The impact of insolvency (bankruptcy) legislation on the effectiveness of methods for securing the performance of obligations

Abstract

The article examines the impact of insolvency (bankruptcy) legislation on the effectiveness of methods for securing the performance of obligations. It analyzes the legal status of creditors whose claims are secured by various security mechanisms and the influence of insolvency proceedings on the enforcement of security rights. The paper considers the differences in the legal regimes governing pledge, suretyship, independent guarantee, retention of property, and other methods of securing obligations with regard to preserving their security function in the debtor's insolvency. Particular attention is paid to the reduced effectiveness of certain security mechanisms resulting from restrictions imposed by insolvency legislation. Separate consideration is given to the concept of the «bankruptcy test» developed by contemporary Russian civil-law doctrine, that is, a hypothetical assessment of the fate of a creditor's claim secured by a particular security device in the debtor's insolvency. It is shown that pledge, retention of property, suretyship and independent guarantee retain their compensatory function in bankruptcy proceedings, whereas a contractual penalty, option structures, covenants, insurance and a negative pledge confer no priority on the creditor. The article concludes that a security mechanism's ability to preserve priority and confer advantages upon the creditor in bankruptcy proceedings constitutes one of the principal criteria for assessing its practical effectiveness, and that the system of named and unnamed methods of securing obligations requires further development with due regard to the specific features of insolvency law.