The legislative acts that regulates third parties’ rights in rem governed by insolvency
matters belong to UNICTRAL (United Nations Commission on I nternational Trade Law). The
main acts that will be studied and presented in my work are UNICTRAL Model Law on Secured
Transactions; UNICTRAL Model Law on Cross -border Insolvency; and UNICTRAL Legislative
Guide on Insolvency Law . However, the direct regulation of security rights is UNICTRAL Model
Law on Secured Transactions.
“The UNICTRAL Mo del Law on Secured Transactions and the Legislative Guide
‘purpose is to ensure in developing states transactions that creates security right s in moveable
assets. Therefore, is promoted availability of secured credit and in the same time, economic
growth. The model law is created as to be used by states with no transaction laws and states with
existing laws, but not that efficient and that nee d to be harmonized with the laws of other states.
The model law is based on the idea that efficient transaction laws are positive for the economic
growth of the states and that adopts them, since domestic and foreign credit is being attracted

36
thanks to the m and therefore, domestic businesses, like small and medium -sized enterprises are
developed. Transaction laws are beneficial for consumers, since prices for goods and services
become lower and consumer credit policy is changed, being available for consumer s. To have the
desired effect, an efficient enforcement system of transaction laws must be developed, through
multiple mechanisms, including judicial power. Transaction laws are also, governed by
insolvency in respect of rights derived from secured transa ctions laws, for example, UNCITRAL
Legislative Guide on Insolvency Law . The key to the effectiveness of secured credit is that it
allows busi nesses to use the value corresponding to their assets as a means of reducing the
creditor ’s risk of non -payment . That means that creditors can make use of collateral assets in any
moment in the case of non -payment of the secured obligation. As prospective creditors perceive
that this risk is reduced in a proposed credit transaction, they are more likely to be willing to extend
credit and to increase the amount or reduce the cost of the credit they provide . Therefore, a legal
system that supports secured transactions is cr itical to reducing the resulted risks of transactions
and promoting the availability of secured cr edit generally. Secured credit is more readily available
to businesses in States that have efficient and effective laws that provide for consistent, predictable
profits for secured creditors in the event of non -performance by debtors. On the other hand, in
States where the absence of such laws means that creditors perceive the risks associated with credit
transactions to be high, the cost of credit normally increases, as creditors require increased
compensation to evaluate and assume the increased risk. In some States, the absence of an efficient
and effective secured transactions regime or of an insolvency law regime, under which security
rights are recognized, has resulted in the virtual elimination of credit for small and medium -sized
commercial enterpris es, as well as for consumers . “61“The Model Law and the guide also addresses
concerns regarding secured credit. One such concern is that providing a creditor with a priority
claim to all or substantially all of a person’s assets may appear to limit the abil ity of that person to
obtain financing from other sources. A second concern is the potential ability of a secured creditor
to exercise undue influence over a business, to the extent that the creditor may seize, or threaten
seizure of, the encumbered asse ts of that business upon bankruptcy . A third concern is that, in
some cases, secured creditors may enforce their rights in most or all of a person’s assets in the case
of insolvency and leave little for unsecured creditors, who may not be in a position to ba rgain for
a security right in those assets .”62
As insolvency and commercial law are connected, it was possible to create an insolvency
regulation at a regional level, respectively EIR. However, the increasing globalization of business
and investment causing international insolvencies, involves non -participating States too.

61 UNICTRAL Legislative Guide on Secured Transactions, page 1 -2;
62 Idem, page 3.

37
Therefore, UNICTRAL Model Law was drafted to ensure regulation for all . The international
protocols provided innovat ive solutions to cross -border matters; have facilitated courts to address
the spec ific facts of individual cases; obtained a more widespread harmonization of international
insolvency law and practice and more information about them is being spread across t he world.

Subchapter 2.1 . Comparison between EIR and UNICTRAL regarding third
parties’ rights in rem

In order to analyze the application of EIR is necessary to make a comparison with
UNICTRAL legislation, as to see the lacks of EIR and the possible solutions. Both UNICTRAL
legislation on insolvency matters and EIR are considered soft -law, containing simil ar provisions
and features that can be more mandatory in EIR and more discretionary in UNICTRAL. The main
difference between the two legislations is that EIR is applied regionally, meanwhile UNICTRAL
has a more global vision of the Model L aws: UNICTRAL Mod el Law on Insolvency and Cross –
border Insolvency with their legislative guides. Also their scope differs, as EIR has as main scope
maintaining and developing the European market and facilitating the trade and credit flow between
businesses across Europe and UNICTRAL Model Laws has as scope coordinate insolvency
proceedings and create an efficient communication system between insolvency practitioners when
more than one jurisdiction is involved and is created a conflict of law, maintaining the sovereignty
of states as a priority. Both legislations regulate two jurisdictions based on COMI and
establishment where, according to EIR, are opened main and secondary proceedings and according
to UNICTRAL, are opened main and non -main proceedings. Other aspects regardi ng effects of
recognition and the available relief are also different.
As the business has a globalization element, it happens that European companies merge
with international businesses. Therefore, in case of bankruptcy, both international legislation as
UNICTRAL and EIR may be potentially applicable to the same debtor. Even though, there are
differences in respect to cooperation rules, as in EIR there are provisions regarding choice of law
and carve -out present just in this text of law. According to article 10 of EC Treaty, MS have the
obligation to take all the measures in order to accomplish the scope of the treaty that is superior to
domestic laws and article 3 from UNICTRAL Model Law on Cross -border Insolvency allows
subordination of the text to other treaties or agreements entered by the enacting state in order to
regulate insolvency aspects. Therefore, the Model Law is more flexible. Also, the Model Law may
offer additiona l protection to a foreign representative as a European one, from being influenced by

38
other national rules. Ho wever, EIR is more rigid in this area. A concurrent application of both texts
seems to be a good idea, even though if European MS would adopt the M odel law would be
ensured a more uniform regulation, since the Model Law offer much more information regarding
cooperation and communication. In this area, t he Model Law recognizes the possibility of opening
proceedings based on a recognition request that facilitates subsequent coordination between
proceedings against the same debtor which applies to EU too. The concurrent application of the
Model Law outside EU and recognition of the opened proceedings by EU courts using at the same
time EIR, offers the po ssibility of a simultaneous application of both texts.
A harmonization between the two legislations is seen in the new EIR Recast which is based
on UNICTRAL Model laws and Legislative Guides provisions. This interaction happens in the
field of group of c ompanies, since EIR Recast requires all insolvency practitioners and courts to
comply with the rules of cooperation and coordination when main and secondary proceedings are
opened against the same debtor (UNICTRAL Model Law on Insolvency, Chapter V, sectio n 1);
an insolvency practitioner may require the opening of a “group coordination proceeding” that
would enhance the restructuring plan and reduce the costs for coordinating the proceedings, each
proceeding should have a reasonable cost (UNICTRAL Model Law on Insolvency, Chapter V,
Section 2) There is a continuous need of improvement in the area of cooperation at the opening
of insolvency proceedings at the international and European level. That is the reason why I intend
in this subchapter to present the similarities and differences between UNICTRAL and EIR,
especially in the field of protection for secured creditors.

Subsection 2.1.1. The role of UNICTRAL regarding insolvency matters

In this subsection I would like to make a research of the legal background of insolvency
matters under UNICTRAL and the protection that insolvency law offers to secured rights over
encumbered assets located internationally . The legislative acts in this domain are The UNICTRAL
Model Law on Cross -border insolve ncy and the UNICTRAL Legislative Guide on Secured
Transactions jointly with UNICTRAL Legislative Guide on Insolvency regulates secured rights .
The UNICTRAL Model Law on Cross -border insolvency regulates three aspects :
(1) the granting of access to local courts to representatives of foreign insolvency proceedings and
creditors;
(2) according recognition to certain orders issued by foreign courts;
(3) cooperation among the courts of the States where the debtor's assets are l ocated;
“The first aspect, p roviding the person administering a foreign insolvency proceeding with access
to the courts of the ena cting State, allows the foreign representative to seek a temporary “breathing

39
space”, and allows the courts in the enacting St ate to determine what coordination among the
jurisdictions or other relief is warranted for optimal dis position of the insolvency. The second
aspect regards d etermining when a foreign insolvency proceeding should be accorded
“recognition” and what the cons eque nces of recognition may be. The third is p ermitting courts in
the enacting State to cooperate more effectively with foreign courts and foreign representatives
involved in an insolvency matter; providing a transparent regime for the right of foreign cre ditors
to commence, or participate in, an insolvency proceeding in the enacting State; authorizing courts
in the enacting State and persons administering insolvency proceedings in the enacting State to
seek assistance abroad; p roviding for court jurisdicti on and establishing rules for coordination
where an insolvency proceeding in the enacting State is taking place concurrently with an
insolvency proce eding in a foreign State; e stablishing rules for coordination of relief granted in
the enacting State to as sist two or more insolvency proceedings that may take place in foreign
States regarding the same debtor . Therefore, the Model Law offers effective cro ss-border
cooperation framework for courts that have experience in dealing with cross -border insolvency
cases and for courts that desire to gain experience in this field.”63
“The model represents the interaction of insolvency la w, national judicial and civil
procedure laws. Scope of application of UNICTRAL model is to extend to any foreign insolvency
proceeding regarding reorganization or liquidation of t he debtor if the proceeding is collective
(whether judicial or administrative) and the assets and affairs of the debtor are subject to court
control or supervision, where the court may be a judicial or other authority competent to control
or supervise insolvency proceed ings. Based on these charac teristics, a variety of collective
proceedings would be eligible for recognition, whether compulsory or voluntary, corporate or
individual, winding -up or reorganization, or those in which the debtor retains some measure of
control over its assets, or under court supervision . There are some legal institutions which are not
regulated by Model law, like banks or insurance companies specially regulated with regard to
insolvency under the laws of the enacting State. ”64
“In addition to the general right of access , a foreign recognized representative has
procedural standing to commence a local insolvency pr oceeding in the COMI State, under the
cond itions applicable in that State; may initiate actions to avoid or otherwise annul acts detrimental
to cre ditors; may pa rticipate in an insol vency proceeding in the COMI State; may also intervene
in proceedings concerning in dividual actions in the COMI State affecting the debtor or its assets .”65

63 UNCITRAL Model Law on Cross -Border Insolvency Law with Guide to Enactment and I nterpretation, page 19 -20.
64 UNCITRAL Model Law on Cross -Border Insolvency -A Legislative Framework to Facilitate Coordination and
Cooperation in C ross-Border Insolvency, page 318.
65 UNCITRAL Model Law on Cross -Border Insolvency -A Legislative Framework to Facilitate Coordination and
Cooperation in Cross -Border Insolvency , page 321.

40
“In addition to providing direct access for foreign represen tatives, the Model Law applies
non-discrimination between local and foreign creditors. That minimum level requires that a
country treat a foreign creditor in a distribution at least as well as a general unsecured creditor,
provided that the equivalent local claim would rece ive at least that treatment . As foreign creditors
have acce ss to the courts of the COMI State for the purpose of commencing an insolvency
proceeding or participating in a local proceeding . The premise is that creditors have primary
economic interest in the profit so they have an interest to obtain their part from debtor’s business
when insolvency proceedings ae opened.”66
“UNICTRAL Legislative Guide on Insolvency scope is establish an efficient and effective
legal framework as to solve the problem of insolvency of debtors. It is intended to be used as a
reference by national authorities and legislative bodies when preparing new laws and regulations
or reviewing the adequacy of existing laws and regulations. The advice provid ed in the Guide aims
at achieving a balance between the need to address the debtor’s financial difficulty as quickly and
efficiently as possible and the interests of the various parties directly concerned with that financial
difficulty, principally credito rs and other parties with a stake in the debtor’s business, as well as
with public policy concerns. The Guide discusses issues central to the design of an effective and
efficient insolvency law, which, despite numerous differences in policy and legislative treatment,
are recognized in many legal systems. It focuses on insolvency proceedings commenced under the
insolvency law and conducted in accordance with that law, with an emphasis on reorganization,
against a debtor, whether a legal or natural person, th at is engaged in economic activity. Issues
specific to the insolvency of individuals not so engaged, such as consumers, are not addressed. ”67
Also the guide addresses questions as to the restructuring negotiations made voluntarily between
creditors and debt or and represents a guide of enactment of the UNICTRAL Model Law on Cross –
border insolvency
. To sum up, UNICTRAL Model Law on Cross -border insolvency has been drafted as a necessity
caused by the absence of international regimes that coordinates cross -border insolvency
proceedings. Such absence created uncertainty, inadequacy of approaches to cross -border
insolvency and represented an obstacle for the protection of the value of the assets of insolvent
businesses and for their rescue . UNICTRAL Legi slative Guide on Insolvency stipulates the
necessity of effective and efficient insolvency regimes. Efficient insolvency regimes are important
for preventing or limiting insolvency and for a rapid rescue of the business that is in financial
distress. Such regimes are effective as to recover financial resources from a business that is

66 UNCITRAL Model Law on Cross -Border Insolvency -A Legislative Framework to Facilitate Coordination and
Cooperation in Cross -Border Insolvency , page 321.
67 UNICTRAL Legislative Gu ide on Insolvency Law, page 1.

