Proprietary claims

The following Restructuring & Insolvency practice note provides comprehensive and up to date legal information covering:

  • Proprietary claims
  • Trust principles
  • Constructive trust
  • Quistclose trust
  • Interaction with pari passu principle
  • Interaction with preferences/transactions at an undervalue
  • Interaction with a moratorium

Proprietary claims

Creditors are often keen to establish proprietary claims as they create rights in rem (which attach to the property itself) rather than personal claims (which just attach to a person). This difference is particularly important when a company enters insolvency as assets subject to proprietary claims will not form part of the distressed company's estate, so the holder may be able to make a full recovery, rather than having to prove as an unsecured creditor in the liquidation/administration and wait for a dividend (which usually takes several months and is often less than a 50% dividend). Effectively, proprietary claims leap-frog over secured and preferential creditors in the waterfall of priorities as the assets are ring-fenced for the benefit of the holder of the proprietary claim.

For payment waterfalls, see Practice Note: Waterfall of payments—a comparative guide.

Trust principles

Proprietary claims are usually based on principles of trust law, which require the existence of the following certainties to create a valid trust (Re Sendo International (in administration)):

  1. subject matter—the asset must be identified (this may be a problem if the asset has been worked on, incorporated into a new product, or mixed with other assets). It's also generally harder to identify assets with the passage of time

  2. objects—the beneficiary must be identified

The two main types of trust created are:

  1. constructive trust

  2. Quistclose trust


The basic remedy for breach

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