What forms of security can be granted over immovable and movable property? What formalities are required and what is the impact if such formalities are not complied with?
Restructuring & Insolvency
Standard securities under Spanish Law are the mortgage over immovable assets (e.g. buildings, plots or malls) and the ordinary pledges of credit rights arising from the main agreement of the debtor (e.g. concession agreement, sales agreement or lease agreements) or the pledge over the shares or quotas of a company with transfer of possession.
Chattel mortgages (hipoteca mobiliaria) and non-possessory pledges over certain valuable assets (e.g. patents, trademarks, industrial or commercial assets, machinery or equipment) are usually granted in specific financings related to companies belonging to the industrials sector.
Financial securities granted under the regime of Royal Decree-Law 5/2005 on urgent reforms to promote productivity and improve government contracting (“RDL 5/2005”), which implements the Directive 2002/47/CE regarding the financial security agreements, are usually shares pledges, pledge over certain credit rights and pledge over bank accounts.
Notarization plays an important role in the Spanish legal system, so securities granted under Spanish Law are always granted in a public document before a Spanish Notary although in cases where this formality is not required as the Financial securities granted under the regime of 5/2005 RDL.
The advantages of granting a security in a Notarial deed are: (i) benefit from an executive procedure in an enforcement scenario, as it will be considered as an enforcement title (título ejecutivo); and (ii) provide certainty of the date and content of the applicable security vis-à-vis third parties.
In addition, some of these types of securities are subject to compulsory entry on public registries, which requires the formality of public document, such as the land registry (Registro de la Propiedad) (e.g., real estate mortgage) or the chattel registry (Registro de Bienes Muebles) (e.g., mortgage on inventory), while registration is not required for other guarantees (e.g., pledge of unlisted shares).When the entry on public registry is compulsory, its non-compliance implies that the security is not completed and is null and void.
Pursuant to article 1,863 of the Spanish Civil Code, ordinary pledges requires the transfer of possession to be valid granted. The transfer of possession could be fulfilled by an entry into the Companies shares book, endorsing the title of the shares certificates or sending a notice to the counterparty of the agreement which is pledged.
Pledge over listed shares requires to enter into the book entry register held by Iberclear (the Spanish Central Securities Depository that keeps accounting records in the form of book entries of securities traded in the Spanish Securities Markets) in order to be enforceable against third parties.
The non-compliance of the formalities will imply that the securities are not valid granted, will be considered null and void, non-enforceable against third parties and not recognized in an insolvency procedure.
Japanese law recognises a number of types of security interests, and the law of secured transactions is one of the most complex areas of the Japanese legal system. Many types of security interests are provided for by statute, but others have been created by the courts. Security can be taken over various types of assets, including both immovable and movable property. The main methods of taking security over immovable property include, inter alia:
- revolving mortgages;
- pleges (shichiken);
- statutory liens (sakidori tokken);
- provisionally registered ownership transfers; (kari toki tampo)
- mortgage by transfer (joto tampo); and
- retention of title (shoyuken ryuho).
Mortgage by transfer and retention of title are recognised by precedent, whereas the other forms of security are provided for by statutes. Statutory mortgages are the most commonly used type of security interests. Statutory mortgages must be made public through registration in order for the mortgagee to have priority over other creditors (either in the ordinary course of business or in a formal insolvency).
The types of security interests that can be taken over movable property include, inter alia:
- pledges (shichiken);
- statutory liens (sakidori tokken);
- repurchase arrangements (sai-baibai no yoyaku);
- security by transfer (joto tampo); and
- retention of title (shoyuken ryuho).
The formalities required for enforcing a security interest over movable property differ across the different types of security interests.
In Denmark the three forms of security that may be granted over immovable property listed below are those most widely used:
The mortgage is typically issued by a creditor or a credit institution where a property is mortgaged with the payment of a specific amounty in favour of the creditor/credit institution for a loan. The debtor will typically service the debt.
• indemnity bond
The indemnity bond is a mortgage where the debtor’s property is mortgaged with the payment of a maximum sum in favour of a specific creditor in respect of a loan in respect of which the final amount owed has not yet been fixed. The indemnity bond is typically provided by the debtor as security for an over-draft facility.
