Paritas creditorum – a rule for the protection of creditors

1. What is the paritas creditorum rule?

The paritas creditorum rule, also known as the principle of “equality among creditors”, is a rule of insolvency law. It provides that creditors in concurrence situations, such as bankruptcy, must in principle be treated equally. This principle is particularly important in a bankruptcy situation, where the company’s assets must be distributed among the creditors.

The purpose of this rule is to ensure a fair distribution of the available resources, regardless of when the claim arose.

In Belgium, this principle is laid down, among other things, in Article 8 of the Mortgage Act:

A debtor’s assets serve as the common security for his creditors, and their proceeds are distributed among them in proportion to their claims, unless there are lawful grounds of priority between the creditors.

The principle is based on the idea that all creditors (ordinary creditors) are equal, except where certain creditors, subject to specific conditions, may invoke a statutory right of priority before distribution (the preferred creditors). For example, an unpaid seller may invoke a special priority right over the realization of the sold asset, while the tax authorities and the NSSO have a general priority right. Moreover, there is an order of ranking between these different priority rights: one priority right takes precedence over another.

In addition, some creditors do not fall under this paritas creditorum rule. These are the so-called “separatists”, such as a holder of a mortgage and/or pledge, or a creditor who has stipulated a retention of title.

2. When is the paritas creditorum breached?

In practice, it regularly occurs that a director, shortly before bankruptcy – when the company is often already effectively in a state of bankruptcy – breaches the paritas creditorum rule.

Common examples of this include:

• Preferential treatment of an affiliated company or oneself (for example, repayment of a current account);
• Repayment of a creditor for whom the director has personally acted as guarantor;
• Set-off (for example, between the debt for full payment of capital and a claim in a current account).

3. What are the consequences of a breach of the paritas creditorum?

A vigilant trustee in bankruptcy will not leave breaches of the paritas creditorum rule unaddressed in bankruptcy. The legislator provides an arsenal of legal actions for this purpose. Thus, in addition to taking various criminal law measures, the trustee may, under certain conditions, also choose to:

• Have the acts declared unenforceable against the estate;
• Bring forward the date of cessation of payments;
• Use a bankruptcy avoidance action to have certain unlawful acts annulled.

Most of these remedies are provided for in Articles XX.110 to XX.114 of the Code of Economic Law.

In addition, the trustee may also bring a director liability claim against directors who have breached the paritas creditorum rule.

All these actions aim to act in the interest of the creditors and to restore the balance embodied in the paritas creditorum rule.

Need advice on paritas creditorum or bankruptcy?

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