What practical issues do secured creditors face in enforcing their security (e.g. timing issues, requirement for court involvement)?
Restructuring & Insolvency
Enforcement of liens
The creditor may exercise its right to satisfaction either by way of judicial enforcement or by means other than judicial enforcement. As regards the relation between enforcement proceedings and liquidation proceedings, if enforcement is pending against the debtor at the time of opening liquidation proceedings, the enforcement proceedings will be terminated by the court, and the assets concerned and the funds remaining after deducting the costs of the enforcement proceedings will be transferred to the appointed liquidator. In this case the creditor will only be able to enforce its security during the course of the subsequent liquidation proceedings, under the rules applicable to the normal procedure.
Right to satisfaction by way of judicial enforcement
In enforcement proceedings – besides the normal procedure – the creditor may also enforce its security trough a fast-track or simplified procedure, provided that the creditor, as pledgee, and the pledgor have previously agreed (before the right to satisfaction would have been opened) on the lowest sale price (or on the formula for calculating the sale price) of the pledged assets. The agreement shall be executed in writing and shall be notarized.
Right to satisfaction by means other than judicial enforcement
The right to satisfaction by means other than judicial enforcement may be exercised, at the lien holder's discretion: (i) through the sale of the pledged property by the lien holder; (ii) through the acquisition of the pledged property by the lien holder (without prejudice to the prohibition of lex commissoria); or (iii) through the enforcement of a hypothecated right or claim. The pledgee is entitled to switch between the above [(i)-(ii)] enforcement methods. As an exception from the general rule, liens on payment account balances can only be enforced by way of judicial enforcement.
Security deposits – right to direct satisfaction
The holder of a security deposit is entitled to acquire ownership – by way of a unilateral statement addressed to the lienor – of the pledged property up to the amount of the secured claim at the effective date of his right to satisfaction, or, if it was acquired previously, may terminate his obligation to transfer assets of the same type and amount as the collateral security received to the lienor.
In liquidation proceedings, holders of security deposits provided before the time of opening liquidation proceedings are entitled to exercise their right to direct satisfaction, irrespective of whether liquidation is opened or not, and shall refund any excess collateral to, and settle accounts with, the liquidator. If the holder of the security deposit fails to exercise his right to direct satisfaction within three months following publication of the opening of liquidation, he may seek satisfaction as a lien holder.
Enforcement of fiduciary collaterals
Fiduciary collateral holders may enforce their security according to the general rules on judicial enforcement if the debtor fails to comply with its duties under the fiduciary collateral arrangement. In liquidation proceedings, fiduciary collateral holders may enforce their claims according to the rules applicable to lien holders, provided that:
- the statement of acquisition in relation to the transfer / assignment of the relevant right or claim by way of security has been entered into the Collateral Register before the time of opening liquidation proceedings;
- the option right established by way of security has been registered in the Land Register or in the Collateral Register before the time of opening liquidation proceedings.
The holder of an option right established by way of security has 60 days from the time of opening liquidation proceedings to declare his intention to buy the asset in question. In that case, the procedure for the exercise of the right of pre-emption also applies if the asset is sold during the course of the liquidation proceedings.
Traditionally, the Italian legal system has not offered secured creditors the opportunity to enforce their security in a timely manner owing to both the requirement for court involvement in most cases (e.g. in the enforcement of mortgages and pledges over IP rights) and the excessive length of the court-administered enforcement procedures.
New measures for speeding up credit enforcement were enacted in 2015-2016, thus bringing the Italian framework closer to international best practices. To this extent it is worth mentioning:
- for loans granted to enterprises, it is now possible to include the “Marcian Pact” forfeiture clause in loan agreements thus enabling the secured creditor, should the debtor commit a material breach, to obtain ownership of the real estate collateral through an out-of-court procedure, provided that should the estimated value of the collateral be higher than the amount of the outstanding loan, the secured creditor shall pay the exceeding amount to the debtor. This novelty has the potential of reducing the time of recovery to a period counted in months, instead of years;
- the non-possessory pledge can be enforced through a variety of methods that do not require a court-supervised enforcement procedure;
- the mandatory use of digital tools in sales transactions, the increased chances to directly assign the assets to creditors, the prohibition for the debtor to challenge an enforcement after court’s authorization for the sale or the assignment of the collateral being given.
Pursuant to article 572 of the Spanish Civil Procedure Law 1/2000, express agreement between the lender and the debtor on the system used to assess the amount due secured by a certain security should be the amount of the balance resulting from the transactions accomplished under the agreement secured, provided the parties have agreed in the title deed that the amount due and payable in the event of enforcement would be the result of the settlement made by the lender as per the formula agreed by the parties in the enforceable title.
Mortgages enforcement can be carried out through judicial or notarial proceedings, although the latter only when this possibility is stipulated in the mortgage deed (which is standard practice).
In judicial proceedings, the asset can be sold (i) by direct sale (through a sale agreement), (ii) by a specialized entity or (iii) through an auction. Notarial proceedings can only be carried out by auction. Auctions must be carried out through an electronic auction held on the Official Gazette of the Spanish State’s Auctions Portal.