41
winding -up; to support insolvent companies search for investment and administrators to rescue the
business and maintain employment and increase the credit flow. The guide make s important
recommendations as to company group inso lvency, since company group is an important element
for international trade and finance. And at the international level, regulation of company group
insolvency appeared r ecently, for example EIR Recast . Therefore, jointly the UNICTRAL text
laws have as scope regulating insolvency matters as liquidation and restructuring of multinational
companies when more than one jurisdiction in involved. However, the cooperation between
national governments have improve d in the area of cross -border transactions and less in the area
of cross -border insolvency , remaining a field with inefficient solutions to cross -border
insolvencies .

Subsection 2.1.2. Better protection of secured creditors – EIR or UNICTRAL?

Based on the research made in the first chapter regarding the regulation of third parties’
rights in rem by European legislation, I would like to make a comparative analysis of UNICTRAL
Legislation on secured transaction and insolvency matters. My purpose is to observ e the efficiency
or the lacks of EIR in the area of secured creditors’ protection.
UNICTRAL Legislative Guide on Secured Transactions and UNICTRAL Legislative
Guide provides clauses regarding protection of third parties secured rights created over assets
belonging to insolvency estate. The Legislative Guide on Secured Transactions jointly with The
Legislative Guide o n Insolvency regulates differen t legal aspects, but the interaction happens when
the rights regulated by secured transactions are affected by t he opening of insolvency proceedings.
“A secured transactions law seeks to promote secured credit, because security for an obligation
reduces the risk of nonpayment of the obligation (“default”). It allows debtors to use the full value
of their assets to obtain credit and develop their enterprises. In the case of default by a debtor, a
secured transactions law seeks to ensure that the value of the encumbered assets protects the
secured creditor. It focuses on effective enforcement of the rights of individu al creditors to
maximize the likelihood that, if the secured obligations owed are not performed, the economic
value of the encumbered assets can be realized to satisfy the secured obligations. An insolvency
law, on the other hand, is principally concerned with collective business and economic issues. It
seeks, among other objectives, to preserve and maximize the value of the debtor’s assets for the
collective benefit of creditors and to facilitate equitable distribution to creditors. The achievement
of thes e objectives will be assisted by preventing a race among creditors to enforce individually
their rights against a common debtor, and by facilitating the reorganization of viable business
enterprises and the liquidation of businesses that are not viable. Fo r these reasons, an insolvency

42
law may affect the rights of a secured creditor in different ways once insolvency proceedings
commence.’’68 EIR and EIR Recast has as main scope opening collective proceedings that affect
all creditors to whom the debtor owes a substantial part of its debts; proceedings involving
financial creditors; and proceedings of liquidation of debtor’s assets and cessation of its activities
involving all creditors. Also, the Regulations has focused more on business restructuring. “ The
scope of this Regulation should extend to proceedings which promote the rescue of economically
viable but distressed businesses and which give a second chance to entrepreneurs. It should, in
particular, extend to proceedings which provide for restructuring of a debtor at a stage where there
is only a likelihood of insolvency, and to proceedings which leave the debtor fully or partially in
control of its assets and affairs. It should also extend to proceedings providing for a debt discharge
or a debt adjustm ent in relation to consumers and self -employed persons ”69. Therefore, in order to
accomplish the scope of reorganization, third party rights in rem may be affected by the stay of
enforcement that could decrease the value of the charged assets.
According to UNICTRAL Guide on Insolvency the security right belonging to third parties
that is legally effective, enforceable and with priority, recognized under secured transaction law,
will be protected by insolvency law. “The insolvency law should specify that whe re a security
interest is effective and enforceable under law other than the insolvency law, it will be recognized
in insolvency proceedings as effective and enforceable. In order to establish and develop an
effective insolvency law, the following key obje ctives should be considered… (h) Recognize
existing creditors rights and establish clear rules for ranking of priority claims.”70 However, the
main goal of insolvency proceedings is restructuring debtor’s business which can affect or modify
secured credit ors interests. The necessity of insolvency clear rules regarding insolvency
proceedings on the rights of a secured creditor is to determine secured creditors to make a risk
assessment of debtor’s insolvency as to decide on further extending credit and on w hat terms. The
aspect of the applicable law over creation of third party security rights before and after
commencement of insolvency proceeding, the effectiveness and priority of the rights becomes a
concern when the insolvency assets are located in more t han one state or when insolvency
proceedings are opened in two states because of the international nature. Therefore, the applicable
law is the law of the state where insolvency proceedings are opened, lex fori, and it should use its
rules of conflict of i nterest that governs third -party security right existing at the time of the

68 UNICTRAL Legislative Guide on Secured Transactions , Chapter XII “The impact of insolvency on a security right’’,
page 423, para. 2 -3.
69 Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 o n insolvency
proceedings , Recital 10.
70 UNICTRAL Legislative Guide on Insolvency, page 14, Recommendations 1,4.

43
commencement of insolvency proceedings. 71Secured rights are regulated by article 5 of E IR and
article 8 of EIR Recast as an exception from lex concursus which does not apply over e ncumbered
assets located in another MS than the state where the main insolvency proceedings are opened.
The main purpose of security rights is developing the flow of capital and trade inside EU based on
the certainty that secured creditors receive when the ir charge assets remain intact from insolvency
proceedings.
The a pplicable law is lex fori, according to recommendation 31 of UNICTRAL Insolvency
Guide, lex fori governs the commencement, conduct and conclusion of insolvency proceedings.
‘’Identification of the debtors that may be subject to insolvency proceedings; (b) Determination of
when insolvency proceedings can be commenced and the type of proceeding that can be
commenced, the party that can apply for commencement and whether the commencement criteri a
should differ depending upon the party applying for commencement; (c) Constitution and scope
of the insolvency estate; (d) Protection and preservation of the insolvency estate; (e) Use or
disposal of assets; (f) Proposal, approval, confirmation and imple mentation of a plan of
reorganization; (g) Avoidance of certain transactions that could be prejudicial to certain parties;
(h) Treatment of contracts; (i) Set -off; (j) Treatment of secured creditors; (k) Rights and
obligations of the debtor; (l) Duties and functions of the insolvency representative; (m) Functions
of the creditors and creditor committee; (n) Treatment of claims; (o) Ranking of claims; (p) Costs
and expenses relating to the insolvency proceedings; (q) Distribution of proceeds; (r) Conclusion
of the proceedings; and (s) Discharge.’’72Therefore, as the lex fori decides on the ranking of
security rights that under secured transaction law receives priority, it can offer priority to other
claims that will be satisfied before security rights in dependence of the influence that restructuring
debtor’s business can hav e. “When establishing these categories of claims, reference should be
made to secured transactions law with regard to the creation, third -party effectiveness, priority and
enforcement of the security right before considering the extent, if any, to which th e priority of the
security right should be affected by the commencement and administration of insolvency
proceedings’’73According to UNICTRAL Insolvency Guide, the exceptions from lex fori must be
established in a limited number and clearly specified in ins olvency law.” The insolvency law
should specify that, notwithstanding that a security interest is effective and enforceable under law
other than the insolvency law, it may be subject to the avoidance provisions of insolvency law on
the same grounds as othe r transactions.’’74 “ The exception regarding security rights means that

71 Idem, page 425 -426.
72 UNICTRAL Secured Transactions Guide, Chapter XII “The impact of insolvency on a security right’’ ,
recommendation 31, pag e 72.
73 UNICTRAL Insolvency Guide, para. 16.
74 UNICTRAL Insolvency Guide , recommendation 88, page 152.

44
the law governing a right in rem would determine not only its creation and general validity, but
also its effectiveness in the case of insolvency proceedings. In other words, the posit ion of the real
security interest in insolvency proceedings commenced abroad will not be established by the lex
fori concursus, but by the insolvency rules of the law applicable to the security interest. Application
of the lex fori concursus otherwise may affect the legal framework for secured lending, introducing
a factor of instability that may increase the domestic cost of finance. If foreign proceedings intrude
upon local security interests, the value of those security interests may be seriously affecte d.
Similarly, a transfer of the debtor’s center of main interests to a different State or forum shopping
can bring about a radical change in the position of the secured party.’’75 According to EIR the
applicable law is lex concursus of the state where main insolvency proceedings are opened.”
Unless otherwise stated, the law of the Member State of the opening of proceedings should be
applicable (lex concursus). The lex concursus determines all the effects of the insolvency
proceedings, both procedural and su bstantive, on the persons and legal relations concerned. It
governs all the conditions for the opening, conduct and closure of the insolvency
proceedings. ”76Based on its conflict of law rules, the applicable law established for security rights
is the law wh ere the assets are situated. “ The basis, validity and extent of rights in rem should
therefore normally be determined according to the lex situs and not be affected by the opening of
insolvency proceedings .”77Lex situs is considered as the law that satisfie s secured creditors
expectations. However, if there is a surplus on the sale of an encumbered asset it will pass to the
insolvency estate, in case that no secondary proceedings are opened , therefore lex fori will apply.
As well, lex fori applies to the sec urity rights created after commencement of insolvency
proceedings.
The encumbered assets once that insolvency proceedings are opened are affected by
insolvency law matters as “the assets of the debtor that are subject to the insolvency proceedings;
appli cation of a stay or suspension of actions against the debtor; post -commencement finance;
avoidance of transactions that took place before commencement of the proceedings; approval of a
reorganization plan; and ranking of claims’’78 ” The UNCITRAL Insolvency Guide recommends
that the estate formed on commencement of the proceedings will typically include all property,
rights and interests of the debtor, including rights and interests in property, whether tangible
(movable or immovable) or intangible, wherever located (domestic or foreign), and whether or not

75 UNCITRAL Insolvency Guide p art two, chapter I, paras. 88.
76 Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on in solvency
proceedings, Rec ital 66.
77 Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on in solvency
proceedings, Recital 68.
78 UNICTRAL Legislative Guide on Secured Transactions, Chapter XII “The impact of insolvenc y on a security right’’
page 427, para.18

