In files where several creditors assert rights over a single debtor’s assets, the question arises whether the creditor who was first to obtain an attachment will take the whole of the sale price. Articles 100 et seq. of the Enforcement and Bankruptcy Act No. 2004 permit creditors coming later to join an existing attachment and to take a share of the sale price, provided that certain conditions are satisfied. Participation in an attachment is the name given to this exceptional institution.
This facility is not, however, afforded to creditors unconditionally. Strict conditions are required, such as the nature of the claim, the finality of the first attachment, the observance of the statutory time limits and compliance with the rules of ranking among creditors. In that respect, participation in an attachment is among the institutions of enforcement law in which errors are most frequently made in practice and which most often ends in the loss of a right.
Below we assess the concept of participation in an attachment, the conditions required, the relationship of priority among creditors, its effect upon the distribution of the sale price and the remedies of objection and complaint, within the framework of the statutory provisions and of the principles applied in practice.
The Concept of Participation in an Attachment
Participation in an attachment denotes the ability of a creditor conducting proceedings against a debtor to join, where the statutory conditions are present, an attachment previously placed by another creditor, and to take a share of the price arising from the realisation of the attached property or claim. The function of the institution is to ensure that creditors exercise their demands over the debtor’s assets within a particular order and ranking; in that character it is an exceptional provision departing from the general rule.
The general framework of attachment forms the subject of a separate note entitled What Is Attachment?
Ordinary Participation
Ordinary participation, governed by Art. 100 of the Enforcement and Bankruptcy Act No. 2004, is the form that requires the creditor to have commenced proceedings beforehand in order to be able to join an attachment placed by another creditor. The principal conditions required are as follows:
- The claim must have arisen before the first attachment; in enforcement without judgment the criterion is the date of the request for enforcement, while in enforcement based on a judgment it is the date of the action.
- That priority must be established by the documents listed in the statute: a certificate of insolvency, a judgment, an official or certified deed and similar official documents fall within this scope.
- The creditor requesting participation must have commenced proceedings against the debtor and have brought those proceedings to finality, that is to say must have reached the stage at which an attachment may be requested.
Where the conditions are satisfied together, the creditor joins the attachment by applying to the enforcement office in which the first attachment was placed. The enforcement director decides whether to accept or to reject the request; the complaint remedy lies against that decision.
Privileged Participation
Privileged participation, contained in Art. 101 of the Enforcement and Bankruptcy Act No. 2004, affords certain creditors the opportunity to join an attachment without any obligation to have commenced proceedings beforehand. This privilege applies only in respect of the persons listed in the statute:
- a creditor of alimony based upon a judgment
- a creditor under a contract of maintenance until death
- persons of whom the debtor is the guardian or the curator
- the debtor’s children
- the debtor’s spouse
By reason of the character borne by their claims, the persons listed may join an attachment without commencing proceedings. In respect of claims arising from the spousal, parental and guardianship relationships, however, the request for participation must be advanced within 1 year of the date on which the relationship came to an end.
The request is directed to the enforcement office that placed the first attachment and may be advanced until the sale price has been paid into the enforcement office cash desk. If the request is objected to, participation is provisionally allowed; in that case an obligation arises for the creditor to bring an action within 7 days.
Conditions for Participation in an Attachment
Participation in an attachment is not a general and unlimited power afforded to creditors; it is an exceptional facility that becomes operative where the conditions laid down in Act No. 2004 are satisfied together. The absence of even one of those conditions leads to the rejection of the request.
The existence of a legally valid claim. The first requirement is that the creditor making the request holds an existing and legally valid claim against the debtor. Participation is not possible in respect of claims that have not yet arisen, that are conditional or whose legal existence has not become certain. That the claim rests upon a particular legal relationship and upon a document is a fundamental condition of the acceptance of the request.
The finality of the first attachment. Participation may be directed only at an attachment placed in accordance with the proper procedure and become final. Joining an attachment that has not become final, that has been lifted or that has lapsed is not possible. When the request is examined, it must therefore be separately verified whether the first attachment is legally valid and whether it continues to subsist.
The type and legal character of the claim. The category into which the claim falls is decisive for the purposes of participation. While the legislature has afforded the opportunity of participation in respect of certain claims, it has provided for restrictions or exceptions in respect of others. The regime applicable to claims based upon a judgment, claims without a judgment, secured claims and privileged claims may differ in this respect.
Observance of the statutory time limits. The right of participation must be exercised within the periods indicated in the statute. Requests not advanced within the time limit are preclusive in nature and cannot subsequently be remedied.
Priority and Ranking Among Creditors
Where there is participation in an attachment, the order in which shares of the sale price are taken is one of the fundamental questions of enforcement law. In order to prevent an arbitrary advantage arising among creditors, the legislature has laid down particular rules of ranking and priority.
Priority among creditors. Participating creditors are as a rule regarded as being of the same rank. The date on which the claim arose, its legal character and the privileges recognised in the statute may nevertheless bear directly upon this ranking.
Creditors placed in the same rank. Among creditors falling within the same rank, the sale price is divided pro rata, that is to say proportionately. If the price is insufficient to meet the claims in full, each creditor receives payment in proportion to their claim.