• owner’s mortgage
An owner’s mortgage is a mortgage where the debtor reserves a mortgage of a fixed amount on its immovable property and provides this as security for an underlying debt owed to the creditor, If the underlying debt is repaid, the owner’s mortgage may serve as security for a new debt.
As a starting point, security granted over movable property depends on the type of movable property. The most widely used types of security over movable property are:
• company charge
Company charge means that the debtor grants a charge in favour of the credi-tor over, for instance, the inventory at any time, operating equipment, goodwill and amounts owing from sale of goods and services. The company charge is a type of a floating charge that does not prevent that assets under the charge are separated from the debtor’s business during operations.
• receivables charge
Receivables charge means that the debtor provides security in favour of the creditor over receivables from sale of goods and services. The debtor’s receiva-bles become included in the receivables charge as they are created and deleted from the charge as they are repaid.
• chattel mortage
The chattel mortgage may be created on a specific chattel, for instance a car or a machine. For traders that carry on their business activities from leased prem-ises chattel mortgages may be created on the operating plant and operating equipment situated at the business’s address without any separate specification.
• charges on rights
By agreement charges may be created on rights, for instance amounts owing, instruments of debt, shares, securities etc.
A pledge may be granted over assets in respect of which the security in favour of the creditor is created by transfer of physical assets to the creditor.
It is a characteristic of the above types of security model – except from the last two – that the creditor must register the security. If the creditor does not have the security registered, the creditor will not be protected against the debtor’s other creditors or assignees in good faith but only rely on the charge agreement between the parties.
In respect of a charge on rights the security is established by information to the issuer of the right in question.
In respect of a pledge the creditor’s security is established by physical dispos-session of the pledged assets.
In Australia, the principal type of security that is taken on ‘immoveable property’, i.e. interests in land or fixtures and buildings attached to land, is a real property mortgage, for which a registration system exists (referred to as the Torrens Title system). Under this system, a mortgagor who has registered a mortgage with the relevant state or territory land title register grants a legal charge over the land as opposed to transferring legal title to the mortgagee. This transfer is subject to the ‘equity of redemption’, that is, the mortgagor’s right to redeem the title to the property once it has satisfied its debt obligations. The mortgagor and the mortgagee thereafter both possess a legal interest in the land. The mortgagor is free to deal with the land (subject to any restrictions in the terms of the mortgage itself) and retains the beneficial and legal interest in the land. The mortgagee holds a legal charge that will confer actionable rights in the event of default by the mortgagor.
It is also possible under the Australian system for an equitable mortgage over land to exist. This arises in circumstances where the mortgage is not yet registered but the parties have an intention (often a written agreement) to enter into one or, the mortgagor deposits the title deeds with the mortgagee. An equitable mortgage can arise by design or by the failure to prefect the requirements to effect a legal mortgage.
Since its inception in 2012, the Personal Properties Securities Act 2012 (PPSA) has established a uniform concept of a ‘security interest’ in Australia. This concept covers all forms of security interests, including mortgages, charges, pledges and liens. It applies primarily to security interests under which an interest in personal property is granted pursuant to a consensual transaction that, in substance, secures payment or performance of an obligation. It also applies to certain deemed security interests such as certain types of lease arrangement for certain terms, retention of title arrangements and transfers of debts, regardless of whether the relevant arrangement secures payment or performance of an obligation. ‘Personal property’ (or moveable property) is broadly defined and essentially includes all property other than land, fixtures and buildings attached to land, water rights and certain statutory licences.
The PPSA has introduced a new lexicon relating to security in Australia. For instance, the traditional concept of a fixed and floating charge has now been replaced by a ‘general security agreement’ and the concept of a floating charge has now become a ‘circulating asset security agreement’. The concept of crystallisation and the distinction between fixed and floating charges under the PPSA have become irrelevant.
The concept of ‘security interest’ is broad enough to capture pre-existing forms of security and the documentation creating security has not changed significantly (i.e. charges, debentures, mortgages and pledges may still be used with certain amendments).