With regard to credits secured with the debtor’s assets required for the continuity of the debtor’s professional or business activity, when the debtor is declared bankrupt, the possibilities of enforcing the collateral will be limited, in accordance with the provisions of the Spanish Insolvency Act. In such cases, enforcement or realization of the security may not commence until a composition is approved (which does not affect that entitlement) or one year elapses from the insolvency declaration without liquidation taking place, unless the auction announcement for the asset or right had been published at the time of the insolvency declaration.
Financial securities granted under RDL 5/2005 can be enforced by retaining the collateral or enforce them through “direct sale.” This executive procedure will imply the faster enforcement procedure under Spanish Law. In addition, financial securities are not affected by the insolvency rules.
The enforcement of pledges of credit rights is quite straight forward just notifying that an enforcement event has occurred to the counterparty of the debtor and all flows under the underlying agreement should be deposited in a lender’s bank account.
In order to avoid delays in case of enforcement of the securities, parties should establish an auction value in the securities agreement which calculation should be objective and simple as possible. (i.e. the net book value of shares).
After the amended of the Notary Act carried out by the Voluntary Jurisdiction Act 15/2015, the extrajudicial proceeding (“subasta notarial”) pursuant to article 1872 of the Spanish Civil Code regarding the enforcement of the pledges and the out-of court foreclosure of the mortgages, speed up the enforcement procedures but there is not much practical experience so far.
The auction must be announced in all cases in the Official Gazette (article 74.1 of the Notary Act). Moreover, the parties expressly agreed that the announcement will be published and notice to the debtor with at least 15 days before the first auction.
The auction will be electronic and carried out in the Auction Portal of the Official State Gazette (“Portal de Subastas de la Agencia estatal Boletín Oficial del Estado”). The bidding period lasts for a period of 20 calendar days from the start of the auction (article 75.1.3ª of the Notary Act).
Although the out-of-court foreclosure proceeding is less time-consuming than the courts’ one, our suggestion would be to follow the out-of-court foreclosure proceeding just in the event the foreclosure is done in an amicable way with the Debtor. If there is any chance that the debtor will challenge the out-of-court foreclosure proceeding will not be suggested.
It is very difficult to assess accurately the effective duration of an enforcement process of a pledge or the foreclosure of a mortgage, as it is conditioned by certain contingencies that are impossible to predict pre-emptily (the workload of certain courts or the challenges invoked by the debtor) and that may make the duration of the process vary substantially. However we could make the following standard estimation of timing: executive procedure in-courts could take approximately 10 to 12 months. The extrajudicial proceedings are the fastest procedure, and it could last around 3 or 6 months depending on the period of time needed for the auctions.
Security enforcement is generally governed by the Civil Execution Act. Although the specific steps for enforcing security differ across the different types of security interests and different types of assets, the process generally is controlled by the court. In the case of a mortgage over immovable property, for example, the court will hold a compulsory auction to convert the property into cash. However, in certain exceptional circumstances (in particular with respect to non-statutory security), secured creditors can exercise their security interests without the court’s involvement.
It should be noted that once a corporate reorganisation procedure is commenced with respect to the debtor corporation, enforcement of security interests will be subject to certain limitations as contemplated in the Corporate Reorganisation Act. Commencement of other types of insolvency proceedings (i.e. bankruptcy, civil rehabilitation and special liquidation) does not automatically affect a secured creditor’s right to enforce their security interests; provided, however, that in exceptional circumstances, the court can impose certain restrictions on the secured creditors’ right to enforcement.
In respect of a mortgage secured on the debtor’s immovable property, the creditor may commence a forced sale procedure before the enforcement court of the debtor’s jurisdiction if the debtor defaults on the debt. However, it is a condition that the creditor levies execution on the debtor’s immovable property and subsequently the creditor may file a request for a forced sale with the enforcement court of the debtor’s jurisdiction.
In case of a charge on movable property it is also possible for the creditor to request that execution be levied on the charged item. Based on the execution the creditor may dispossess the item as security for the creditor’s agreement with the debtor and the creditor may sell the item in question for the purpose of covering the arrears. The creditor’s request for execution may also be filed with the enforcement court of the debtor’s jurisdiction.
Recovery through the enforcement court assumes that the creditor has obtained a basis for the recovery, for instance a judgment, instrument of debt, settlement etc.
In a voluntary administration, a statutory moratorium under section 440B of the Corporations Act 2001 (Cth) (Corporations Act) prevents a security interest from being enforced against the company’s assets without the administrators consent or leave of the Court.
There are exceptions to this general rule, the primary one being where a secured creditor has security over the whole or substantially the whole of the company’s property. Where this occurs the secured creditor may enforce its security and appoint a receiver within 13 business days’ following the date the administrator gave notice of his or her appointment (if notice is required). If a secured creditor does not enforce its security within this time period, the section 440B moratorium will apply preventing enforcement during the period of the administration. Notwithstanding the short window available to secured creditors to enforce their security, there are often practical difficulties associated with being satisfied that the security is ‘over the whole or substantially the whole’ of the company’s assets.
A similar moratorium on enforcement operates in a liquidation (under section 471B of the Corporations Act), however secured creditors are usually granted immunity from this process (by section 471C), assuming the validity of their security, as they remain entitled to realise their security despite the liquidation.