45
in the possession of the debtor at the time of commencement. The debtor’s rights and interests in
encumbered assets and in third party -owned assets, as well as assets acquired by the debtor or the
insolven cy representative after commencement of the proceedings and assets recovered through
avoidance actions, should also be included in the estate. ’’79 As regarding encumbered assets, is
important to identify the included and excluded assets into and from debtor ’s estate and as
regarding third -party owned assets and applying a stay on starting certain actions with respect to
security rights. The importance relates to business rescue or reorganization that can be achieved
through charging an essential asset that i s part of debtor’s estate. UNICTRAL Insolvency Guide
recognizes that secured creditors satisfaction should be balanced with rescuing debtor’s business.
“One question of some importance is whether the insolvency law includes encumbered assets as
part of the insolvency estate. Insolvency laws adopt different approaches to the treatment of such
assets. Many laws provide that encumbered assets are included in the insolvency estate, with the
commencement of proceedings giving rise to different effects, such as l imiting the enforcement of
security interests by application of a stay. Including encumbered assets in the estate and thus
limiting the exercise of rights by secured creditors on commencement of proceedings may assist
not only in ensuring equal treatment o f creditors, but may be crucial to the proceedings where the
encumbered asset is essential to the business . Where encumbered assets are included in the
insolvency estate, a number of insolvency laws provide certain protections, such as those relating
to maintaining the value of the encumbered asset or the secured portion of a creditor’s claim and
to specified situations where the encumbered asset may be separated from the estate. An
insolvency law should make it clear that such an inclusion will not depri ve secured creditors of
their rights in the encumbered assets, even if it does operate to limit the exercise of those rights,
as it is a stay or moratorium, and should specifically ensure the protection of the rights of secured
creditors in encumbered asse ts. Other insolvency laws provide that encumbered assets are
unaffected by i \nsolvency proceedings and secured creditors may proceed to enforce their legal
and contractual rights. Recognizing that there will be cases where encumbered assets may be
crucial to the proceedings, there are examples of laws that provide that even where those assets
are unaffected by the insolvency, the court may be requested to prevent such enforcement where
the asset is necessary for the business to continue operating. Exclusion of encumbered assets may
have the advantage of generally enhancing the availability of credit because secured creditors
would be reassured that their rights would not be adversely affected by the commencement of
insolvency proceeding’’ . Some jurisdictions permit assets in which a creditor retains legal title to
be separated from the insolvency estate on the basis that the insolvency law should respect the

79UNICTRAL Legislative Guide on Secured Transactions, Chapter XII “The impact of insolvency on a security right’’ ,
para.19

46
creditor’s legal title in the asset. In some jurisdictions the separation of the asset may be subject to
the provisions of the insolvency law relating to treatment of contracts. The estate will generally
include, however, as indicated above in the general definition of the estate, any rights that the
debtor might have in respect of those third -party -owned assets . There will be cases where the third –
party -owned assets may be crucial, like encumbered assets, to the continued operation of the
business, whether in reorganization or sale as a going concern in liquidation. In those cases, it will
be advantageous for the insolvency law to include a mechanism that will permit third -party -owned
assets to remain at the disposal of the insolvency proceedings, subject to protecting the interests
of the third -party owner and to the right of the third party to dispute tha t treatment. Where the
interest in assets that is claimed by the debtor is disputed by a third party, it will be desirable for
the insolvency law to enable those assets to be protected on an interim basis to ensure their
preservation, pending decision by t he court as to ownership. Where the decision is ultimately made
that the assets do not form part of the estate, the law may also address issues of damage to the third
party arising from the debtor’s retention. The issue of damages may also be relevant wher e a third
party withholds assets that are found to form part of the estate.’’80 According to EIR, “ The opening
of insolvency proceedings shall not affect the rights in rem of creditors or third parties in respect
of tangible or intangible, moveable or immov eable assets, both specific assets and collections of
indefinite assets as a whole which change from time to time, belonging to the debtor which are
situated within the territory of another Member State at the time of the opening of
proceedings. ”81Therefore , there are clearly stated the assets that are part of the exception and the
terms of where are located. What we can observe is a definition of concrete assets , tangible,
intangible, moveable, immovable , but also of a collection of indefinite assets as a w hole which
change from time to time, the floating charge , recognized as security right under English law.
Floating charge can be considered as a highly ranked security right, but much more uncer tain than
other security rights and also uncertain for unsecur ed creditors that are not equally being payed
after the sale of the floating charge. The holder of a floating charge will be able to enforce its rights
in the moment when the floating charge crystallizes . As regarding future assets, they must exist
when insolvency proceedings are being opened. As requirements for all assets, is that they must
be situated in a European MS and belong to the debtor when insolvency proceedings start. The
idea of belonging to t he debtor includes a legal and an economic ownership over assets that are
attributed to the insolvency estate. According to article 2 (g), the applicable law is in case of
tangible assets, the law of the state where the asset is located; in case of propert y rights, ownership

80 UNICTRAL Insolvency Guide, part two, chapter II, paras. 7 -12.
81 Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency
proceedings , article 8.

47
rights or entitlement to such rights registered in a public register, the law of the place where the
register is located; and in case of claims, the state where the person required to meet such claims
has its main center of interest.
As a requirement for assets to be subject to protection under UNICTRAL legislation, is
necessary the rights over assets to be created before opening insolvency proceedings.” The
UNCITRAL Insolvency Guide provides that an asset acquired by the debtor after the
commencement of insolvency proceedings generally is part of the insolvency estate . Accordingly,
even though the secured creditor may have a security right in future assets of the debtor, the
security right should not extend to assets acquired by the de btor after the commencement of the
insolvency proceedings, unless the secured creditor is providing additional funding. If the security
right did extend generally to assets acquired by the debtor after the commencement of the
insolvency proceedings, the se cured creditor would unfairly benefit from the increase in the
encumbered assets that could be available to satisfy the secured obligation resulting from the post
commencement acquisition of assets by the debtor without the secured creditor providing any
additional credit to the debtor. Likewise, other creditors of the insolvency estate would be unfairly
prejudiced if unencumbered assets of the insolvency estate were used after the commencement of
the insolvency proceedings to acquire additional assets and those assets were to become
automatically subject to the secured creditor’s security right and used to satisfy the secured
obligation. However, if the assets acquired by the debtor after the commencement of the
insolvency proceedings consist of proceeds of assets in which a secured creditor had a security
right that was effective against third parties before the commencement of the insolvency
proceedings or was made effective against third parties after commencement but within any
applicable grace period, t he security right should extend to those proceeds. If this were not the
case, the secured creditor would not have the benefit of its security right in an encumbered asset
that is disposed of or collected after the commencement of the insolvency proceedings and,
because of that risk, would be less willing to extend credit to the debtor even where there is no
prospect of the commencement of debtor’s insolvency proceeding.’’82 According to EIR, rights in
rem exception is only valid to rights which already exist s at the time of the opening of insolvency
proceedings. Otherwise, if that these rights have been created after the opening of proceedings ,
Article 4 is fully applicable. As an exception, is possible that the law of a MS regulates a right,
that is consider ed like a right in rem only when the holder of the rights pursues the right, regardless
of the moment when insolvency proceedings are opened.

82UNICTRAL Legislative Guide on Secured Transactions, Chapter XII “The impact of insolvency on a security right’’ ,
page 428, para.21 -23.

48
As a requirement to save the business and satisfy collectively all the creditors, proceedings
of stay may be required to secured creditors during reorganization or liquidation. “The stay
required to secured creditors may include respecting the pre -insolvency priorities of secured
creditors as regards their rights over the encumbered assets; minimizing the effect of the stay on
the value of encumbered assets; and, in cases of reorganization, ensuring that all assets necessary
for the successful reorganization of a viable debtor are available to the proceedings. Creditors
generally seek a security interest for the p urpose of protecting their interests in the event that the
debtor fails to repay. If a security interest is to achieve that objective, it can be argued that, upon
commencement of insolvency proceedings, the secured creditor should not be delayed or
prevent ed from immediately enforcing its rights against the encumbered asset. The secured
creditor has, after all, bargained for a security interest in exchange for value that reflects the
reliance on the security interest. For that reason, the introduction of an y measure that will diminish
the certainty of the secured creditor’s ability to recover debt or erode the value of security interests,
such as applying the stay to postpone enforcement, may need to be carefully considered. Such a
measure may ultimately und ermine not only the autonomy of the parties in their commercial
dealings and the importance of observing commercial bargains, but also the availability of
affordable credit; as the protection provided by security interests declines, the price of credit may
need to increase to offset the greater risk. Some of the insolvency laws that except actions by
secured creditors from the stay focus, as an alternative to the stay, on encouraging pre –
commencement negotiations between the debtor and creditors to achieve agreement on how to
proceed.’’83 However, by allowing creditors to separate their charged asset and realize it c an affect
rescuing the business. Therefore, the scope is restructuring the business offering protection to
creditors that accepts the stay of enf orcing their claims. “It may be worth noting that the increasing
acceptance by banks and other financial institutions of moratoriums in voluntary restructuring
negotiations conducted pursuant to, for example, the “London approach” may be responsible, in
part, for the growing acceptance by secured creditors of the application of the stay to them in
insolvency proceedings.”84 “Insolvency laws take different approaches to the application of the
stay to actions by secured creditors in liquidation proceedings. As a general principle, where the
insolvency representative’s function is to collect and realize assets and distribute proceeds among
creditors by way of dividend, the secured creditor may be permitted to freely enforce its rights
against the encumbered asse t to satisfy its claim without affecting the liquidation of other assets.
Some insolvency laws thus except secured creditors from the scope of the stay. Where that
approach is adopted, however, some flexibility may be needed in cases where the insolvency

83 UNICTRAL Insolvency Guide, paras 36 -38, page 87.
84 Idem, para 38.

49
representative may be able to achieve a better result that maximizes the value of the assets for the
collective benefit of all creditors if the stay is applied to secured creditors. T his may be particularly
relevant where the business can be sold as a going concern in the context of the liquidation
proceeding. It may also be true in some cases where even though assets are to be sold in a
piecemeal manner, sometime is needed to arrange a sale that will give the highest return for the
benefit of all unsecured creditors. Measures as protection of the value of the encumbered assets,
payment of interest and provision of relief from the stay where the encumbered assets are not
sufficiently protected or where they are not necessary to the sale of the entire business or a
productive part of it, may protect secured creditors interest ”85.” It may be desirable for the stay to
apply to secured creditors for a sufficient period of time to ensure that the reorganization can be
conducted in an orderly manner without the possi bility of assets being separated before it can be
determined how those assets should be treated in reorganization and an appropriate plan approved.
To avoid application of the stay for an uncertain or unnecessarily lengthy period and encourage a
speedy res olution of the proceedings, there may be advantage in limiting the application of the
stay to the time it may reasonably take for a reorganization plan to become effective, provided that
that does not take a significant period of time and the proceedings a re not allowed to continue for
years without a plan being proposed and approved. Such a limitation may also have the advantage
of providing secured creditors with a degree of certainty and predictability as to the duration of the
period of postponement of their rights and the treatment of those rights in the plan. Alternatively,
a fixed time period might be specified. The difficulty with that approach, however, is that the time
period may not always be sufficiently long, depending on the size and complexity of the
reorganization and the plan required, and may be difficult to enforce . Solutions may include
establishing clear time limits, with the possibility of extension or providing for relief from the stay
in certain circumstances. It is important that the overall design of the insolvency law encourage
speedy and efficient progress of the proceedings, enabling the period for application of the stay to
secured creditors, in particular in reorganization, to be minimized. Insolvency laws adopt different
approac hes to application of the stay to actions by secured creditors in liquidation. Of those laws
applying the stay to secured creditors, some adopt the approach that the stay automatically applies
upon commencement of liquidation proceedings but only for a bri ef period, such as 30 or 60 days.
This period is to allow the insolvency representative to assume its duties, take stock of the assets
and liabilities of the estate and determine the best means of achieving liquidation of the assets. In
those cases, where an encumbered asset is essential to the sale of the business as a going concern,
some laws provide that application of the stay may be extended beyond the specified period. Where

85 UNICTRAL Insolvency Guide , paras 39 -40.

50
the encumbered asset is not required for the sale of the business, however, t he stay could be lifted.
Another approach extends the stay to secured creditors for the duration of the liquidation
proceedings, subject to a court order for relief where it can be shown that the value of the
encumbered asset is being eroded and cannot be maintained.”86 “Where a security right was
effective against third parties at the time the insolvency proceedings commenced, it is necessary
to exempt from the application of the stay any action that the secured creditor may need to take to
ensure that effe ctiveness continues. For example, the secured transactions law may provide a grace
period for registration of certain security rights, such as acquisition security rights, in the general
security rights registry; the stay generally should not interfere wit h registration within such a grace
period (even if the grace period ends after the commencement of the insolvency proceedings.”87
During reorganization, the stay is applied for a period of time long enough to allow reorganization
administrators decide wheth er the encumbered assets are necessary not to be removed from
insolvency estate in order to rescue the business. During insolvency the stay may be applied in
order to allow the sale of the business as a going concern. Therefore, the time may vary from 30 –
60 days till the extension provided by the court in certain terms. “The insolvency law should
specify that the measures applicable on commencement of insolvency proceedings remain
effective throughout those proceedings until… In the case of secured credi tors in liquidation
proceedings, a fixed time period specified in the law expires, unless it is extended by the court for
a further period on a showing that: (i) An extension is necessary to maximize the value of assets
for the benefit of creditors; and (i i) The secured creditor will be protected against diminution of
the value of the encumbered asset in which it has a security interest.”88 According to EIR, “ This
Regulation should also apply to procedures which grant a temporary stay on enforcement actions
brought by individual creditors where such actions could adversely affect negotiations and hamper
the prospects of a restructuring of the debtor's business. Such procedures should not be detrimental
to the general body of creditors and, if no agreement on a restructuring plan can be reached, should
be preliminary to other procedures covered by this Regulation. ”89The stay or moratorium is set in
place by the law or based on a request. A temporary postponement of the enforcement o f a right
in rem can be applied if the right in rem remains unaffecte d. The right may be used and the asset
realized, however the enforcement of the right is postponed in order to realize a more important
interest, as recuing business’s debtor.