Generally, attachment and perfection of a security interest occurs when the grantor and the secured party execute a security agreement (although the parties can defer attachment) and the security interest is registered on a register known as the Personal Properties Securities Register (PPSR). However, security interests over certain assets can be perfected other than by way of registration, for example, by the security holder controlling the relevant assets in the manner prescribed by the PPSA.
The rights of a secured creditor to enforce a security interest are subject to a requirement that the security interest be perfected through registration. Unregistered or unperfected security interests vest with the grantor upon insolvency. This includes in relation to retention of title arrangements. If a security interest is not perfected in accordance with the PPSA the security interest will, on liquidation of the grantor, vest in the grantor. This has created a paradigm shift for retention of title arrangements since failure to perfect the retention of title arrangement (by registration on the PPSR) will vest title in the relevant goods to the recipient of the goods, despite the agreement between supplier and recipient that the supplier retains title to those goods until they are paid for.
Further, registration of a security interest has an important bearing on its priority position with respect to competing security interests. It is therefore essential to register a security interest as soon as possible to provide the secured party with perfection and the best possible claim against the grantor vis-a-vie competing secured parties.
The following security rights may be granted over immovable and movable property in the Cayman Islands:
- Mortgage. A mortgage arises when a creditor lends money at interest in exchange for a transfer of an interest in the debtor's property. The conveyance of title will become void upon the payment of the debt. An equitable mortgage will be created where the property subject to the mortgage is not transferred to the lender. An equitable mortgage is capable of being defeated by a third party buyer with no notice of the lender's interest.
- Charge. Unlike a mortgage, title to the property will not be transferred to the lender pursuant to a charge, with the chargee merely being granted rights over the property as security for a debt. A charge may be fixed or floating, with a fixed charge attaching to specific assets which cannot then be sold by the borrower. Under a floating charge, a borrower is free to deal with the various assets subject to the charge until such time as a default occurs. Upon an event of default, the charge will crystallise over the property held by the borrower at the time of default. The charge then becomes a fixed charge, with the lender having the power to sell the assets in order to satisfy the outstanding debt.
- Lien. A lien arises by operation of law based on lawful possession and may be used when a creditor is in possession of an asset and monies are due to it for services provided. A lien will not create any rights in the property in the creditor's favour and a creditor has no power to sell the property to allow payment of the debt.
- Pledge. Under a contract to pledge, the property is deposited as security for a debt. The right to the property vests in the creditor to the extent necessary to secure the debt. The creditor has the power to sell the property in the event of a default by the borrower.
The relevant to be observed in circumstances in which a borrower entity incorporated in the Cayman Islands grants security over its assets will largely be prescribed by the relevant entity's articles of association. However, it is likely that a directors' resolution will be required prior to the granting of any security interest over the company's assets.
The Cayman Islands has centrally maintained ownership registers for land, ships, aircraft and motor vehicles on which creditors' mortgages or charges can be registered. Any third-party purchaser will be deemed to have notice any interest registered at the time of the purchase of the relevant encumbered asset and will acquire the asset subject to a creditor's interest as the holder of a registered mortgage or charge.
Although a Cayman Islands incorporated company is required to maintain an internal register of mortgages and charges, no central register exists for other types of immovable property. A creditor must therefore take adequate steps to ensure that it has sufficient control over an asset to prevent a third party from purchasing it. Any creditor should review a company’s register of mortgages and charges prior to making a loan, in addition to ensuring that the register is updated following the date upon which the loan is made.
Failure to comply with the relevant formalities will not automatically render the security void, although there is a risk that the security will not be binding on the debtor company. In addition, a third party purchaser could acquire the asset free of the creditor's security interest or acquire a higher ranking security interest over the asset.
