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