86 UNICTRAL Insolvency Guide, paras 56 -57.
87 UNICTRAL Secured Transaction Guide, para 28, page 430.
88 UNICTRAL Insolvency Guide, recommendation 49, page 102 -103.
89 Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolv ency
proceedings, Recital 11.

51
The aim of insolvency law should be of protecting secured creditors from diminishing the
value of encumbered assets by the applied stay above mentioned. In that situation, the court must
take provisional measures of protection. According to UNICTRAL Insolvency Guide, “The
insolvency law should specify that, upon application to the court, a secured creditor should be
entitled to protection of the value of the asset in which it has a security interest. The court may
grant appropriate measures of protection that may incl ude: (a) Cash payments by the estate; (b)
Provision of additional security interests; or (c) Such other means as the court determines. ”90
Another type of protection measure could be a relief from stay or the release of charged assets.
“The UNCITRAL Insolven cy Guide recommends that grounds for relief from the stay or release
of the encumbered asset could include cases where, for example, the encumbered asset is not
necessary to a prospective reorganization or sale of the debtor’s business; the value of the
encumbered asset is diminishing as a result of the commencement of the insolvency proceedings
and the secured creditor is not protected against that diminution of value; and, in reorganization, a
plan is not approved within any applicable time limit .”91 The i nsolvency law establishes that once
the stay is lifted, the secured creditor may enforce its right over charged asset under the applicable
law. If after the payment to the secured creditor remains an extra amount, that amount goes to the
insolvency estate. Besides protection of the value of encumbered assets, there is the need of
calculating the value of assets in dependence of the purpose of insolvency, restructuring or
liquidation. According to UNICTRAL Secured Transactions, “ The value of an encumbered as set
may, at least in the first instance, be determined by pre -commencement agreement of the parties
or may require determination by the court on the basis of evidence, including a consideration of
markets, market conditions and expert testimony. ”92
Once in solvency proceedings are opened , there is a special treatment of charged assets, in
dependence of “ application of the stay, further encumbrance of encumbered assets, use of assets
during the course of the insolvency proceedings, sale or disposal of assets, relinquishment of assets
and sale of encumbere d assets free and clear of any security rights.”93According to UNICTRAL
Insolvency Guide, there is a special treatment when charged assets are being sold free of security
right, including there is a protection offered to secured creditors that are being notified regarding
the sale of assets and regarding their right to object.
“In both liquidation and reorganization proceedings, an insolvency representative may
require access to funds to continue to operate th e business. The estate may have insufficient liquid

90 UNICTRAL Insolvency Guide , recommendation 50.
91 UNICTRAL Secured Transactions, para 32, page 430.
92 UNICTRAL Secu red Transactions, para 33.
93 UNICTRAL Secured Transactions, para 35.

52
assets to cover anticipated expenses, in the form of cash or other assets that will be converted to
cash (such as anticipated proceeds of receivables) and that are not subject to pre -existing security
rights effective against third parties. Where there are insufficient unencumbered liquid assets or
anticipated cash flow, the insolvency representative must seek financing from third parties. Often,
these parties are the same lenders that extended credit to t he debtor prior to the commencement of
insolvency proceedings, and typically they will only be willing to extend the necessary credit if
they receive appropriate assurance (either in the form of a priority claim on, or priority security
rights in, the asse ts of the estate) that they will be repaid. ”94UNICTRAL Insolvency guide makes
recommendations regarding security rights created by post -commencement financing and that has
priority ahead pre -commencement security rights. That would be that pre-commencement secured
creditors should be protected from diminution of the encumbered assets. “An insolvency law can
recognize the need for such post -commencement finance, provide authorization for it and create
priority or security for repayment of the lender. The cent ral issue is the scope of the power and, in
particular, the inducements tha t can be offered to a potential creditor to encourage it to lend. To
the extent that the solution adopted has an impact on the rights of existing secured creditors or
those holding an interest in assets that was established prior in time, it is desirable that provisions
addressing post -commencement finance be balanced against a number of factors. These include
the general need to uphold commercial bargains; protect the pre -existing r ights and priorities of
creditors; and minimize any negative impact on the availability of credit, in particular secured
finance, that may result from interfering with those pre -existing security rights and priorities. It is
also important to consider the impact on unsecured creditors who may see the remaining
unencumbered assets disappear to secure new lending, leaving nothing available for distribution,
especially if the reorganization were to fail .”95
Another issue is the effects of existing contracts after insolvency proceedings are being
opened. “ Parties to security agreements have an interest in the treatment in insolvency proceedings
of clauses that define events of default giving rise to automatic termination or acceleration of
payments under the a greement . The UNCITRAL Insolvency Guide recommends that such clauses
should be unenforceable as against the insolvency representative and the debtor . The reason is t he
inability of the debtor or insolvency representative to interfere with general principle s of contract
law in this way, however, may make reorganization impossible where the contract relates, for
example, to an asset that is necessary for reorganization or the sale of a business as a going concern .
Any negative impact of a policy of overriding these types of clause can be balanced by providing
compensation to creditors that can demonstrate that they have suffered damage or loss as a result

94 UNICTRAL Secured Transactions, para 37.
95 UNICTRAL Insolvency Guide, para 97.

53
of a contract continuing to be performed after commencement of insolvency proceedings or
providing an exce ption to a general override of such clauses for certain types of contract. The
UNCITRAL Insolvency Guide recommends that the contracts excepted from a general override
should include financial contracts and that special rules should be required in the case of labo r
contracts . The UNCITRAL Insolvency Guide makes a number of recommend ations relating to the
treatment of contracts once insolvency proceedings commence. These include recommendations
about the procedures for determining whether contracts should co ntinue to be performed or
rejected, the treatment of contracts where the debtor is in default on commencement of insolvency
proceedings, effects of continuing performance or rejection, leases, assignments of contracts, types
of contract for which exception s might be required and post -commencement contracts . What is
important for a secured creditor is that rejection of a security agreement does not terminate or
impair the secured obligations already incurred or extinguish the security right and that financi al
contracts and loan commitments are frequently excepted from the scope of insolvency laws
governing the treatme nt of contracts more generally. ”96
A secured transaction may be considered avoidable if is about “ a transaction that occurred
within a specifi ed period of time prior to commencement of the insolvency proceedings (often
referred to as the “suspect period”) may be avoided as a preferential transaction, an undervalued
transaction or as a transaction intended to defeat, hinder or delay creditors fro m collecting on their
claims ”97Therefore, if a debtor charged its assets at the opening of insolvency proceedings
advantaging a creditor or diminished the value of its charged assets in detriment of a creditor, is
called a preferential or undervalued transaction.
” Where encumbered assets are part of the insolvency estate and the rights of secured
creditors are affected by insolvency proceedings, secured creditors should be entitled to participate
in the insolvency proceedings . That participation may t ake different forms. Under some laws, it
includes the right to be heard and to appear in the proceedings, while under other laws, it includes
the right to vote on certain specified matters, such as selection (and removal) of the insolvency
representative a nd approval of a reorganization plan, the right to provide advice to the insolvency
representative as requested or on matters specified in the insolvency law, and other functions and
duties as determined by the insolvency law, the courts or the insolvency representative. In some
cases, the extent of a secured creditor’s right to vote on certain issues may depend upon whether
the secured obligation exceeds the value of the encumbered assets; if the secured creditor is under

96 UNICTRAL Secured Transactions Guide, paras 39 -42, page 432 -433.
97 UNCITRAL Insolvency Guide, recommendati on 8 .

54
secured, it might participate as a n unsecured creditor to the extent that its obligation is not satisfied
from the encumbered asset. ”98
The participation of secured creditors into the approval of a reorganization plan depends
on how secured creditors are treated by insolvency law, if the re organization plan impairs or
modify security rights and if the value of the charged asset satisfies creditor’s claim, in the last
case if the value is not proportional with the claim, then the creditor can participate as a secured
and as an unsecured credi tor. In case that the reorganization plan impairs or modifies the security
rights, the secured creditors may participate in the approval of the plan. The creditors are classified
in dependence of their rights and interest or are participating as a separate group from unsecured
creditors. If the secured creditors are voting as a class and the majority requires approval of the
reorganization plan, those who voted against or didn’t vote are being paid as if liquidation was
opened or they would be paid in full later with interest at the market rate. ” There are several
examples of ways in which the economic value of security rights may be preserved in a
reorganization plan even though the security rights are being impaired or modified by that plan. If
a plan provides for a cash payment or for cash payments in instalments to a secured creditor in
total or partial satisfaction of the secured obligation, the cash payment or the present value of the
cash instalment payments should not be less than what the secured creditor would have received
in liquidation. In determining such value, consideration should be given to the use of the assets
and the purpose of the valuation. The basis of such a valuation may include not only the strict
liquidation value but also the v alue of the asset as part of the business as a going concern , which
means that the value of the asset will be determined as being an asset of the going -concern
business.”99 EIR Recast regulates the possibility of participation of secured creditors in the
reorganization plan in order to protect their rights from being diminished. EIR offers solutions as
to protect secured creditors, the application of public policy on recognition of judgements and
inter-creditor deed agreement, that regards a change of rights from senior to junior creditors.
“In recent years, significant attention has been given to the development of expedited
reorganization proceedings (that is, proceedings commenced to give effect to a plan negotiated
and agreed to by affected credit ors in voluntary restructuring negotiations that took place prior to
commencement of insolvency proceedings, where the insolvency law permits the court to expedite
the conduct of those proceedings). Voluntary restructuring negotiations undertaken before the
comm encement of proceedings will generally involve those creditors, including secured creditors,
whose participation is required to ensure an effective reorganization or whose rights are to be

98 UNICTRAL Secured Transactions, para 45, page 434.
99 UNICTRAL Secured Transactions Guide, para 50, page 435.

55
affected by the reorganization. ”100 The requirements for an expedited restructuring commenced by
the debtor are “(a) Is or is likely to be generally unable to pay its debts as they mature; (b) Has
negotiated a reorganization plan and had it accepted by each affected class of creditors; and (c)
Satisfies the jurisdictional re quirements for commencement of full reorganization proceedings
under the insolvency law. ”101 The reorganization plan confirmed by court creates effects on the
debtor, creditors involved and equity holders affected by the plan .
If charged assets are not part of insolvency estate and secured creditors can freely enforce
their rights is no need to file a claim, unless their rights are not satisfied from the value of sale of
encumbered assets. “Also, in some insolvency laws the secured creditors are required to submit a
claim for the total value of their security rights irrespective of whether any part of the claim is
unsecured with the purpose of providing information to the insolvency representative as to the
existence of all claims, the amount of the secured ob ligation and the description of the encumbered
assets .”102If the amount of the claim has not been determined in the moment of submission of
claim, many insolvency laws admits the claims temporarily. The value can be either liquidated by
a court, insolvency court or another court, or estimated by the court, insolvency practitioner or
another appointed person.103
Both secured transactions and insolvency law establishes priority for secured rights ahead
competing claimants as administration expenses, wages, taxes. “ Such laws provide that secured
claims should be satisfied from the proceeds of the sale of the specific encumbered assets or from
general funds, depending upon the manner in which the encumbered assets are treated in the
insolvency proceedings .”104 The situation is different is the value of the encumbered assets has
been maintained by making expenses from unencumbered assets from estate. These expenses will
rank firstly. “ Other insolvency laws rank secured claims after administration costs and unsec ured
claims like wages or taxes or limit the amount with respect to which a secured claim will be given
a higher ranking to a fixed percentage of the claim. The higher ranking given to certain unsecured
claims, which is often based on social policy considera tions, has an impact upon the cost and
availability of secured credit. The approach of restricting the amount recovered by a secured
creditor from the value of the encumbered assets is sometimes taken with respect to a security right
in the entirety of a d ebtor’s assets in order to provide some protection to unsecured creditors .”105
The priority offered to unsecured rights must be clearly states and maintained as the minimum

100 UNICTRAL Secured Transactions Guide, para 54, 435 -436.
101 UNICTRAL Insolvency Guide, recommendation 160.
102 UNICTRAL Secu red Transactions Gu ide, para 57, 436.
103 UNICTRAL Secured Transactions, paras 56 -58, 436.
104 UNICTRA L Secured Transactions, paras 59, 437.
105 UNICTRA L Secured Transactions, paras 60 , 437.