The main types of security interests for movable property are pledges and transfers or assignments for security purposes. Pledges come in two forms, i.e. regular pledges with no transfer of ownership and irregular pledges with a transfer of ownership and an obligation to return collateral of the same amount and quality. An irregular pledge is assumed where a secured creditor benefits from a right of rehypothecation or similar right of use. Security over immovable property is taken in the form of mortgages and, more often, by way of a pledge or transfer for security purposes of mortgage certificates. Pledges and mortgages are so-called accessory security interests which implies, inter alia, that (i) the valid existence of the pledge or mortgage is dependent on the continuing valid existence of the secured obligations and (ii) the holder of the secured obligations must be identical with the holder of the relevant security interest. In turn, a transfer or assignment for security purposes is a non-accessory security interest where the aforementioned principles do not apply.
The concept of a pledge is frequently used for the following asset categories:
Certificated shares: The valid creation requires a written pledge agreement and the transfer of possession of the share certificate (with an endorsement for registered shares). The articles of association of the pledged company may establish additional requirements for the creation and/or perfection of a right of pledge.
Other securities: Uncertificated securities are pledged by way of a written pledge agreement. If the securities are in the form of book entry / intermediated securities either of the following must occur for the creation of a valid security interest: (i) a transfer to an account of the pledgee or (ii) an irrevocable instruction from the pledgor to the intermediary regarding adherence of the intermediary to instructions from the pledgee without consent or cooperation from the pledgor.
Bank accounts: The valid creation requires a written pledge agreement. Enforceability of the pledge vis-à-vis the account bank further requires notification of the pledge to the account bank.
Intellectual property rights: The valid creation requires a written pledge agreement. Registration of the pledge in the relevant registers for patents, trademarks and designs is not required for the valid creation but for perfection of the right of pledge.
Movable assets: In addition to a pledge agreement (for which the written form is not required but strongly recommended) the creation of the security interest requires the depossession of the pledgor. A security interest is not validly created as long as the pledgor has unrestricted access to the relevant assets. This makes the security unattractive in many instances.
A transfer for security purposes is regularly chosen for the creation of a security interest with respect to mortgage certificates over real estate. The creation of the mortgage certificate requires an act in the form of a public deed. In addition to a transfer agreement (for which the written form is generally not required but strongly recommended) the valid creation of the security interest requires the transfer of the relevant mortgage certificate (if it is issued in certificated form) or an application to the land registry to record the secured party as a holder of the mortgage certificate (if the mortgage certificate is a register mortgage certificate). If the mortgage certificate is issued in certificated form in the name of a specific creditor and not to the bearer, an endorsement is required. The endorsement must not be in blank.
Failure to comply with the aforementioned requirements to create a valid right of pledge will result in the security not having been validly created and, therefore, not being enforceable. In turn, non-compliance with perfection requirements may have the effect that security may not be fully enforceable with respect to certain specific third parties only or that such security may have limited effects.
Security over immovable property:
- A mortgage (Hypothek), a type of security which exists only as accessory to the secured debt.
- Land charges (Grundschulden), more common than mortgages, are independent from the secured debt. How they are used, depends on the security agreement that is drafted to complement the land charge.
Both are valid only if registered in the land register (Grundbuch); they normally require a notarized authorization of the owner of the land and are commonly created by a notarial deed in which the debtor submits to immediate enforcement in case of default, because otherwise the creditor would need to obtain a court order to initiate the public auction process.
Security over movable property:
- Security transfer of ownership (Sicherungsübereignung) is the most common collateral over movables, because the transferor may retain the actual possession of the movable.
- Chattel pledge over movables is less common because it requires the pledgor to deliver the actual possession of the movable to the pledgee.
- Retention of title as security for the claims of the seller.
Moreover, claims may be used as collateral by assigning them as security (Sicherungsabtretung). Security assignments may be made in respect of specific claims against specific third parties or all existing and future claims against all third parties (global assignment). Claims may also be pledged, but security assignments are more common, because, unlike pledges, security assignments are valid without being notified to the third party debtor.
While none of these security interests over movables and claims requires any specific formalities, in practice such collateral is granted in a written agreement.
Shares in companies and other transferable rights may be pledged. Such pledge requires the same formalities as a transfer of the relevant right. Hence, a pledge of shares in a German limited liability company (GmbH) is only valid if notarized.
