Glossary security interests and insolvency

In order to maintain uniformity within and to ensure comparability of results, the project collaborators have compiled a glossary. This will serve as basis for the terminology that will be used in the project's publications. Any comments are welcome at d.deruysscher<at>uvt.nl. 

A security interest is a charge: this is a right of the creditor which allows him to gain access to the assets of his debtor in case of the latter’s default. Security interests can be voluntary or imposed by law; they can be vested in a contract or not; they can be concerned with movables and/or immovable property. The beneficiary of a security interest is the chargee or the secured creditor; the debtor is the chargor or the security provider.

A right of collateral is a right that is connected with a debt and which can be materialized upon default. The term is more common in economic literature, whereas security interest is more usual in legal literature. Sometimes “collateral” refers to a security interest in a movable asset, which can be either possessory or non-possessory.

A pledge is a synonym for a pawn: it is a possessory security interest, which entails the handing over of a movable asset to the creditor; therefore, it is a voluntary, contractual arrangement; the chargee holds the asset under pledge but does not receive the title, which remains with the debtor. Pledge is associated with movable goods and is always voluntary; it is linked to the creditor’s right to sell. In both literature regarding economics, finance and law, pledge refers to all these characteristics, except for the retention of title by the chargor, which is more commonly stressed in legal literature.

To pledge is often used in the meaning of “establishing a security interest”. Its meaning is thus broader than “handing over a pledge”, since it also encompasses non-possessory security interests.

A lien, in legal literature, refers to both possessory and non-possessory rights of creditors, on their debtor’s effects (that is, movable assets and/or immovable property). Such rights are usually not expressly agreed on by the parties to a contract. They are vested in a contract, even when they are not consensual, or the law. Possessory liens are rights of retention; both possessory and non-possessory liens are not traceable against bonafide holders, except for maritime liens. Rights for the creditor to auction the assets under the lien differ. In non-legal literature, the term lien is sometimes used as synonym of charge.

A hypothec is among lawyers used in two meanings. A first meaning refers to non-possessory pledges. In that sense, the concept corresponds to the hypotheca of Roman law. This was a non-possessory charge established by contract, which could involve both movables and/or immovable property. In a second meaning, it is used in the sense of a lien vested in the law (eg legal hypothec in Scots law). 

A mortgage is a special type of non-possessory pledge, that is on immovable property. According to English law, a mortgage entails the transfer of title to the chargee. This is not the case in civil law. In older legal literature and economic-historical literature mortgage sometimes refers to any non-possessory pledge (thus corresponding to hypothec in the first abovementioned meaning). The use of “mortgage” for any non-possessory pledge on immovable property requires additional clarification that – for civil law systems – this does not require transfer of title.

Security ownership is the transfer of title as security for a debt, while the debtor remains in possession of the assets on which the security interests rest. The chargee becomes owner, the chargor loses his title but remains holder. This corresponds to the Roman-law arrangement of fiducia cum creditore.

Foreclosure is a seizure proceeding started by the creditor holding a mortgage. Seizure in legal literature refers to either a court-authorized proceeding that is concerned with the locking of assets (movables and/or immovable property), or the physical act of taking assets (that is, movables). Etymologically, it is derived from the Latin sacire, which goes back to the Frankish *sakjan, “to lay claim to”. In origin seizure proceedings were voluntary and extrajudicial and they were not based on agreements (Planitz). The Holland “thoonpand” refers to an extrajudicial proceeding that involved the designation of a movable good upon default. In legal literature seizure proceedings are commonly associated with seizure without a court order, whereas attachment proceedings presuppose such an order. Attachment proceedings can be provisional (i.e. sequestration) or executory (i.e. as means of enforcing a title or judgment). Confiscation refers to the physical taking of assets, on the instigation of public authorities, and/or for purposes of payment of tax dues. Sequestration refers to either the act of seizure or to a specific arrangement of locking assets for as long as a court proceeding is pending. Execution refers to any proceeding of enforcement on the basis of a title or judgment. Arrest refers to either apprehension and subsequent imprisonment of a person, or to the locking of assets (it is then a synonym of seizure). Debt enforcement encompasses both seizure (even when it is non-procedural) and arrest in the meaning of apprehension. Since proceedings that were concerned with the locking or selling of assets of defaulting debtors became more detailed over time, it is advisable to detail for each publication what is meant with the abovementioned terms.

In the US and the UK bankruptcy (as economic phenomenon) is often used as a synonym of insolvency. Actually insolvency is a requirement for bankruptcy. One is insolvent and is thereupon declared bankrupt. In the UK law of the nineteenth century insolvency had the connotation of persistent default of non-merchants and also of companies, since bankruptcy by law was restricted to tradesmen. Nowadays, insolvency is the most common overarching legal term to express persistent default, both in the US and UK. In US law bankruptcy typically was used for both traders and consumers but nowadays mostly for consumers alone. In order to avoid confusion, personal insolvency is used, next to corporate insolvency. In civil law the legal notion of bankruptcy historically has criminal connotations (referring to the French banqueroute and the Italian bancarotta). In economic literature bankruptcy and insolvency are used interchangeably. The legal definition of bankruptcy/insolvency often requires a cash-flow test: debts cannot be paid because of a lack of (liquid) assets. Bankruptcy/insolvency is then the incapacity to pay debts as they fall due in the ordinary course of business. However, in some jurisdictions bankruptcy/insolvency is the outcome of a balance-sheet test: an enterprise is then considered as not viable because future incomes are expected to be insufficient to pay debts.

Pre-insolvency proceedings are proceedings that are voluntary: the debtor declares payment problems and starts proceedings outside insolvency proceedings. A composition is an agreement between an insolvent and his creditors, in or outside a court proceeding. In UK law, in the nineteenth century a distinction was made between a deed of arrangement and a composition. The first was more formal, the second an out-of-court settlement. A deed of arrangement could be a deed of assignment, a deed of composition or a deed of inspectorship. A deed of assignment entailed the transfer of all assets to the creditors; a deed of composition was a payment scheme combined with a partial discharge and the appointment of a trustee; with a deed of inspectorship the creditors replaced the managers. But because of laws incorporating compositions, the notions of deed of arrangement and composition became blurred; composition became the most commonly used notion. 

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