56
level, so the secured creditors could make a risk assessment of extending credit. As mentioned
above in my work, post -commencement security rights may have priority over pre -commencement
security rights. Also, similar to post -commencement security rights, it was established
subordination that is, a change of priority of a security right by agreement, by order of a court or
even unilaterally . The subordinated creditors may not have a higher ranking than it would have as
an individual creditor or as part of the class of secured creditors under applicable non -insolvency
law.106
To sum up, both EIR and UNICTRAL Model Laws have as scope the rescue of debtor’s
business as to satisfy subsequently the claims of all creditors, therefore that could affect secured
creditors that may be required to stay the enforcement of their rights over encumbered ass ets or
the secured creditors may be imposed to make insolvency administration payments, in case when
there are no liquid assets or cash available. Both legislations share the principle of collective
proceedings, since they are open with the intention of co llective benefit for creditors . EIR and
UNICTRAL are similar because of the rules intending to rescue debtor’s business even by using
the encumbered assets. However, the secured creditors are being protected from losing the value
of their charged assets. T hat’s the reason why the creditors shall make a risk assessment as to
decide on extending credit to the debtor. As regarding the applicable law, both legislations
recognizes lex fori or the law of the state where main insolvency proceedings are opened and
regulates the opening, conduct and closure of insolvency proceedings, as well regulates the ranking
of creditors. However, UNICTRAL outlines that security rights are regulated by the insolvency
rules of the applicable law to rights in rem, but does not cle arly distinguish that law, as it is
distinguished lex situs applicable to rights in rem under EIR. Both laws ac cept the neutrality of
security rights from lex fori, as a protection for secured creditors from remaining without the value
of the encumbered as set that is being realized for the satisfaction of all creditors. EIR “pure and
simple rule: offers an interconnection between lex fori and lex situs, as security rights are protected
from lex fori, but anyway the orders and decisions from main insolvency proceedings may
influence security rights . UNICTRAL offers a broader regulation than EIR as to the encumbered
assets and assets belonging to third -parties. Also UNICTRAL outlines the necessity of the
encumbered assets and third party owned assets for the d ebtor’s business reorganization. To
accomplish that goal, the assets may be included in the insolvency estate. I would like to outline
some distinctions. That would be the type of assets and interest included into estate. UNICTRAL
regulates that insolvency estate includes all assets, even those that are not in the possession of the
debtor when insolvency proceedings are opened, while EIR just stipulates general provisions

106 UNICTRAL Secured Transactions, paras 6 3, 438.

57
regarding “assets which form part of the insolvency estate and the treatment of assets acquired by
or devolving on the debtor after the opening of the insolvency proceedings.” Also, UNICTRAL
states that debtor’s interests in encumbered assets and third party owned assets, should make part
of the insolvency estate, contrary from EIR, where t he encumbered assets remain unaffected by
the opening of main proceedings. Both legislations, protects encumbered assets with the purpose
of offering legal certainty to creditors in order to offer further financing. Both UNICTRAL and
EIR regulates that gen erally the security rights acquired after commencement of insolvency
proceedings are part of insolvency estate, as it would be unjust that a secured creditor has a benefit
from the increased value of the encumbered assets after opening insolvency proceedin gs.
However, in both laws there are exceptions to the rule, as UNICTRAL stipulates that security
rights may be created over assets achieved after commencement of proceedings if the rights were
made enforceable against third parties before commencement or a fter, with a grace period and
EIR, may regulate security rights achieved after opening of proceedings if the rights where in rem
when they were pursued by the holder of the right. UNICTRAL provides a broader regulation and
explanation of the need and effec t of stay of enforcement of secured claims, than EIR does.
UNICTRAL specifies the business restructuring method as is increasing the value of the assets for
the collective benefit of creditors by applying the stay on secured creditors; methods of protectio n
conferred to creditors as measures of protection of the value of the encumbered assets, payment of
interest and provision of relief from the stay where the encumbered assets are not sufficiently
protected or where they are not necessary to the sale of th e entire business or a productive part of
it, may protect secured creditors interest; and the period of time of the stay necessary for
restructuring or liquidating the debtor’s business. As regarding reorganization plan, both
legislation regulates the poss ibility of secured creditors to participate in realizing the plan, in order
to defend their interests and avoiding losing the value of their assets. However, UNICTRAL
provides measures as cash payment or cash payment in installments, that are applied as to
safeguard the economic value of security rights modified by the reorganization plan. UNICTRAL
regulates more aspects regarding secured creditors and much more detailed, as the contracts,
claims of secured creditors, the ranking of their rights after openi ng insolvency agreement, with
the purpose of satisfying their claims and offer further financing to the debtor. Therefore,
UNICTRAL protects better creditors. However, EIR Recast, also establishes a solid legal
background of which secured creditors can ava il as to defend their rights. The difference between
legislations may be the fact that EIR has a less extension of its rules than UNICTRAL, as it applies
just in Europe, having as main purpose the welfare of business across Europe. There is a need of
coope ration between UNICTRAL and EIR much deeper in the area of secured transactions. EIR

58
Recast is an example of such cooperation, as it is a reform based mostly on UNICTRAL
provisions, especially in the field of cooperation and coordination of insolvency proc eedings.

Subchapter 2.2 . Collateral se curities located in non -EU Member States

Security rights locate d in non -EU states are subject to both national and international
regulation. EIR states that the matters which does not relates to EIR, but is connected to a EU state,
are regulated by article 4. Lex concursus applies its rules of private international law as to establish
the applicable l aw. According to the WBG Doing Business Report’s Legal Rights Index is intended
to establish a balance between collateral and bankruptcy laws as to expand access to credit. The
report points some features of the laws like: moveable assets can be accepted b y financial
institutions as collateral while they are under possession of the collateral provider; nonpossessory
security rights can be extended to all assets, including moveable as long as there is a description
of the secured assets; security rights can involve future assets or proceeds and replacements of the
original assets; secures assets have priority if debtor enters n default outside insolvency
proceedings or when the business is liquidated; when the restructuring is supervised by a court the
secure d creditors are not subject to stay; the parties of a collateral agreement can agree that the
enforcement of the collateral could be outside the court. In this subchapter, I would like to make a
research of international regulation over security rights and of their position when insolvency
proceedings are opened. The first subsection is entitled “ International regulation of insolvency
proceedings for secured creditors ” and the second subsection is “ Comparison between Lithuania
and Moldova”.

Subsection 2.2.1 International regulation of insolvency proceedings for secured creditors

I have presented in my work, the main international regulations in the area of insolvency
that provides rules for security rights too, UNICTRAL Model Law and EIR. However, we should
have an understanding of the present international rules and sources of law applicable in
insolvency. The legal framework is based on international treaties and conventions ; international
rules and model laws; European jurisprudence; private intern ational rules; principles of law in the
area of cross -border insolvencies; comity of law. International treaties and conventions have a
narrow ef fect over insolvency matters, because usually they involve two countries. According to
“Principles of Internati onal Insolvency” by Wood, the existing treaties and conventions don’t have

59
a large enough geographical scope. Some treaties as he Nordic Bankruptcy Convention of 1933
and the Montevideo and Bustamente Conventions with regard to Latin America have a more cr oss-
border coverage. The reason is that the countries regulated by these treaties have similar insolvency
regimes and they trust in each other’s legal systems. The limited effect of treaties is caused by the
different legal systems that cause legal uncerta inty in the area of insolvency.107 International rules
and model laws refers specifically to UNICTRAL Model Law on Cross -border insolvency and
Cross border insolvency Concordat approved by the Council of the Section on Business Law of
the International Bar Association (IBA) in September 1995 . Both legal initiatives have as purpose
providing efficient solutions in the area of cross -border insolvency . The Model Law as I have
stated above provides mechanisms to improve cooperation between courts of different
jurisdictions; to create efficient administration of insolvency proceedings; create legal certainty
for investors; and rescue businesses in financial distress. The new European cross -border
insolven cy regime was based on an existing EU legal and institution al framework , in contrast to
international law. The new regulation on insolvency proceed ings was adopted covers insolvency
issues not related to entities as credit institutions, insurance undertakings, investment firms and
collective investment s chemes. Ot her two directives have been adopted concern ing the winding –
up and reorganiz ation of insurance undertakings and of credit institutions , the EU Winding -up
Directive for insurance undertaking and the EU Winding -up Directive for credit institutions . These
laws recognize and coordinates insolvency proceedings opened in EU, however insolvency law is
under competence of national law. International private law represents a set of rules that exist in
every state’s legal system and where questions regarding cross -border insolvency can be found
and their answers as well. Cross -border insolvency questions are subject to more than one national
law that can be unreconciled with another laws . So, an insolvency national legal system that claim
to have cross -border effec ts in certain states, may not be recognized in the jurisdiction where cross –
border effects are supposed to be recognized. Principles of law applicable to insolvency cases
determine the private international law of a specific country with regard to the conf lict-of-law
questions that may arise. The principles are the universality of insolvency proceedings which
means that the insolvency “adju dication of bankruptcy is effective erga omnes in the other
countries in which the insolvent debtor may have assets or branches, without there being any need
to seek judicial authorization to have the decision recognized as such, but without prejudice of
course to the own conflict of law rules of the foreign jurisdiction concerned (lex fori) .”108 The

107 Annex A: Cross -border aspects of insolvency, A13, https://www.bis.org/publ/gten06c.pdf (Accessed on 28 April,
2017).
108 Annex A: Cross -border aspects of insolvency, A18 , https://www.bis.org/publ/gten06c.pdf (Accessed on 28
April, 2017).

60
second is the principle of territoriality “is the principle of plurality or territoriality of bankruptcy,
whereby bankruptcy proceedings are effective only in the country in which they are initiated and
proceedings therefore also have to be initiated in every country in which the bankrupt party holds
realizable assets. For each estate, courts will apply their own laws as lex fori and will appoint their
own liquidator. This territoriality principle leads to the initiation of as many proceedings as there
are countries in which asset s or branches are located .”109 Comity of law represents a concept
meaning that courts and other judicial authorities from different jurisdictions cooperate between
each other without any applicable international law. The courts seek for assistance in each ot her’s
jurisdiction in order to achieve a commercial purpos e. The requirement is the mutual respect for
the territorial integrity of each other’s jurisdiction, however this is not an obstacle for two courts
to cooperate as regarding assets and persons resid ing within the territory of the another jurisdiction.
These legal texts governing insolvency, also governs the protection of security rights .
Collateral securities are provided through contractual arrangements that has the purpose of
protecting a party from insolvency, by providing finance. The other party is protected by the
default of the other party that does not fulfill its obligation. The general advantage of c ollateral
securities is that provides stability to financial market, as ensures a credit flow. The applicable law
to collateral securities should provide predictability and certainty in the case of inso lvency . The
parties are entitled to establish in advan ce the applicable law that will apply in case of insolvency
in order to ensure an effective collateral security arrangement. An important aspect is how a
collateral security is realized under a financial contract in case of insolvency. However, there is no
clear regulation in this area which causes obstacles as to the use of the collateral. “As regards the
law applicable to such arrangements, the lex rei sitae principle is generally recognised and usually
applied to the effect that the law of the country wh ere the securities are located/registered is
applicable. With regard to the law applicable to securities held through a securities settlement
system within the European Union, the Settlement Finality Directive contains rules that create
legal certainty in this respect held through a securities settlement system within the European
Union, the Settlement Finality Directive contains rules that create le gal certainty in this respect.
Pursuant to these provisions, the traditional lex rei sitae rule is clarified in relation to book -entry
securities in such a way that the law applicable shall be the law of the so -called place of the relevant
intermediary (PRIMA). According to the PRIMA principle, the rights of a holder of securities
provided as collateral will be governed by the law of the country where the right to the securities
collateral is legally recorded on a register, account or centralized deposit system . Through the

109 Annex A: Cross -border aspects of insolvency, A18, https://www.bis.org/publ/gten06c.pdf (Accessed on 28 April,
2017).