The most commonly used forms of security interest in Mexico are (a) the commercial pledge (prenda mercantil); (b) the floating lien pledge (prenda sin transmisión de posesión); (c) the security trust (fideicomiso de garantía); (d) the mortgage (hipoteca); and (e) the industrial mortgage (hipoteca industrial). Each of these forms of security interest has specific formalities requirements which, if not complied with, would render the security interest ineffective or not enforceable vis-à-vis third parties, as applicable.
a) Commercial Pledge.
Formalities: (i) execution of a pledge agreement; and (ii) additional requirements depending on the type of assets (e.g. in case of assets or bearer negotiable instruments, their delivery to the pledgee or in case of negotiable instruments, they must be delivered to the pledgee duly endorsed “in pledge” (en garantía) and, if such negotiable instruments are subject to registration (e.g. in the share registry book), the pledge must also be registered in the corresponding registry to be enforceable vis-à-vis third parties).
b) Floating Lien Pledge.
Formalities: (i) the execution of a floating lien pledge agreement; (ii) its ratification by a notary public; and (iii) its registration in the Sole Registry of Movable Collateral (Registro Unico de Garantías Mobiliarias, the “RUG”) to be enforceable vis-à-vis third parties.
c) Security Trust.
Formalities: (i) the execution of a security trust agreement (in a public deed in case the trust estate includes real property or ratified by a notary public in case the value of such trust estate meets certain threshold (approximately USD$76,315.00); and (ii) its registration in the corresponding public registries to be enforceable vis-à-vis third parties (i.e. in the public registry of property and/or in the RUG in case the trust estate includes real property and/or personal property, respectively).
Formalities: (i) the execution of a mortgage agreement by means of a public deed issued by a notary public; and (ii) its registration in the public registry of property where the real property is located to be enforceable vis-à-vis third parties.
e) Industrial Mortgage.
Formalities: (i) execution of an industrial mortgage agreement by means of a public deed issued by a notary public; and (ii) its registration in the corresponding public registries to be enforceable vis-à-vis third parties (i.e. in the public registry of property and/or in the RUG in case the industrial mortgage includes real property and/or personal property, respectively).
British Virgin Islands
BVI companies are often used as holding vehicles either on a stand-alone basis or as part of a wider group structure when seeking to raise capital through debt financing, and there are a number of features of BVI law that make it particularly attractive to lenders to structure such transactions through a BVI entity or to use such a company as a security provider. Because BVI companies are often used in holding structures, the assets that are generally the subject of security interests governed by BVI law are shares in BVI companies.
Broadly speaking, there are seven types of security interest that can arise under BVI law: legal mortgage, equitable mortgage, equitable charge (fixed or floating), pledge, legal lien, equitable lien, and hypothecation or trust receipt. Of these, mortgages, equitable charges, and pledges are most commonly used in relation to shares.
There are several other arrangements that parties can put in place that have the effect of conferring a type of security but which do not actually create a proprietary security interest in the subject matter. For example, it is possible to grant a power of attorney or conditional option in favour of the secured party relating to shares, to enter into a retention-of-title agreement, or to execute undated transfer instruments. While these methods may provide protection for the secured party, they do not confer a proprietary interest in the assets to which they relate, and for this reason they are not subject to the same legal considerations the courts have developed in the context of conventional proprietary security interests.
In order for a security interest to arise, it is generally necessary that six conditions be met:
- There must be an agreement for the creation of the security; in some cases this agreement must be in writing (as where the interest to be created is a legal mortgage), and in some it must be by deed (where a legal mortgage is created in relation to land);
- The collateral must be identifiable as falling within the security;
- The chargor must have the power to create the security interest in the collateral;
- There must be an obligation of the chargor that the collateral is intended to secure; and
- Any contractual conditions for the creation of the security must be satisfied.
A failure to comply with these requirements will generally mean that no security interest will arise.