A debtor company may seek to frustrate a secured creditor's attempts to secure the repayment of its debts by dissipating assets prior to enforcement. In such circumstances, a creditor may be required to issue proceedings to recover the debt, whilst at the same time issuing an application for an injunction for the purpose of freezing a company's assets pending the outcome of such proceedings. In order to obtain such relief, a secured creditor would be required to demonstrate to the Grand Court of the Cayman Islands (the "Court") that there was a substantial risk of dissipation of assets on the part of the company.
The legal rights of a secured creditor will be unaffected by the commencement of winding up proceedings in respect of a debtor company. Accordingly, a secured creditor will retain the ability to enforce its security and sell the charged property to obtain payment of the debt. If the sale proceeds of the charged asset are insufficient to discharge the debt, a secured creditor can rank as an unsecured creditor in the liquidation in respect of the balance of the debt.
A secured creditor may appoint a receiver over a charged asset for the purpose of enforcing their security rights under the relevant security document. A receiver is not subject to supervision by the Court and their primary duty will be to the secured creditor, as opposed to the general body of creditors.
If security is enforced outside of formal proceedings on the basis of a relevant contractual authorization, Swiss law does not establish major obstacles for secured creditors. A robust and clear authorization language is particularly important for enforcement by way of appropriation, though. In any event, appropriation without proper accounting of the value of the relevant collateral against the secured obligations is prohibited under Swiss law. Secured creditors could become liable to the provider of the security if the security is not being enforced in good faith. To our knowledge, such proceedings are very exceptional, though.
Enforcing security through debt enforcement proceedings is only available for pledge type of security interests and requires the involvement of the authorities. This may significantly slow down the enforcement process. Also, the statutory default enforcement route of a public auction does often yield a depressed result below the fair value of the collateral. Secured creditors, thus, have a preference for sales outside of an auction process which generally requires the consent of all relevant parties.
In a bankruptcy context, secured creditors benefitting from a regular pledge type of security interest are under a general obligation to hand in the collateral to the insolvency practitioner who would then sell the relevant asset. This results in a significant delay. Exceptions apply (i) for book-entry / intermediated securities with a value which may be determined objectively and (ii) under insolvency regimes for certain regulated entities. Again, the standard enforcement route is a public auction but sales outside of an auction process are permissible with the consent of the relevant parties. No obligation to hand in the collateral exists for secured parties benefitting from a transfer or assignment for security purposes or from an irregular pledge.
In a composition proceeding, there would not be an obligation to hand in the collateral to the insolvency practitioner. However, during the moratorium phase enforcement in the collateral would generally not be permissible. Again, the exceptions referred to above apply.
Mortgages and land charges can only be enforced:
- by a sale of the real estate in a public auction (Zwangsversteigerung) or
- by being placed under forced administration (Zwangsverwaltung), if used as a rental property, in which case a property manager is appointed by the court and the creditor receives the rental proceeds less the costs of managing the property.
Forced administration and auction proceedings can be used concurrently.
During preliminary insolvency proceedings (Question 4), the court can issue orders prohibiting secured creditors from realising their security over movable property which is in the debtor’s possession.
After (final) insolvency proceedings have been opened (Question 4), only the insolvency administrator has the right
- to sell encumbered movable property which is in his possession and
- to collect claims assigned as security (but not pledged claims),
in which case the estate is entitled to a share of the proceeds, as a rule, 9 per cent.; if the claims collected by the insolvency administrator represent significant amounts, the creditor should scrutinise the realisation process and the actual costs involved. In practice, quite often the secured creditors and the administrator enter into a sales agreement, thus avoiding cost intensive and long lasting court procedures. Creditors are hesitant to enforce their rights directly in such situations.
A retention of title (Eigentumsvorbehalt) gives the holder the right to separate his property from the estate without paying any fees to the insolvency administrator. However, separation usually cannot be enforced until after the first creditors’ meeting, which is scheduled by the court (Sec. 107 Insolvency Code). The insolvency administrator or debtor in possession may also pay the contract price and obtain title to the goods.
During insolvency proceedings, if pledged movables are in the possession of the pledgee, the insolvency administrator is generally not entitled to realise the pledged collateral and the estate therefore does not receive the 9 per cent. fee.
Except for the security trust (which could contemplate an extrajudicial foreclosure procedure), enforcement of all these collateral structures needs to take place by means of a judicial procedure. As in many other jurisdictions, judicial enforcement tends to be costly and lengthy. No self-help remedies are available in Mexico.
British Virgin Islands
The enforcement of security interests is normally conducted in the jurisdiction where the relevant collateral is located. In most cases concerning the enforcement of security in assets located within the BVI, the assets in question are most likely to be shares in BVI companies. As such, most of the legal issues that arise in this context are in relation to security over shares. In practice, the common-law remedies available in the BVI are similar to those remedies available under the laws of other common-law jurisdictions.
The range of remedies that is available to the security holder depends to a degree upon the type of security interest. In the event that there is a default on the secured obligations, the holder of a security interest over shares may have up to four primary remedies (depending upon the type of interest they hold): foreclosure; power of sale; receivership; and taking possession.