61
national implementation of the Settlement Finality Directive, this principle is applicable in all EU
count ries. This is also reflected in the carve -outs included in the recent EU insolvency legislation,
such as the EU Winding -up Directive for credit institutions. The principle of lex rei sitae, as
applicable with regard to the choice of law applicable to colla teral security rights, is generally
embraced also by the non -EU countries studied within this project, the United States and Japa n. In
addition to certainty with regard to the laws applicable to a specific collateral security arrangement,
the rules of thos e laws have to be sufficiently clear in order to allow parties to structure their
transactions accordingly. In general terms, the purpose of collateral taken under financial contracts
is to achieve protection from the effects of insolvency, either through the creation of a valid
security interest or by an absolut e transfer of title arrangement. The Collateral Directive provides
for a uniform regime for parties as takers of “financial collateral” consisting of transferable
securities and cash. The protection of the rights granted under the Collateral Directive is suggested
to be extended to collateral security rights irrespective of the purpose or type of underlying
transaction, and would be applica ble in all the EU member states . The Directive also aims to
enhance the legal certainty with regard to the enforcement of security rights over collateral through
the inclusion of provisions that entitl e the collateral taker to realiz e the collateral without being
subject to a waiting period in the event of default o f the collateral provider. ”110
To sum up, the international sources that regulates matters of insolvency and security rights
are based on international treaties; international rules and model laws; European jurisprudence;
private international rules; principles of law in the area of cross -border insolvencies; comity of
law. The less legal assistance offers international treaties that have a narrow extent on cross -border
insolvency cases. The discrepancies between national legislations involved in an in ternational
treaty creates legal uncertainty. Another less protective is private international law, since is regards
regulation of distinct states over the same insolvency matters, that can create legal differences. The
UNICTRAL Model Law on Cross -border insolvency and Cross border insolvency Concordat are
effective as they offer flexible and effective solutions for cross -border insolvency cases. European
legislation is efficient as it is based on a well -established legal framework that regulates insolvency
cases that arise in Europe. However, insolvency is under competence of national law and not
European institutions. The principles of universality and territoriality clearly distinguish the
applicable law when there are or there are not establishments in a nother states. The comity of law
is important and more reform in this direction is required as regards the cooperation between
courts. In case of collateral securities, the parties should decide over the applicable law that ensures
predictability and certa inty in case of insolvency. That would be lex situs or the law of the state

110 Annex A: Cross -border aspects of insolvency, A21 -A22, https://www.bis.org/publ/gten06c.pdf (Accessed on 28
April, 2017).

62
where collateral assets are located. In case of securities settlement system in EU, the Settlement
Finality Directive contains rules as to the applicable law. In case of book -entry securities, the
applicable law is the law of the country where the right to the securities collateral is legally
recorded on a register, account or centralized deposit system , so-called PRIMA. For financial
collaterals, the applicable legislation is the C ollateral Directive that ensures the possibility of the
collateral to realize the charged asset even in case of default of the collateral provider. The lex
situs rule is applicable for non -EU countries as well. The cross -border commercial activity is
devel oping, even if there are territorial limitations as to the application of insolvency law that are
creating obstacles regarding the insolvent debtor business rescue. Therefore, is important to have
an efficient regulatory and legal framework for cross -borde r insolvency cases.

Subsection 2.2.2 Comparison b etween Lithuania and Moldova

In Lithuania security rights are created in dependence of the type of asset involved.
Therefore, for immovable property, including ships and aircrafts, there is the mortgage that secures
the performance of a monetary obligation. The mortgage ge nerally secures the paym ent of the
obligation , the recovery of the interest aris ing from the claim and the expenses incurred by
enforcement of mortgage. Due to the fact that t he transfer of possession of the mortgaged asset to
the cr editor is not possible, the asset may be a coll ateral for several mortgages. Even if the asset
is secured by a mortgage bond, it can be transferred to another party. According to Lithuanian
legislation, there are two general types of mortgages: contractual mortgage and forced mortgage.
The contractual mortgage represents that the parties may enter into an agreement for the mortgage
over one or more immovable assets. The mortgage may secure its own debts or debts of third
parties , excluding cases when is not allowed to secure debts.111
“The mortgage may b e created over an individual immovable object, registered in the public
register, which according to appl icable law may be foreclosed. If, when the principal object is
mortgaged, the parties do not agree otherwise, it is considered that all present and fut ure
appurtenances added to the principle object by the will of the owner or as a result of natur al events
are also mortgaged. Only an insured object may be mortgaged with the exception of land. The
mortgage of an immovable object co vers the insurance indemnity. For the mortgage of buildings,
the plot of land on which the buildings are situated must be mortgaged together with the buildings

111 file:///C:/Users/U ser/Downloads/LIT%20 -%20Ieva%20Dosinaite%20Jurate%20Misonyte%20 –
%20Tark%20Grunte%20Sutkiene.pdf (accessed on April 27, 2017)

63
themselves or the mortgage must provide the right of lease (right of use) in respect of the plot of
land required for the use of the building. ”112
As regarding movable assets and ownership rights, the security used is the p ledge that
ensures payment of an existing or future debt. The pledge in contrast to mortgage allows the
transfer possession of ass et or right to creditor, third party or the possession may remain to the
pledger. In case that the debtor enters into default being unable to pay its debt the pledgee will be
entitled to satisfy his claim prior to other creditors.113 “The assets encumbered b y pledge must be
identified e.g. in respect of goods, savings, deposits, securities, funds, contractual rights, rights to
receive deposit, ri ghts to receive dividends, etc. Usually the pledge of an object covers
appurtenances and undivided fruits. However , Lithuanian law generally does not recognize
floating charges, i.e. the collateral must be described precisely, identifying the pledged object and
the quantity thereof. The law provides for one exception to the requirement to indicate the quantity
of the pledged objects. Pursuant to the law, running stock, running inventory or a bank acc ount of
the pledge r may be pledged. When describing the collateral, the nature of the stock or inventory,
the value thereof and the place where they are kept must be identi fied. In this case, the composition
and form of the pledged stock or inventory may change, subject to the condition that the
accumulated value thereof will not d ecrease below the agreed value. The value of the collateral
must be agreed between the parties to the pledge bond. Upon a failure to agree, the value will be
established by the appraiser. Since public auction is a method of last resort upon disagreement
between the parties and s ince the creditors of the pledge r or debtor whose obligation was secured
may dispute the value for which the collateral was sold, the value of the collateral established at
the moment the pledge is created does not have substantial influence on the value at which, at the
time of foreclosure , the collateral will be sold.”114
“Another type of security are financial collateral a rrangements that secures the payment of
obligations owed to supervised financial institutions. Therefore, the collateral must be a legal
entity. The Law on Financial Collateral Arrangements of the Republic of Lithuania provides for a
higher protection standard, specifically in insolvency proceedings, to the creditors whose claims
are secured by financial collaterals. According to the Law on Financi al Collateral Arrangements
of the Republic of Lithuania, under the financial collateral arrangement, the collateral taker
(creditor) will have the right, if the debtor defaults on his relevant financial obligations secured by
financial collateral, to satis fy his claim from the financial collateral or its value prior to other

112 Lithuania Survey on: claw -back of security in insolvency: 1, Accessed on April 27, 2017.
113 file:///C:/Users/User/Downloads/LIT%20 -%20Ieva%20Dosinaite%20Jurate%20Misonyte%20 –
%20Tark%20Grunte%20Sutkiene.pdf ( accessed on April 27, 2017).
114 Lithuania Survey on: claw -back of security in insolvency: 2, Accessed on April 27, 2017.

64
creditors. In this case, on the occurrence of an enforcement event as opening of insolvency
proceedings, the collateral taker will have the right to unilaterally realiz e financial colla teral
provided under the financial collateral arrangement in the manner prescribed in the above
mentioned law and subject to the terms agreed in the financial collateral arrangement. This is one
of the major differences from the procedures of settlement of the creditor’s claims secured by the
regular pledge in the debtor’s (pledger’s) insolvency proceedings, wherein the realiz ation of the
pledged financial collateral is effected in the regular course of insolvency proceedings managed
by the enterprise admin istrator .”115
“In case that the debtor failed to pay the debt secured by mortgage, the secured creditor is
able to enforce its claim by appealing to the mortgage judge. The mortgagee is entitled to ask the
mortgage judge to sell the charged asset by publi c auction and to be fully paid from the proceeds
of sale or to be appointed as the administrator of the asset, only after the seizure of assets and
notification of the debtor by the mortgage judge as regarding the discharging of the obligation. If
the mort gagee does not satisfy his claim administering the charged asset, he can ask the mortgage
judge to start the public auction. The auction is subject to the Code of Civil Procedure of Republic
of Lithuania or other rules if the owner of the charged asset is a legal person affected by bankruptcy
or legal restructuring. If the claim is not entirely satisfied from the auction of the asset, the creditor
is entitled to ask recovery of his claim from other properties of the debtor.
If the debtor does not pay its d ebt secured by pledge, the pledgee has to notify by written
consent the debtor about the fact that he will enforce its claim if the debtor fails to make the
payment in a preferential period of 20 days or other agreed term, but not less than 10 days. If the
pledge is registered in the Mortgage Register, then the debtor and all persons with rights over the
charged assets will be notified through the register. If the debtor does not transfer the possession
of the charged asset to the creditor, the later one ha s the right to address the mortgage judge in
order to seize the collateral asset and transfer to its possession. Based on agreement between the
pledger and the pledgee, the collateral is sold or is transferred to the pledgee. In case that the
agreement fai ls, the collateral is sold by auction. In case the collateral is subject to more than one
pledge, the asset is sold to one of the creditors based on the agreement between all involved
creditors. If the amount resulted from the sale of the pledged asset is not sufficient to cover the
debt, that the pledgee may recover the rest of the amount from other proprieties o the debtor.
However, he has no priority against other creditors.
Once that insolvency proceedings are opened, the enforcement may be stayed if the debtor
as mortgagor or pledger decides to open application of bankruptcy or legal restructuring. That

115 Lithuania Survey on: claw -back of security in insolvency: 2, Accessed on April 27, 2017.

65
implies certain measures taken as to determine the validity, terminatio n or modification of the
secured right, that may protect the debtor . In that case the asset is part of insolvency estate and is
administered by the insolvency administrator. After paying the fee for administration, the secured
creditor or mortgagee will be firstly paid from the proceedings of sale of the asset secured by
mortgage or the asset is transferred to the mortgagee. However, if the amount received from
proceedings of sale is higher than the amount of creditor’s claim, the surplus will remain in the
estate and distributed to other creditors. In case of the pledge, once that insolvency proceedings
are opened, the pledgee or the secured creditor must file the secured claim and all the claims that
were created before the opening of insolvency proceeding s against the pledger or the debtor. In
case that the pledgee does not file his claims in due time, he will lose the right to demand the
payment and other creditors will be satisfied from pledger assets, including the charged assets. ”116
“The Enterprise Bank ruptcy Law of the Republic of Lithuania confers to the enterprise
administrator a variety of rights pertaining to enterprise bankruptcy proceedings. These obligations
encompass the right and duty of the enterprise administrator to organize the sale of the assets
according to the procedure prescribed by the above mentioned Act and to sell or transfer the assets
to the creditors, and to satisfy the creditors’ claims allowed according to the procedure established
by the Act. “117
Moldovan legislation contains v arious text laws regarding the creation of mortgage, its
enforcement and termination. Mortgage and pledge cover the same assets in as related above,
regarding Lithuanian legislation. Both, the Pledge Law No. 449 -XV dated 30 July 2001 and the
Moldovan Civil Code relating mortgage (Book II, Title IV, Chapter V – Articles 454 to 495 )
regulates the mortgage assets and the parties related to the secured transactions, the mortgagor and
mortgagee; the creation and public registration of the mortgage and of any ame ndments regarding
the mortgage; legal effects of mortgage between parties and third parties; disposal of the
mortgaged assets; judicial and procedural aspects of enforcement of the mortgage. Besides the
immovable property, the mortgage may include unfinish ed constructions or parts of unfinished
constructions. Property Cadaster Law must also be amended so as to extend the registration process
over unfinished immovable property . Mortgage transactions should ensure the protection of rights
of all involved part ies. According to Moldovan Civil Code, article 479 (2), “t he mortgagee likewise
should be protected in cases of expropriation of the property and avoidance of the ownership title.
Law should provide that a property may only be returned (restitutio) after r eceipt of an equitable
indemnity for the returned property, which indemnity will be subject t o mortgage by operation of

116 Lithuania Survey on: claw -back of security in insolvency: 7 -9, Accessed on April 27, 2017.
117 Lithuania Survey on: claw -back of security in insolvency: 9 -10, Accessed on April 27, 2017.

