19. The concept of creditors’ favoured status.

Debtor-creditor is the area of the law which relates to the rights and obligations of debtors and creditors. The law outlines what happens when the debtor is unable or unwilling to make payments and what remedies are available to the creditor in this situation. It does not focus on the creation of the debtor-creditor relationship but, rather, on the collapse of the debtor-creditor relationship.

With this in mind, debtor-creditor law largely involves how creditors get paid when the debtor does not have the resources to make payment. This question is determined by whether the creditor has some type of 'favoured status'. Broadly speaking, creditors get favoured status by two means, either by lien or by priority.

There are three different types of liens: consensual, judicial and statutory. A consensual lien is one which is created upon agreement between the debtor and creditor. Usually, this type of lien must be perfected through some type of registration process in order to be invoked against third parties (e.g. other creditors seeking payment from the debtor from the same property). Examples of these types of liens would be mortgages and registered security interests. Mortgages are liens created in land, whereas security interests are generally related to other types of property. Judicial liens arise as a result of some sort of judicial proceedings brought by the creditor to secure an interest in the debtor's property. Examples of this type of lien include attachment liens, garnishment, judgment liens and execution liens. These liens generally entail seizure of the debtor's property by a public official (such as a bailiff) to enforce the obligations of the debtor. Statutory liens are liens created by legislation due to the economic relationship between the debtor and creditor. Common examples of this type of lien are tax liens and mechanic's liens. In some cases, perfection of this type of lien is required in order to be valid against third parties.

Priority becomes an issue when the debtor is unable to make payment of his debts when they become due and a group of creditors take action to secure payment of their particular claim. Most commonly, creditors bring some form of action or claim during the course of insolvent liquidation1 proceedings. In such a circumstance, the usual procedure is to gather the debtor's property and to distribute it among the creditors. When there is not enough property to go around, the law has a system of priorities under which certain creditors are paid before others. Most of the rules that apply in this situation are f1rst-ln-tlme rules related to different classes of creditors. Examples of priority creditors would be wage earners, landlords and tax collectors. Other creditors are usually subject to first-in-time rules to determine their priority.

The majority of creditors will not have any favoured status, either by lien or priority. These creditors are often referred to as general creditors. In the context of group actions, these creditors generally end up receiving nothing upon distribution of the debtor's property. In order for these creditors to secure their claims to some degree, they will have to bring an action to attain the status of lien creditor.