As in many other jurisdictions, foreclosure is a draconian equitable remedy that is only available to a legal mortgagee. The mortgagee must obtain an interim order and then a final order from the court before the mortgage can be foreclosed and the mortgagor’s beneficial ownership is extinguished. This can be time consuming and the courts are reluctant to grant this remedy. In some cases, the court may reopen the foreclosure, though this does not affect the title of a bona fide third party purchaser. If the debt owed to the creditor is less than the value of the collateral, the court will generally order the sale of the asset and an account for the proceeds rather than foreclosure, though the reverse is not always the case. In order to seek foreclosure, a payment must be due and owing to the creditor in law. Because foreclosure, if granted, extinguishes subsequent mortgages, any mortgagees with lower priority must be joined to the claim.
A secured creditor may be entitled to appoint a receiver over the collateral, whether out of court (if the terms of the security instrument permit it) or by order of the court. A receiver appointed over a company’s shares has the power to exercise voting rights attached to them, to sell the shares, and to receive any income derived from them, such as dividends or redemption proceeds. In practice, receivers frequently exercise the shareholder’s power to replace the company’s directors in order to effect the sale of the company’s underlying assets and distribute the proceeds by way of dividends or as direct repayment of the debt. Alternatively, the receiver may be entitled to exercise a power of sale of the asset, in which case they must obtain the best price for the asset that is reasonably obtainable.
If the creditor appointing the receiver over shares in a BVI company is another BVI company, they must file notice of the receivership with the BVI Registrar of Companies. This rule applies whether the receiver was appointed by court order or out of court; however, if the creditor is a natural person or a foreign company no notice is required.
Every mortgage, charge, or pledge contains an implied power of sale, and this may be exercised whether or not a receiver is appointed. The creditor may apply to the court for a judicial sale, or may alternatively conduct the sale privately, and there is no need for a court order before the power may be exercised. Where the collateral is in the form of shares in private BVI companies, the sale process can be lengthy because of extensive due diligence exercises; however, if the BVI company is publicly listed, or if it operates as a joint-venture vehicle in relation to which a market exists (ie, the other joint venture partner(s)).
Whether the power of sale is exercised by the creditor or a receiver they have appointed, the asset must be sold for the best price that is reasonably obtainable, and any surplus must be accounted for to the debtor. If the sale is conducted by a receiver, the creditor may be able to purchase the shares by way of a credit bid. This is not something the creditor could do if selling the shares themselves.
The holder of an equitable mortgage has the same remedies as the holder of a legal mortgage, subject to two points. Firstly, the equitable mortgagee will not be able to enforce their rights against a bona fide purchaser of the asset for value without notice of the security interest. Secondly, they must seek the conveyance of the asset into their name before they can resort to remedies that are available only to a legal mortgagee, such as foreclosure. The security instrument should include an express entitlement to possession of the collateral when the security is in jeopardy. If it fails to do so, the equitable mortgagee will only be able to seek possession where the debtor is actually in default. If there is no default but the asset is imperilled, the creditor should seek the appointment of a receiver.
Neither a chargee nor a pledgee has a right to seek foreclosure, but may be able to exercise a power of sale. The holder of a pledge cannot appoint a receiver.
A secured creditor can usually sue upon the covenant to pay that appears in most security documents. There are other remedies available, in particular to the holder of a mortgage, but they relate predominantly to land and are rarely exercised in relation to shares. The holder of a security interest is entitled to pursue all of its remedies concurrently or consecutively.
A liquidator of a company in insolvent liquidation has the power to borrow money in the company’s name, if doing so is likely to be in the interests of the company’s creditors. In such circumstances the liquidator can grant post-commencement lenders security or higher priority than other creditors: section 186 and Schedule II, paragraph 11, of the Insolvency Act 2003 (IA). A liquidator of a company in solvent liquidation also has the power to grant lenders security over the company’s assets; however, as stated above the liquidator is required to keep the question of the company’s solvency under review and be careful that borrowing does not cause the company to become insolvent. Unlike in some other jurisdictions, however, there is no provision in BVI legislation for the grant of super-priority status in respect of post-commencement finance, or for the grant of security over already-secured assets.
There are no insolvency procedures in the BVI that result in the imposition of a moratorium on secured creditors’ rights to enforce their security. If a company goes into liquidation, the rights of secured creditors remain unaffected, unless there is a dispute over the validity of the security. After the commencement of the liquidation, the secured creditor can either value the assets subject to the security interest and, if there is a shortfall, prove for the balance as an unsecured creditor in the liquidation, or surrender his security interest to the liquidator and prove as a wholly unsecured creditor.
If the liquidator does not agree with the value placed on the asset by the secured creditor, he can require that the asset be offered for sale. The secured creditor will be paid his debt out of the proceeds of sale, and any surplus funds will be paid to the liquidator for the benefit of the general body of unsecured creditors.
There are three methods by which a secured creditor may enforce its security:
- A sale of the secured property through appointment of a receiver out of court pursuant to the terms of the security documents.