66
law.”118 “For the cases when the prohibition to alienate the mortgaged immovable property is
breached, the law should make it a right of t he mortgagee to opt either for avoiding the alienation
transaction or for enforcing against such alienated property .”119 In case that the claim of the
mortgagee is not fulfilled by realizing the mortgage asset, the mortgagee shou ld be given the right
of using a pledge in accordance with the law over other property of the mortgagor . As regarding
the rights of the mortgagor, there is possibility of obtaining new income by leasing the charged
asset until the maturity of the secured obligation with the requir ement that the lessee will lose its
right when the secured claim is enforced.
The enforcement of the mortgage should protect the interests of the debtor, but also ensure
that the creditors will enforce their rights in due time and without obstacles. Acco rding to a rticles
809 to 816 of the Civil Code , the enforcement is realized through public auction. T he law does not
lay down how a mortgage over the same asset can be enforced by several creditors with different
security ranking. A solution would be that the enforcement of one creditor entitles another creditor
to accelerate the maturity of his claim and to participate in the enforcement process. The third
parties are protected from a detrimental sale of asset. “An y third party whose situation would be
aggravated as a result of the sale of the property is entitled to settle the secured obligation and
subrogate the mortgagee .”120 The purchaser of secured rights could be protected by subrogating in
all rights and obligations related to the property that belonge d to the previous owner of the right .
However, the law does not provide this kind of protection. The enforcement is realized through
two procedures, forced dispossession of the charged asset from the debtor and through forced sale.
The first one represents an ordinance issued by court in order to seize the asset and to transfer the
asset to the creditor and second is the sale under court supervision and by the judicial enforcer .
“The Insolvency Law No.632 – XV dated 14 November 2001 , article 128 sets forth that any
property, including rights of claim, subject to a pledge may be applied by the insolvency
administrator who will take into account the pledgee’s proposal to hand over the property to him.
After hearing both the pledgee and the administrator, the c ourt will fix the period of time in which
the pledged property is to be sold by the pledgee; after it has expired the administrator is authorized
to apply the property . This procedure disadvantages the pledgee, to whom legal barriers –

118 European Bank for Reconstruction and Development by Progressive Banking Solutions Ltd Dublin, Ireland,
“Assessment of the current Mortgage Lending Market and Re commendations on How the Market can be Further
Stimulated ”: 48, may 2005, Accessed on April 27, 2017.
119 European Bank for Reconstruction and Development b y Progressive Banking Solutions Ltd Dublin, Ireland,
“Assessment of the current Mortgage Lending Market and Recommendations on How the Marke t can be Further
Stimulated”: 49 , May 2005, Accessed on April 27, 2017.

120 European Bank for Reconstruction and Development by Progressive Banking Solutions Ltd Dublin, Ireland,
“Assessment of the current Mortgage Lending Market and Recommendations on How the Marke t can be Further
Stimulated”: 50 , May 2005, Accessed on April 27, 2017.

67
endangering his enfo rcement of the pledge – are created. The removal of these barriers by allowing
the pledgee to enforce the pledge under the general rules would reduce legal uncertainty,
motivating lenders to accept as security the mortgage – on the primary market – and the pledge of
mortgage claims as collateral for mortgage securities – on the secondary market .”121
To sum up, the main two securities regulated by Lithuanian and Moldovan laws are
mortgage and pledge. Even though in Moldova the securities are being regulated by the same laws
and creates the same legal effects. Mortgages in both legislations represent securities over
immovable property . In Moldova, the mortgage includes unfinished construction or part of it. Both
legislations regulate enforcement through public a uction. H owever, Lithuanian law specifies
certain measures to be taken before public auction. These measures are the possibility for
mortga gee to administer the charged asset and for pledgee to sell or receive the charged asset’
possession based on an agreement between debtor and creditor. As contrary to Moldovan
legislation, the Lithuanian law regulates the situation when an asset is subject to more than one
pledge. In this case the ownership of the collateral is transferred to one of the secured cred itors
based on an agreement between parties. In both legislations, is provided seizure of the asset in case
that the debtor fails to fulfill h is obligation of payment, called in Moldova forced dispossession of
the charged asset, and the forced sale of the mortgage asset demanded by the judge. In Lithuania
is a much clear protection offered to secured creditors than in Moldova, having a much extended
legal background as EIR. In Moldova, the pledgee’ s right to enforce the charged asset is based on
the agreem ent with insolvency administrator and the decision of the court. However, in Lithuania
is clearly stated that the mortgagee may enforce his right prior to other creditors and the pledgee
has the same right, if he fills the relevant claims against debtor on ce insolvency proceedings are
opened. The two legislations are similar as regarding the secured transactions laws, but different
regarding security rights under insolvency law. Moldova as a young candidate to EU is applying
the EU Regulations which creates a legal framework convenient for reforms, including improving
the position of secured creditors during insolvency proceedings.

121 European Bank for Reconstruction and Development by Progressive Banking Solutions Ltd Dublin, Ireland,
“Assessment of the current Mortgage Lending Market and Recommendations on How the Marke t can be Further
Stimulated”: 61 , May 2005, Accessed on April 27, 2017

68
Conclusions

Considering the afore mentioned legal analysis, we may conclude that the European and
International legislation contains a significant number of legal rules on the creation, enforcement
and termination of security rights under insolvency law. The scientific gap of my thesis represented
weather secured creditors are protected enough under European Insolvency Regulation and
weather security rights can be affected when a restructuring plan is applied. Security rights or
rights in rem are an instrument of financing which provides financial aid to c ompanies before
entering into insolvency proceedings with the scope of preventing insolvency. However, even is
insolvency proceedings are opened the secured lenders can be considered as post -commencement
of insolvency proceedings financers. Therefore, righ ts in rem are an incentive for businesses rescue
and development. As regarding security rights regulated by EIR, these rights are ensuring capital
flow and trade development inside EU. In order to assure that lenders will continue investing into
EU busines ses is necessary to be offered legal certainty as to the enforcement of the security rights.
That certainty is ensured by article 5 of EIR or article 8 of EIR Recast, as states that once that
insolvency proceedings are opened, secured creditors are able to enforce their charged assets
irrespective of lex concursus or the law of the state where main insolvency proceedings are opened.
However, if a charged asset is vital for the rescue of debtor’s business, the enforcement of the
secured asset can be stayed o r postponed till the reorganization procedure is realized. Also, the
enforcement of security rights should not affect other unsecured creditors rights, as it would be
breached the principle of paritas creditorum. Therefore, is required a balance between en forcement
of security rights and realization of secured assets for business restructuring. The protection
offered by EIR to secured assets is efficient , but is not as extended as is UNICTRAL Model Law
that regulates more aspects of secured transactions and covers a bigger geographical area.
I have reached some specific results and conclusions for each objective mentioned in the
introduction. Therefore, regarding the objective of comparison between EIR and EIR Recast , I
have concluded that EIR and EIR Recast have as scope the harmonization of national laws
belonging to MS related to insolvency rules, as to avoid legal discrepancies and uncertainty for
investors. However, insolvency law is a legal institution that is under the national compet ence and
not European. EIR Recast is a reform of EIR as it improves many fields, excepting area of rights
in rem. The reforms brought by EIR Recast are too complex as some point. For example, there is
no distinction between winding -up and reorganization pr oceedings in Annex A, which brings
confusion for the parties involved into insolvency. The forum shopping is regulated by EIR as
“bad” forum shopping, “abusive or fraudulent” forum shopping, no regulation as to “good” forum

69
shopping. The definition of loca l creditor is incomplete as regards only the requirement that claims
of creditors should arise or be connected to an establishment. A new change into the legal and
economic sphere arose with the BREXIT, that creates uncertainty regarding communication
betw een courts and insolvency practitioners.
Regarding the objective of making a research of principles of territoriality and universality,
I have concluded that that there should be a balance between application of universality and
territoriality principles, since the first one facilitates the administration of insolvency proceedings
and the second one protect the rights of local creditors, including secured creditors. Therefore,
secured creditors are protected by secondary proceedings, but it creates an obst acle for
reorganization of debtor’s business.
The objective of analyzing the effects of rights in rem under insolvency and property law
are similar as regards real security rights created as an instrument to ensure that the secured creditor
will be able t o enforce its claims over charged asset. The paritas creditorum meaning that no
preferential rights are offered to creditors, can be breached if preferential rights are used for the
reorganization of debtor’s business. Property law ensures priority to secu red creditors prior to third
parties that possess the charged asset.
Base on the comparative analysis of UNICTRAL and EIR, I have established certain lacks
of EIR. UNICTRAL offers a more extended regulation than EIR as to the charged assets and assets
belonging to third -parties. UNICTRAL regulates that insolvency estate includes all assets, even
those that are not in the possession of the debtor when insolvency proceedings are opened, while
EIR states the assets nature just in article 5. UNICTRAL provides a broader regulation regarding
the effect of stay of enforcement of secured claims and compensation of secured creditors when
the stay is applied, than EIR does.
I have reached the objective of comparing laws of two different states as Lithuania and
Moldo va in the area of security rights. Both countries have similar security rights like mortgages
and pledges that can be used as to secure a debt. However, the protection offered by Lithuanian
Law to secured creditors is much more efficient than the Moldavian Law. That is proved by the
fact that in Lithuania, secured creditors may enforce its rights prior to other creditors, however in
Moldova that is possible only by court or insolvency administrator approval. Also, Lithuanian
secured transactions law is base d on EIR in contrast from Moldovan Law.
In a nutshell my opinion ba sed on my research is that new EIR should include a reform of
article 8, focusing more on creating a balance between third ‘party rights in rem and business
restructuring.

