The Law of Georgia on Rehabilitation and the Collective Satisfaction of Creditors’ Claims (the Insolvency Law) establishes a comprehensive legal framework governing the treatment of creditors in insolvency proceedings. The stated objective of the Insolvency Law is the collective satisfaction of creditors’ claims, primarily through the rehabilitation of the debtor where feasible, and, where rehabilitation cannot be achieved, through the orderly liquidation of the insolvency estate and distribution of proceeds. This article outlines the key creditor protections under Georgian laws and the issues that shall be taken into account by the creditors in Georgia.
General Principles
The Insolvency Law applies to business entities established under the Law of Georgia on Entrepreneurs (excluding individual entrepreneurs), non-entrepreneurial (non-commercial) legal entities, unregistered unions and joint ventures, as well as foreign legal entities whose center of main interests is located in Georgia.
The scope of the law does not extend to natural persons, legal entities under public law, commercial banks, non-bank depository institutions, insurance companies, or other entities subject to special insolvency regimes.
Categories of Creditors
The Insolvency Law defines several categories of creditors:
Secured Creditors – A secured creditor is defined as a creditor whose claim is secured by a mortgage or pledge in accordance with the Civil Code of Georgia. Secured creditors enjoy a privileged position in insolvency proceedings, as their claims are satisfied primarily from the collateral securing the obligation rather than from the general insolvency estate.
A first-ranking secured creditor may apply to the bankruptcy manager with a request to sell the secured property in the manner prescribed by the relevant mortgage or pledge agreement, and the bankruptcy manager is obliged to ensure the sale in accordance with such request.
Preferential Creditors – The Insolvency Law establishes two distinct categories of preferential claims. Preferential claims proper include: (i) salary and leave payments covering a period of three months prior to the court’s declaration of admissibility of the insolvency application (excluding directors, supervisory board members, and their family members); and (ii) compensation for occupational injuries, capped at GEL 1,000 per creditor. Preferential tax claims consist of indirect tax liabilities arising during the three tax periods preceding the declaration of admissibility.
Preferential claims of the same rank are satisfied on an equal basis and must be paid in full unless the insolvency estate is insufficient, in which case they are satisfied proportionally.
Non-Secured Creditors – Non-secured creditors are creditors whose claims are not secured by a mortgage or pledge and do not qualify as preferential claims. Such claims are satisfied only after the full satisfaction of preferential and preferential tax claims.
The Insolvency Law also recognizes non-preferential claims, defined as claims for which the creditor and debtor have agreed in advance that satisfaction will occur on a non-preferential basis. These claims rank below ordinary non-secured claims in the distribution order.
Moratorium Measures and Protection of the Insolvency Estate
Upon the court’s declaration of admissibility and the opening of rehabilitation or bankruptcy proceedings, a statutory moratorium automatically comes into effect. The moratorium consists of measures aimed at protecting the insolvency estate and eliminating factors that could hinder the achievement of the Insolvency Law’s objectives.
Standard moratorium measures include the suspension of compulsory enforcement actions against the debtor’s property and the prohibition of initiating new enforcement measures. Tax enforcement actions, including tax liens and mortgages, are similarly suspended, except for measures relating to tax liabilities arising after the commencement of insolvency proceedings. The enforcement of security interests through collateral is also suspended for the duration of the moratorium, unless otherwise expressly permitted by law.
Protection of Secured Creditors during Rehabilitation
Although the moratorium restricts enforcement actions, Georgian law provides specific safeguards for secured creditors during rehabilitation proceedings. A rehabilitation manager or supervisor may apply to the court for permission to release certain assets from the moratorium and sell collateral that is not required for the purposes of rehabilitation.
If such an application is not submitted within ten days of a secured creditor’s request, the secured creditor may apply directly to the court. In such cases, the rehabilitation manager bears the burden of proving that collateral is necessary for achieving rehabilitation objectives.
Creditor Participation and Governance
Creditors may participate in insolvency proceedings through creditors’ meetings convened and organized by the court. Secured and non-secured creditors who submit claims within the statutory deadlines are entitled to attend, as is the debtor. The court determines voting rights within 30 days of opening rehabilitation or bankruptcy proceedings.
For larger debtors—those with at least 50 creditors and meeting specified financial thresholds—the establishment of a creditors’ committee is mandatory. The committee consists of three members, one elected by secured creditors and two by non-secured creditors, ensuring balanced representation in the governance of the proceedings.
The Georgian insolvency regime offers a structured and predictable framework for creditor protection and claim prioritization. Secured creditors benefit from robust safeguards, subject to the temporary constraints imposed by the moratorium, while the statutory priority waterfall provides clarity and legal certainty for all creditor classes. The moratorium, combined with transaction avoidance mechanisms, serves to preserve the insolvency estate for the collective benefit of creditors. Taken together, these rules create a balanced system that aligns creditor protection with the overarching objective of collective satisfaction under Georgian insolvency law.