- A sale of the secured property pursuant to statutory provisions, where available, governing a sale (for example, a statutory sale of mortgaged real property under the Conveyancing Act 1983).
- Commencing debt recovery proceedings against the creditor, and on procuring a judgment, obtaining an order for the sale of the secured property. Such a process is only relevant where the security documents for the debt do not allow for a sale of the secured property or where the security is faulty.
The effect of registration of security interests on priorities is an important practical issue. The date of registration of the security governs the order of priority for security interests capable of registration. Mortgages and charges over immovable property in Bermuda must be registered with the Registrar General. Fixed charges and floating charges over moveable property can be registered with the Registrar of Companies, as can a charge on assets outside of Bermuda. Specific statutory registration rules apply to mortgages over certain other moveable assets such as ships and aircraft.
The general rule is that a secured creditor will need to obtain an enforcement title to commence liquidation of security and assets are mandatorily liquidated through public auction procedures. Moreover enforcement proceedings can be contested by a debtor. Consequently enforcement on assets in Greece, entail court involvement in various stages which results into delays and suspensions in the process. In addition there is cost element in obtaining an enforcement deed, in participating in court hearings and in initiating a liquidation process. Therefore timing and cost are the most important practical matters that creditors have to take into consideration in enforcing their security. In addition, the value of the assets to be auctioned is set by an expert at the start of the procedure and may be adjusted in case of unsuccessful auction. Hence the final proceeds of the auction might not necessarily match the expected.
According to the Greek Code of Civil Procedure (GCPC), in order to enforce against a debtor, the secured creditor must obtain an enforcement title, in the form of either a:
- Final court decision; or
- a court mandated order to pay (a “Payment Order”).
Greek Banks and Banks within EU, granted security in accordance with the legislative decree of 1923 can initiate enforcement over the secured assets by way of a simple notification of a payment request once the loan is defaulted.
Payment Orders are issued within 1-2 months following an application to the court accompanied by concrete uncontested evidence of the claim. When serviced to the debtor by a court bailiff, the Payment Order together with a demand for immediate payment, it constitutes the enforcement title pursuant to which the creditor commences the enforcement procedures against the debtor. If the prerequisites for a Payment Order cannot be met, the creditor will need to file a lawsuit. Regarding lawsuits filed from 1-1-2016 and afterwards, in view of amendments to the GCPC in force as of 01.01.2016, which inter alia shortened the procedural deadlines for the cases brought before Court with the ordinary proceedings, the time needed for the final judgment is reduced. Given that there is no precedent on the basis of the new provisions of GCPC, the exact duration under the new procedure to obtain a final decision is estimated to take about 1-3 years.
To be noted that a final and conclusive enforceable judgment against a debtor rendered by a court of a member state of the European Union in any suit, action and proceedings would be enforced by the Greek Courts without any declaration of enforceability being required and without re-examining the merits of the case unless one of the exceptions to recognition and enforcement of judgments laid down in Article 45 of EU Regulation 1215/2012 (Regulation) applies. Consequently, subject to the provision of the enforceable judgment issued by such court, as well as the certificate issued pursuant to Article 53 of the Regulation to a court bailiff, a creditor will be entitled to directly enforce on any assets of a borrower located within Greece. To the contrary, judgements rendered by a non-EU Court, will be enforceable subject to their recognition by the Greek courts (the exequatur procedure). This procedure may take up to two years in a Greek court, if the debtor objects to the procedure and files an appeal against the first instance recognition judgement, otherwise the first instance decision is immediately enforceable and therefore steps can be taken to enforce on the assets of the obligor.
In case of an enforcement by way of a Payment Order and once the enforcement proceedings have commenced, the obligor has the right to contest the Payment Order by filing a complaint for annulment and simultaneously file a petition for suspension of commenced proceedings before the Court of First Instance (Division of Interim Measures), based on the assumed allegation that the Court will accept the petition of the annulment. When filing the petition for suspension the obligor might receive an immediate suspension of the enforcement procedures until the hearing date. The Court, in order to suspend the enforcement procedures, shall briefly evaluate the accuracy and certainty of the allegations contained in the petition of annulment against the Order of Payment. If judged to be valid the enforcement is suspended until the trial of the case before the First Instance Court and the issuance of a decision by the Court of First Instance validating or annulling the Order of Payment.
In any enforcement proceedings, the debtor can file with the competent court of first instance a petition for the annulment of certain actions of the enforcement proceedings based on reasons pertaining to both the validity of the enforcement title (if not already contested) or to procedural irregularities. The filing of an annulment petition entitles the obligor to file with the relevant court of first instance a petition for the suspension of the foreclosure proceedings until the relevant decision of the court of first instance on the annulment motion is issued. As for the suspension of enforcement proceedings, foreclosure proceedings may be suspended until the hearing of the suspension petition or until a final non-appealable decision is issued by the Court of Appeal.
The above described procedure and the delay to the enforcement procedure may take up to approximately two and a half years.
Furthermore, suspension of the auction for up to six months may be sought by the Obligor, on the grounds that the Obligor will be able to satisfy the amount owed to the enforcing party or that, following the suspension period, a better bid offer would be achieved at auction.