In addition to the foregoing, if the security interest to be created is a legal mortgage, the security must be perfected by the transfer of title to the collateral to the mortgagee (though there are exceptions in relation to land, ships, and aircraft). A problem arises where the collateral for the mortgage is in the form of bearer shares, because BVI law requires that these be held at all times by a licensed custodian. In practice, this conceptual difficulty has been navigated by the custodian acting as nominee for the mortgagee rather than the mortgagor. The position is simpler in relation to registered shares: transfer instruments are executed and the register of members is updated to show the mortgagee as the new owner of the shares.
If a legal mortgage is not perfected, it will take effect as an equitable mortgage. An equitable mortgage may also be expressly created. In some cases, the mere deposit of title documents can give rise to an equitable mortgage; however, this rule does not apply in relation to shares or land in the BVI. The deposit of share certificates may, however, give rise to a pledge.
An equitable charge may be fixed or floating. Floating charges are given a greater status in the BVI than in some other jurisdictions: although they may be made subject to the costs of a liquidation and the claims of preferential creditors, in reality there are very few preferential creditors; in addition, a properly executed and registered floating charge will take priority over fixed charges if the floating charge contains a negative pledge by the chargor; and floating charges will only generally be voidable by liquidators if entered into when the company was insolvent on the cash-flow basis.
A pledge can only be created over a physical asset, because it requires that the secured creditor take possession of the collateral itself, in addition to the conditions outlined above. Again, a difficulty arises in relation to pledges over shares in BVI companies: as stated above, bearer shares must be deposited with a custodian, so cannot be given to the creditor; and creating a pledge by depositing a registered share certificate will create security over the certificate itself and not the share. As in relation to legal mortgages, however, the conceptual problem in relation to bearer shares may be overcome by the custodian’s agreeing to act as nominee or agent for the creditor.
Registration of security interests granted by companies is optional but not mandatory, unless the collateral is land, in which case, the security interest must be registered within three months. If this deadline is not observed, a fine is payable but the security remains valid; however, unregistered security rights will be subordinated to registered charges as well as to unregistered charges that were created before the BCA’s commencement date, and may encounter difficulties as against a liquidator: see section 166 of the BVI Business Companies Act 2004 (BCA) and Re Bond Worth Ltd  Ch 228. In some cases, such as where a security interest is created in relation to a debt or other chose in action, it is necessary to give notice to the debtor or the person obliged to perform the obligation the chose in action comprises.
Failure to perfect a security interest, whether, eg, by transfer of the asset in the case of legal mortgages, or by possession of the collateral in the case of pledges, does not render it void or even voidable. It does, however, increases the risk that subsequent interests may take priority, with the effect that the creditor will have little or no recourse to the collateral. As such, a creditor is advised to take as many steps as possible to protect their position, including registration where available, even though it is not generally a requirement.
Mortgages and fixed charges are the most common form of security taken over immovable property. There are two forms of mortgage:
- Legal mortgages: the mortgagor conveys legal title to the mortgagee as security for a debt and recovers legal title once the debt is repaid (Santley v Wilde  2 Ch 474).
- Equitable mortgage: the mortgagor transfers the beneficial interest in its property to the mortgagee as security for the debt. The mortgagor retains legal title. An equitable mortgage will not take priority over a bona fide purchaser for value who acquires legal title without notice of the equitable mortgage.
The most common forms of security taken over movable property are:
- Mortgages, both legal and equitable: Legal mortgages are mostly used in relation to real property and chattels such as ships and aircraft.
- Fixed charges: A charge over a specific moveable or immoveable asset.
- Floating charges: A floating charge can be taken over a class of assets that change from day to day. The instrument creating a floating charge can provide that it crystallises, either on notice or upon some specified event (In re Brightlife  1 Ch 200), and converts into a fixed charge that attaches to the debtor's specific assets at that time.
- Pledges: A right to take physical possession of the pledged asset and to sell it in the event of the debtor's default.
- Liens: The right, pursuant to contract or statute, to retain possession of an asset until the debt is satisfied. The creditor is not automatically entitled to sell the asset if the debtor defaults.
- Charge backs: A bank may take security over its client’s credit balances (section 2 Charge and Security (Special Provisions) Act 1990).