70
Recommendations
1. EIR should specify if protection is offered to the security interest or the secured debt, as
well as the position of secured creditors in a reorganization plan and their treatment and
compensation of secured creditors in case that the secured asset is sold for the rescue of the
debtor’s business. As a solution for the mixed proceedings, could be the involvement of
insolvency practitioners to sort the proceedings into three categories, proceedings for
insolvent companies, proceedings for solvent companies and proceedings for both types of
companies. Is necessary a clarification in EIR about what does “bad” or “good” forum
sopping means. For example, it could be “good” forum shopping or not detrimental fo r the
body of creditors, such situation when COMI is moved in the “suspect period” of three
months in another state where a branch is located, in case of company group. Local
creditors definition should include the location of the COMI of the creditor. As a solution
to BREXIT consequences in insolvency area could be a bilatera l treaty between EU and
England;
2. Regarding protection offered by secondary proceedings to secured creditors, it should be
stayed the enforcement of secured debts if the charged assets are required for the
reorganization of the business. However, the secured creditor should be compensated. In
order to ensure the cooperation between main and secondary proceedings, the opening of
the latest should be i n conformity with Community law;
3. The ‘ excessive’ protection granted by EIR should be replaced by a more balanced
approach. The option of applying the law of the Member state where the asset is located
should be given serious consideration. As mentioned in conclusions, secured creditors have
priority over third parties regarding the same asset. However, should be taken in
consideration the treatment or compensation of those third parties that acquire the asset
with good -faith;
4. The legislator of EIR should take a more global vision and introduce global standards into
European legislation as directives, in order to instigate an international trade and not only
the trade into European market. There should be a standardization of insolvency goals on
a regional and international level, in such areas a s priorities of creditors, recue proceedings,
company group insolvency ;
5. Moldovan lacks legal certainty in comparison with Lithuania. Therefore, Moldovan
security rights effects in the relations with EU countries/’could improve by adopting the
new EIR Recas t, based on the EU -Moldova Association Agreement

71
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Regulation , (UK: Oxford University Press, 2016);
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Secured Creditors : Empirica l Evidence from a Change in Law, 2004;
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(Cambridge University Press, 1996);
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(Cambridge University Press, 2009 );
 Fleisig, Heywood; Safavian, Mehnaz; de la Peña, Nuria. 2006. Reforming Collateral Laws
to Expand Access to Finance. Washington, DC: World Bank. © World Bank.
https://openknowledge.worldbank.org/handle/10986/7100 License: CC BY 3.0 IGO .
Online books:
 Jennifer Marshall – Allen & Overy (England), Article 5 (Rights in rem), April 6 2011,
http://www.eir -reform.eu/uploads/PDF/Jennifer_Marshall.pdf ( accessed on May 1,
2017) ;
 Annex A: Cross -border aspects of insolvency, A13, https://www.bis.org/publ/gten06c.pdf
(accessed on 28 April, 2017);
 Lithuania Survey on: claw -back of security in insolvency. Accessed on April 27, 2017;
 European Bank for Reconstruction and Development by Progressive Banking Solutions
Ltd Dublin, Ireland, “Assessment of the current Mortgage Lending Market and

72
Recommendations on How the Market can be Further Stimulated”, may 2005 , Accessed
on April 27, 2017.
Legal texts:
 Council Regulation No. 1346/2000 of 29 May 2000 on insolvency proceedings ;
 Virgos -Schmit Report on the Convention of Insolvency Proceedings ;
 Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015
on insolvency proceedings (recast );
 UNICTRAL Secured Transactions Guide, Chapter XII “The impact of in solvency on a
security right’’;
 UNCITRAL Model Law on Cross -Border Insolvency Law with Guide to Enactment and
Interpretation ;
 UNICTRAL Legi slative Guide on Insolvency Law ;

Websites:
 http://bobwessels.nl/wp/wp -content/uploads/2015/09/EIR -Recast -Aug-2015 -Technical –
note.pdf (accessed on March 16, 2017 );
 file:///C:/Users/User/Downloads/LIT%20%20Ieva%20Dosinaite%20Jurate%20Misonyte
%20-%20Tark%20Grunt e%20Sutkiene.pdf (accessed on April 27, 2017)
Case law:
 Case C -557/13 Lutz v Bauerle ECLI :EU:C: 2015:227, [2015] BCC 413;
 BGH 27 November 1997, NJW 1998, 671; BGH 8 December 1998, NJW 1999, 940;

73
Abstract

The research is based on application and interpretation of European Insolvency Regulation
regarding protection of rights in rem; application of principles of territoriality and universality on
rights in rem; analyze of article 5 of EIR, specifically the nature of right s in rem, localization of
the charged assets, the applicable law and the ranking of the secured creditors, according to
property law; application of UNICTRAL to security rights and comparison with EIR as to
determine the best protection for security rights . The objectives of the research are to compare EIR
and EIR Recast; EIR and UNICTRAL and Lithuanian and Moldovan law in the field of protection
of security rights; the analyze of principles of territoriality and universality and effects of security
rights under insolvency and property law.
The results of the research are based on how security rights and restructuring plan can be
inter-connected fo r proper insolvency proceedings. The effects of security rights have advantages
as to credit flow and incentive for investment , and disadvantages for satisfaction of unsecured
claims and claims belonging to third parties. EIR Recast is an innovation for in solvency law,
however, there are legal discrepancies in EIR Recast that need to be analyzed . Another result
achieved from the research on the coordination between EIR and UNICTRAL, is understand ing
how EIR should regulate the protection of rights in rem based on the provisions of UNICTRAL.
European MS are more protected in the field of security rights, than non -EU states. That is proved
by the comparison between legislations of Lithuania and Moldova. The legal legislation of
Lithuania is based on a more dev eloped legal framework, including EIR and UNICTRAL,
however Moldovan legislation is less supported by international legislation.

Keywords: Security rights; insolvency; restructuring plan; EIR; UNICTRAL; trade flow;
investment; unsecured creditors; secured creditors; third parties.

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Summary
The aim of my thesis entitled “Third parties ‘rights in rem under EIR” is to make a research
over the importance and application of European Insolvency Regulation over third parties rights
in rem located in another Member State than the state where main insolvency proceedings are
opened and over the trade of the MS where the assets are situated and the legal certainty of the
rights over them.
The objectives of my thesis are: make a comparison between EIR and EIR Recast
application; make a research of the principles of universality and territoriality; make a research
over the effects of rights in rem under insolvency and property law; make a com parison between
application of EIR and UNICTRAL over security rights; make a comparison between Lithuanian
and Moldavian law over security rights.
The structure of the thesis is based on the MRU Methodological Instructions. Therefore,
the thesis is struct ured into introduction, content, conclusions, recommendations, list of
bibliography, abstract, summary, annexes and honesty declaration.
The content is divided into two chapters: “Application of article 5 of the EIR” and
“Application of UNICTRAL and intern ational insolvency regulation in the area of third parties’
rights in rem ”. The first chapter is divided in two subchapters: “ General notions regarding
European Insolvency Regulation ” and “ Third parties’ rights in rem as an exception from lex
concursus ”. The first subchapter is divided into two subsections: “ The scope of EIR analyzed
through comparison with EIR Recast ” and “ Cross -border insolvency under EIR ” and the second
subchapter is divided into three subsections: “ Rights in rem under insolvency law ”, “Rights in rem
under property law ” and “ Application of art. 8 of EIR Recast ”. The second chapter is divided into
two subchapters: “ Comparison between EIR and UNICTRAL regarding third parties’ rights in
rem” and “Collateral securities located in a non EU MS” . The first subchapter is divided into: “ The
role of UNICTRAL regarding insolvency matters ” and “ Better protection of secured creditors –
EIR or UNICTRAL? ” and the second into: “ International regulation of insolvency proceedings for
secured creditors ” and “ Comparison between Moldova and Lithuania ”.
Main results of the research are that EIR jointly with EIR recast offers the possibility for
secured creditors to enforce their rights irrespective of lex concursus. The possibility to apply lex
concursus appears when a reorganization plan is applied. In order to ensure an efficient
administration and protection for all creditors, is necessary to balance the principle of territoriality
and universality. EIR Recast brings reforms in area of coordination and coopera tion and
rehabilitation of debtor’s business. However, there is no reform in the field of rights in rem. More
cooperation should be ensured between EIR and UNI CTRAL regarding security right .

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Annex 1
Case C‑527/10 ,
ERSTE Bank Hungary Nyrt v Magyar Állam, BCL Trading GmbH, ERSTE Befektetési Zrt

“Facts: on 8 May 1998, Postabank és Takarékpénztár Rt (Postabank’) issued a letter of credit in
favour of BCL Trading; On 9 July 2003, BCL Trading gave shares in Postabank as a guarantee
which it held in the event that the letter of credit was drawn upon and the l atter would therefore be
required to pay the corresponding amounts. The shares constituted a security deposit ; As regards
the shares in Postabank held by BCL Trading which constituted a security deposit, on 6 December
2005, the Legfelsőbb Bíróság ordered t he Magyar Állam to purchase them on the ground that the
latter exercised a determining influence over Postabank, which, under Hungarian law, created an
obligation to acquire the Postabank shares offered for sale by small shareholders. Pursuant to that
judgment, the Magyar Állam purchased those shares at an amount fixed by the Legfelsőbb Bíróság
and paid into court the amount representing the value of those shares which were previously
dematerialized ; on 27 January 2006, ERSTE Bank, whose registered office is in Budapest
(Hungary), who became the legal successor of Postabank, brought an action before the Fővárosi
Bíroság (Budapest Municipal Court) against the defendants in the main proceedings seeking a
declaratory judgment to the effect that it had a right over the security deposit paid into court ;
ERSTE Bank then appealed in cassation to the Legfelsőbb Bíróság seeking, principally, the
annulment of the order removing the case from the register and an or der to remit the case back to
the court of first instance so that that court could reconsider the application for the opening of
secondary insolvency proceedings against BCL Trading. Furthermore, it argued that the
Regulation was not applicable in this cas e because the judgment opening insolvency proceedings
against BCL Trading in Austria had been handed down before the Republic of Hungary’s
accession to the European Union, which therefore made it impossible, pursuant to the Regulation,
to regard that compa ny as being in liquidation in Hungary.

Legal background: EIR- article 3,4,5,17(1), 43,47 , recitals 6,11,23,25.
Hungarian Law – The rules relating to securities, in force at the material time,
are set out in Paragraphs 270 and 271 of Law No IV of 1959 on the Civil Code .

Judegement : based on a reference f or a preliminary ruling concernig the interpretation of Article
5(1) of Council Regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings

76
By its question, the Le gfelsőbb Bíróság asks the Court essentially whether Article 5(1) of the
Regulation is applicable in the context of civil proceedings concerning the existence of a right in
rem, in this case a security, in circumstances in which the property to which that r ight refers, such
as a sum of money paid into court, is situated in a State which was not yet a Member State of the
European Union when the insolvency proceedings were opened in a Member State, but which had
become one when the action which gave rise to th e judicial proceedings was brought.
Article 5(1) of the Regulation states that the opening of insolvency proceedings does not
affect the rights in rem of creditors or third parties in respect of assets belonging to the debtor
which are situated within the territory of another Member State at the time of the opening of
proceedings.
The Regulation are applicable in Hungary from the date of accession of that State to the
European Union, that is 1 May 2004, and therefore, from that date, the Hungarian courts were
required to recogniz e the decision to open insolvency proceedings handed down by the Austrian
courts. In those circumstances, in order to maintain the cohesion of the system established by the
Regulation and the effectiveness of insolvency proceedings , Article 5(1) thereof must be
interpreted as meaning that that provision is applicable even to insolvency proceedings opened
before the accession of the Republic of Hungary to the European Union in a case, such as that in
the main proceedings, when, on 1 May 2004, the debtor’s assets on which the right in rem
concerned was based were situated in that State, which is for the referring court to ascertain.
The Cour t (First Chamber) hereby rules: Article 5(1) of Council Regulation (EC) No
1346/2000 of 29 May 2000 on insolvency proceedings must be interpreted as meaning that that
provision is applicable, in circumstances such as those in the main proceedings, even to insolvency
proceedings opened before the accession of the Republic of Hungary to the European U nion where,
on 1 May 2004, the debtor’s assets on which the right in rem concerned was based were situated
in that State, which is for the referring court to ascertain. ”122

122 http://curia.europa.eu/ju ris/celex.jsf?celex=62010CJ0527&lang1=en&type=TXT&ancre = (accessed on 2 May,
2017)

77

Annex No. 2

Form approved on 20 Novemb er 2012 by the decision No. 1SN 10
of the Senate of Mykolas Romeris University

HONESTY DECLARATION
DD/MM/YYYY
Vilnius

I, Craciun Dumitrita , student of

Mykolas Romeris University (hereinafter referred to University), Faculty of law, European and
International Business Law ,

confirm that the Bachelor / Master thesis titled

“Third parties’ rights in rem under EIR”

1. Is carried out independently and honestly;
2. Was not presented and defended in another educational institution in Lithuania or abroad;
3. Was written in respect of the academic integrity and after becoming acquainted with
methodological guidelines for thesis preparation.
I am informed of the fact that student can be expelled from the University for the breach of
the fair competition principle, plagiarism, corresponding to the breach of the academic ethics.

_____________________ _____________________________
(signature) (name, surname)