There is a period of mandatory suspension for all enforcement procedures between 1 and 31 August of each year, while an auction cannot be conducted between 1 August and 15 September of each year.
Under Singapore law, security interests are almost sacrosanct. Secured creditors typically have far-ranging powers under the terms of the security document to take possession, dispose of or otherwise deal with the collateral, or even appoint a receiver and manager in respect of the collateral to satisfy the secured debt. Regulatory consent may be required where the borrower is a regulated entity.
Secured creditors stand outside the liquidation, and their entitlement to realise their security is unaffected by the appointment of a liquidator. In contrast upon the making of a judicial management order, a creditor may not enforce any security over the company’s assets unless it obtains leave of the court or the judicial manager’s permission.
The court may also grant an order for a temporary moratorium if requested by a scheme proponent. Such a moratorium usually carves out the enforcement of security by secured lenders. However, the new 2017 amendments to the Companies Act bring into effect a moratorium preventing secured creditors from enforcing security rights over the property of the applicant or any of its related companies.
If a lender has security over a particular asset or group of assets (for example, the company's real estate or its shares), they will often enforce their security by appointing a receiver (usually an insolvency practitioner) over the asset. The appointment can be made without court involvement provided that the security document has been properly drafted and executed. Following the appointment, the receiver will have power to collect in any income from the asset and to sell it.
A lender may also exercise their own power of sale if they have a legal mortgage or if the terms of the security document otherwise permit. A receiver or a lender making a sale has an obligation to get the best price reasonably obtainable in the circumstances but no public auction is required (unless required by the security document). One advantage of appointing a receiver is that the lender is not usually responsible for the receiver's conduct.
If a lender has security over all or substantially all of the company's assets (including a floating charge), the lender would usually have a “qualifying floating charge” (or QFC). Once their security becomes enforceable, a QFC holder may appoint an administrator (usually an insolvency practitioner) over the company quickly and easily without going to court. This is a popular enforcement option as it creates a moratorium on other enforcement action against the company and potentially allows a sale of the business as a going concern (thereby maximising value). Once a company is in administration, a secured lender cannot directly enforce its security. However, if an administrator sells assets, it must account to the company's creditors in accordance with the statutory order of priorities.
In principle, if the debtor fails to comply with its obligation(s) under the underlying documents, the creditor can immediately enforce the special security rights (eg Hak Tanggungan, pledge, fiduciary security, or collateral right to a warehouse receipt) without waiting for the final and binding court ruling or following the judicial enforcement process. Enforcement may be through a public auction or a private sale or a court order in accordance with the prevailing laws and regulations.
Enforcement of Hak Tanggungan
To enforce a Hak Tanggungan, as explained, the Land Mortgage Law allows the creditor to sell the land privately if both parties agree and as long as this approach gives the highest price that benefits all parties. In a private sale, newspaper or local newspaper announcements must be made and the sale cannot be effected for 1 month after such announcements. Alternatively, the creditor can also ask the court to issue a writ of execution so that the court will sell the secured land at public auction. The creditor does not need a final and binding court ruling because the Hak Tanggungan Certificate already has executorial title (irah-irah) (as stated “Demi Keadilan Berdasarkan Ketuhanan Yang Maha Esa”). With this title, the Land Mortgage Certificate is, by law, considered a final and binding court ruling. However, in Indonesian’s context and as per the ICC, a creditor usually serves proper demand letter(s) to the debtor to confirm that the debtor has failed to comply with its obligations. After the given time period under the demand letter(s) is lapsed, the creditor then submits the foreclosure petition to the court, asking for debt settlement from the debtor. By sending the demand letter, the creditor can avoid the debtor’s argument, among others, the foreclosure petition is premature.
Enforcement of Hypothec Security
To enforce Hypothec Security, the creditor may execute the security object at public auction or another enforcement alternative with or without a court involvement, similar to the execution of fiduciary security and a pledge. According to Article 1178 (2) of the ICC, it allows the first Hypothec holder to require a condition where he can sell the objects encumbered by the Hypothec through an auction office if the debt is not settled. However, in practice, the creditor may need to serve demand letter(s) to the debtor before executing the security object asking for the debt settlement so that it is confirmed that the debtor has failed to comply with its obligations under the underlying agreement.
Enforcement of a Pledge
Under the ICC, a pledgee (ie the creditor) has the right to direct execution (Article 1155) to enforce the pledge security. The right to direct execution allows the creditor to have the pledged object(s) sold at public auction after the period of the debt has elapsed, or after serving proper demand letter(s) on the debtor asking for payment of the due and payable debt if there is no provision regarding the period. Under the ICC, this right to direct execution is automatically given to the creditor.
In addition to a public auction, another alternative is available for the creditor under Article 1156 of the ICC, ie the creditor can ask the court to authorize the creditor (i) to sell the pledged object(s) in a manner to be determined by the court or (ii) to acquire and own the pledged object(s) for a price to be determined by the court, up to the amount of the debt plus any interest and outstanding costs.
Enforcement of Fiduciary Security
Fiduciary Security also has executorial title / irah-irah, and therefore it can be enforced in the same manner as a final and binding court ruling. The same as the enforcement of Hak Tanggungan, the creditor may serve demand letter(s) on the debtor before executing it. If the debtor fails to comply, the creditor can then proceed with the enforcement process.