Documents establishing priority. One of the documents accepted as a basis in this context is a document or receipt drawn up by public offices or by competent authorities on a date preceding the proceedings or the action of the holder of the first attachment.
The Effect of Participation on Distribution
Participation in an attachment is not merely a procedural instrument affording the opportunity to join an existing attachment; it also determines directly among whom, and to what extent, the price obtained from the realisation of the attached property is to be divided. In that respect the institution is one of the fundamental mechanisms shaping the balance of interests and the relationship of priority among creditors.
Division of the sale price. Once the price arising from the sale of the attached property has been paid into the enforcement office cash desk, it is distributed among the creditors who have joined the attachment. In carrying out this operation, regard is had to the character of each claim, to the type of participation and to the rules of ranking and priority laid down in the statute. Participating creditors are placed in the same rank as the creditor who placed the first attachment; in the distribution they are therefore assessed not as a creditor who alone caused an attachment to be placed but together with the other participants.
Pro rata distribution. Among creditors of the same rank, the price is distributed according to the principle of pro rata distribution. That principle means that the sale price is divided in proportion to the amounts of the claims. Put another way, no privileged or absolute priority is afforded to any one of the creditors of the same rank; each creditor collects to the extent of the share their claim bears in the total. The principle in question is a reflection of the understanding of equality and equity in enforcement law.
Insufficiency of the price. One of the situations frequently encountered in practice is that the price obtained from the sale is insufficient to meet the claims of the participating creditors in full. In such a case the creditors may collect only a part of their claims and remain unsatisfied as to the remainder. The insufficiency of the price does not have the effect of extinguishing the claims. Creditors retain the right, in respect of the part they were unable to collect, to have recourse to the debtor’s other assets, to request a fresh attachment and to continue the proceedings. They are no longer able, however, to make any further demand in respect of the sale price arising from that same attachment.
Objection and Complaint Remedies Against Participation
The acceptance or rejection of a request for participation bears directly upon the legal position both of the debtor and of the other creditors. The statute has therefore provided together for the remedy of objection, resting upon substantive grounds, and for the remedy of complaint, directed at the review of procedure and of the act itself.
To Whom Is the Right of Complaint Afforded?
The persons able to pursue the complaint remedy against an act of participation are as follows:
- the creditor whose request for participation has been rejected
- the creditors who have previously joined the attachment
- the creditor who placed the first attachment
- the debtor
The persons listed may pursue the complaint remedy against the act of the enforcement director accepting or rejecting the request for participation.
Grounds of Objection That May Be Advanced
The principal grounds upon which reliance may be placed against a request for participation are as follows:
- the supporting document failing to satisfy the characteristics required by the statute
- the condition of priority not having been satisfied
- the claim not bearing a character suitable for participation within the meaning of Art. 100 or Art. 101 of the Enforcement and Bankruptcy Act No. 2004
- the request being advanced after the expiry of the statutory time limit
- the claim having been created in a simulated or collusive manner
- the claim in truth not existing at all
These grounds rest upon an allegation that the request for participation is unlawful and, as a rule, bear directly upon the order of distribution and upon the proportion collected by the creditors.
The Authority to Which the Application Is Directed
The process involves review at two stages.
The first stage — the enforcement office. Objections are directed in the first place to the enforcement office in which the attachment is held. The enforcement director assesses whether the conditions of participation have been satisfied and decides whether to accept or to reject the request.
The second stage — the enforcement court. The decision of the enforcement director may be brought before the enforcement court by way of a complaint under Art. 16 of the Enforcement and Bankruptcy Act No. 2004. In its examination the court reviews whether the conditions of participation have been satisfied, whether the enforcement director carried out a lawful act and whether the act was procedurally regular, and gives a final decision. The general framework of this application is addressed in a separate note entitled Complaining Against an Act of the Enforcement Office.
The Independent Legal Assessment
In files concerning participation in an attachment, the element determining the outcome is most often not the existence of the claim but the ability to establish, by a document of the character required by the statute, that the claim arose before the first attachment. In practice a significant proportion of requests for participation are rejected solely on account of the inadequacy of the supporting document, without any debate as to the merits of the claim.
Timing is decisive in the same way. Since applications made after the sale price has been paid into the cash desk will have no effect, the sale stage of the file must be closely monitored. In a particular dispute the following points should be assessed as a matter of priority:
- determining at the outset whether the participation is ordinary or privileged in character
- establishing the date on which the claim arose, having regard to the distinction between enforcement with and without a judgment
- verifying whether the supporting document is one of the types listed in Art. 100 of the Enforcement and Bankruptcy Act No. 2004
- examining whether the first attachment retains its validity, in view of the possibility that it has lapsed
- documenting the moment at which the one-year period begins to run in cases of privileged participation
- calculating in advance the effect of pro rata distribution upon the creditor’s expectation of collection
Independent Legal provides advisory services and conducts litigation at every stage of the law of compulsory enforcement, from the preparation of a request for participation in files involving multiple creditors through to applications against the ranking schedule.