What practical issues do secured creditors face in enforcing their security (e.g. timing issues, requirement for court involvement)?
Restructuring & Insolvency
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.