The enforcement may be carried out by (i) exercising the executorial title under the fiduciary security certificate; (ii) selling the property secured by the fiduciary security at public auction, or (iii) if the grantor agrees, by a private sale following the procedure provided in the regulations.
Despite the availability of the above direct enforcement method for each security right under the law, in practice, auction offices often request a court order to hold a public auction. The court order is also required because the purchasers of the collateral prefer to have an execution order issued by a court to prevent any future claims and to reduce the likelihood of success of a later attempt by the debtor to recover its property from the purchaser. In practice, obtaining a court order may take a very long time (even in some cases, it can take a year or more) and involves a complicated court bureaucracy. For example, if the debtor refuses to voluntarily comply with the creditor’s request, to enforce the Hak Tanggungan, the creditor must ask the court to summons the debtor so that the court can order the debtor to voluntarily pay its debt which may take 2 to 3 months from submission of the request. If the debtor does not comply with the court summons, the creditor must submit a petition for an attachment order as well as a petition for execution in accordance with the Indonesian Civil Procedure Law. This process may take more months.
Unlike amicable proceedings, insolvency proceedings trigger an automatic stay on claims which prevents creditors from suing the debtor and enforcing the securities. However, there are a few exceptions:
- Claims secured by a security interest may confer a lien (droit de retention) over the collateral. During the observation period, at the request of the judicial administrator, the insolvency court may exceptionally authorise the payment of a pre-filing secured creditor to obtain the surrender of the retained pledged asset to the estate to the extent that the pledged asset may be necessary to the debtor’s pursuit of its business activity.
- Claims assigned by way of Dailly assignment of professional receivables. The creditor to which the debtor's receivables have been assigned by way of Dailly assignment, can directly seek payment of those assigned receivables despite any filing.
- Claims secured by a fiducie agreement. The creditor can enforce its rights over the assets transferred to the trust, except where the creditor initially agreed, at the time the fiducie agreement was executed, that those assets would remain in the debtor's possession.
In general, a creditor seeking to exercise a pledge must first petition the appropriate judicial forum (execution office or court). However, certain types of creditors such as banks and institutional investors, may exercise pledges directly, without petitioning the court, under the circumstances specified in Article 258 of the Pledge Law.
The procedure before the judicial forum takes time and requires granting the debtor the right to defend.
In recovery proceedings, the court may delay the exercise of a fixed charge, if the property is critical for the recovery plan.
The holder of a security right qualifies as a secured creditor. Secured creditors are in principle not affected by a suspension of payments or bankruptcy of the pledgor. The holder of security right may in these cases enforce its security rights as if there were no suspension of payments or bankruptcy. The exceptions to this are outlined below.
- Ad (i) Cooling off period: In bankruptcy of the pledgor a cooling off period (maximum of 4 months) may apply, during which the right to enforce is temporarily suspended.
- Ad (ii) Reasonable term: The trustee in bankruptcy may set a reasonable term to the mortgagee in which the mortgagee should complete enforcement of the mortgage. In case enforcement is not timely completed, the trustee may sell the property himself.
Enforcement can take place by way of (i) auction, (ii) private sale with court approval or (iii) only in case of movable assets, private sale with approval from the pledger. Depending on the type of asset, and the circumstances of the case, enforcement is usually completed in a period of 1-3 months.
Enforcement of financial collateral security is quick and not very costly (except for valuation) and may be done out of court even in a bankruptcy scenario.
Other security interests are more burdensome, time consuming and costly to enforce and will normally, in case of bankruptcy, require court involvement.
The timing requirements that secured creditors are faced with will depends on the nature of the procedure in which they are involved.
A mortgage over real estate is enforced by the sale of the mortgaged property. The mortgagee must have an executory title, which requires an enforceable court judgment or a notarised executory deed. The mortgagee has no right to appropriate and forfeit the property. A court-appointed notary public will be charged with effecting the (public or private) sale, and the distribution of proceeds in accordance with the ranking of creditors. The time required for enforcement will depend on the debtor’s attitude and the court’s strain.
Unless agreed otherwise, the pledgee of financial collateral is entitled to enforce the security without prior court approval or prior notification. For financial instruments, enforcement will occur by selling or (under certain conditions) appropriating the financial instruments, and for bank accounts by appropriating the amounts standing to the credit of the bank account.
Any sale of shares might be subject to limitations by law, in the articles of association or in contracts. These transfer restrictions are opposable to third parties, if not waived at the time of the creation and enforcement of the pledge.
As regards the enforcement of possessory pledges over other movable property such as a plant or machinery, trade receivables, IP rights or a commercial business, foreclosure is currently subject to a notice of default and prior approval of the President of the Commercial Court. Practice shows that the whole procedure can be completed within a very short period of time.
If the pledgor is not a consumer, the New Pledge Act introduces fundamental changes in relation to the enforcement of a pledge (both possessory and non-possessory) over movable property in Belgium. Some of the most fundamental changes include that (i) it will no longer be necessary to obtain prior court approval to enforce a pledge, (ii) the parties can agree that the pledgee may appropriate the pledged goods, and (iii) a change to the procedure for enforcement.
Enforcing securities may take time, depending on the jurisdiction and the type of security. So, the first issue that creditors may have to face is time.
Except for some possessory pledges over certain assets, the enforcement of securities must be filed before a Court.
While in certain jurisdictions of our country it might take time and would be costly to enforce a security, it would be easier to do it in the City of Buenos Aires. Hence, it is advisable to choose that jurisdiction for security contracts.
Finally, it is important to understand that some assets may be sensitive assets and, consequently, difficult to enforce since they may trigger social conflicts (for example industrial plants, family houses and others).
Prior to a debtor filing for bankruptcy, a secured creditor has a number of different paths to enforcing its security interest. Such rights and remedies are generally governed by state law, which have largely been made uniform pursuant to the adoption of the UCC . To enforce a security interest and obtain status as a secured creditor, such interest must first be properly perfected. If not properly perfected, a creditor merely has an unsecured claim against the debtor. Certain security interests are automatically perfected, otherwise, depending on the circumstances, perfection may be achieved by filing a financing statement, mortgage or the like, or possessing or controlling the collateral. Upon a default, unless otherwise provided for in a governing security agreement, a creditor may have the right under Article 9 of the UCC to enforce its security interest by enforcing a judgment on the secured debt, taking possession or control of the collateral, foreclosing on the collateral or disposing of the collateral. In each case, proper notification and judicial process provided for in the UCC must be followed, as applicable.
Once a debtor has filed for bankruptcy, a secured creditor may not enforce its security interest absent bankruptcy court approval authorizing such action. Specifically, section 362 of the U.S. Bankruptcy Code provides that, among other things, upon commencement of a case, a creditor may not “create, perfect or enforce” any lien against property of the estate. The automatic stay therefore bars any action by a creditor to enforce a security interest or improve its position as a secured creditor unless there is an exception to the automatic stay under section 362(b) of the U.S. Bankruptcy Code, or until the stay is terminated or lifted, respectively, under section 362(c) or 362(d) of the U.S. Bankruptcy Code.
There are generally four scenarios in which a creditor may seek relief from the bankruptcy court and file a motion to “lift” the automatic stay pursuant to section 362(d) of the U.S. Bankruptcy Code: (1) “for cause,” including lack of adequate protection; (2) the debtor does not have equity in such property and such property is not necessary to an effective reorganization; (3) single asset real estate cases in which certain conditions are not met by the debtors; and (4) where the bankruptcy filing was part of a fraudulent scheme. A motion to lift the automatic stay must be heard by the bankruptcy court within 30 to 60 days, unless otherwise agreed by the parties or extended by the bankruptcy court for good cause. Any action taken that violates the automatic stay is typically treated as ineffective, regardless of whether such party had notice of the bankruptcy proceeding, and, unless withdrawn, may subject the party to sanctions.
In general, security interests are to be enforced by way of court enforcement proceedings. However, with regard to certain security interests, like registered or financial pledges, out-of-court enforcement methods are also available.
Secured creditors may face various practical issues in enforcing their security including, in particular, the timing.
The typical timeframe for obtaining a court judgment with respect to a claim against a debtor (which is generally a prerequisite to enforcement) varies from a few to 12 months (depending on the complexity of the case) for the first instance proceedings, plus another 10 to 12 months for possible appeal proceedings and an additional 12 to 24 months in the event that a cassation appeal is filed with the Supreme Court. The risks and timing issues related to the conduct of court proceedings may to some extent be mitigated if the security provider has voluntarily submitted itself to enforcement by executing an instrument to that effect in the form of a Polish notarial deed. Such instrument is typically signed at the same time as the principal security. In such case, the adjudication of the merits of the claim by the court may be skipped and only the obtainment of an enforcement clause on the submission to enforcement is needed to initiate court enforcement proceedings against the security provider.
The procedure for furnishing a judgment or a submission to enforcement with a final and binding enforcement clause usually takes from 1 to 2 weeks up to 3 months.
Based on a document with a final and binding enforcement clause, a bailiff initiates court enforcement proceedings which typically take from 8 months to 1 year, depending on how pro-active the creditor is. However, further delays may arise due to possible complaints against the bailiff’s actions or due to the filing of counter-enforcement actions by the debtor.
The extent of the rights and powers of a secured creditor arising on enforcement will depend on the terms of the agreement creating the security and, to a lesser extent, applicable statute, and therefore can vary considerably. However, in most instances it is not necessary for a secured creditor to initiate legal proceedings (i.e., go to Court) before enforcement provided that it is clear that an event of default has occurred under the terms of the security instrument which entitles the secured creditor to take immediate enforcement action.
Most successful challenges to enforcement action arise due to one or more deficiency in the procedure followed by the secured creditor (such as notice of default not having been properly delivered, insufficient time having been given for payment and / or a failure to execute the instrument of appointment in accordance with the terms of the security and finance documents).
Therefore, in order to reduce the risk of a challenge by the obligor, a secured creditor that wishes to enforce should take care to ensure that the enforcement steps required by the security and finance documents are followed precisely.