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 (2nd Edition)
The in rem security interests in Indonesia are limited to those prescribed by Indonesian law. The in rem security rights available under Indonesian law are the mortgage, the fiduciary security, the pledge, and the hypothec.
A mortgage (or Hak Tanggungan) is used to secure land with certain land titles and all fixtures attached to it. Other immovable assets, which arguably include land with land titles not qualified to be mortgaged and untitled land, movable, tangible and intangible assets (including but not limited to receivables, insurance proceeds, the intellectual property rights) can be secured by a fiduciary transfer (sometimes referred to as a fiduciary assignment). Assets which can be secured by a fiduciary transfer (other than immovable assets) can also be secured by a pledge. Due to the requirement under a pledge that the pledged property be delivered to the creditor, most assets are secured by a fiduciary transfer as it does not include this requirement. An exception to this is shares of an Indonesian company and bank account, which, in practice, most of the times are secured by a pledge. The moveable goods / inventory that are stored in the warehouse can be secured by a security right over warehouse receipt. A hypothec is used to secure registered vessel/ship in Indonesia, which must have gross tonnage of more than 20 cubic meter or equivalent to 7 Gross Tonnage. The aircraft object can be secured by the international interest arising from the security right granting agreement.
Based on No. 4 of 1996 concerning Mortgage (“Mortgage Law”), a mortgage may be encumbered on land rights, such as:
- the right of ownership (hak milik);
- the right of exploitation (hak guna usaha);
- the right of building (hak guna bangunan); and
- the transferable right of usage (hak pakai) on State Land.
A mortgage is limited to the particular plot of land described in the mortgage deed and only extends to buildings, fixtures and other immovable appurtenances to the land, including machinery affixed thereto, / if the terms of the mortgage expressly provide as such. A mortgage cannot be granted for land which is to be acquired in the future. The security right of the mortgage follows the mortgaged property notwithstanding any transfer of the property until the debt secured by such security has been paid.
The formalities that are required to establish the Mortgage is as follows:
- the signing of the mortgage deed by and between the mortgagor and the mortgagee before the Land Officer / Conveyancer (Pejabat Pembuat Akta Tanah or “PPAT”) with jurisdiction over the land to be mortgaged. This deed must be in Indonesian and in the prescribed PPAT form;
- the registration of the mortgage deed at the relevant Land Registration Office (“BPN”); The Mortgage is effective on the registration date.
- the issuance of the Mortgage Certificate to the mortgagee, evidencing the registration of the mortgage deed with the Land Registration Book maintained by the BPN.
b. Fiduciary Security
Based on Law No. 42 of 1999 concerning Fiduciary Security (“Fiducia Law”), a fiduciary security takes the form of a written agreement by which the transferor transfers to the transferee its rights of ownership in respect of the transferred assets. Based on the fiduciary transfer agreement, the transferor transfers to the transferee its rights of ownership in respect of the assets for the time during which the debt under the agreement remains outstanding. “Possession” of the tangible assets remains with the transferor who is normally entitled to use or dispose of the assets in the ordinary course of business. The formalities that are required to establish the Fiducia Security is as follows:
- the signing of the fiducia deed (setting out the fiduciary transfer agreement) by and between the fiducia transferor / assignor and the fiducia transferee / assignee before the Indonesian notary in Indonesian;
- the registration of the fiducia deed at the relevant Fiducia Registration Office (“FRO”); Government Regulation No. 21 of 2015 regarding the Procedure for Registering Fiduciary Security and the Fee for Drawing Up a Fiduciary Security Deed requires the registration of the fiducia security to be performed through electronic system. The fiducia security is effective on the registration date.
- the issuance of the Fiducia Security Certificate which is electronically signed by the FRO officer, to the fiducia transferee / assignee, evidencing the registration of the fiducia deed with the Fiducia Registration Book kept by the FRO.
A pledge (pandrecht), as regulated in the Indonesian Civil Code (Articles 1150 through 1160) and Law No. 40 of 2007 concerning Limited Liability Companies (“Company Law”) (Article 53, specifically dealing with a pledge over shares) can be created over tangible movable property (such as machinery, vehicles, equipment, cash physical coins and notes, stock, inventory) as well as over intangible movable property (such as shares, bonds, Indonesian government bonds, receivables, debentures, patents, the credit balance of a bank account and other personal rights). Pledge over movables assets other than shares of Indonesian company and bank account is rarely created in practice due to the requirement that the pledged object must be removed from the pledgor’s possession and is physically transferred to the pledgee or a third party agreed to by the pledgor and the pledgee (such as a custodian).
With respect to a pledge of intangible assets (such as shares and bank account), the requirement of “possession” or physical transfer means that the third party (such as the company (in case of pledge of shares) or the bank (in case of a pledge of bank account)), must be notified of the pledge. With respect to a pledge of shares and a bank account, the requirement of notification is generally considered to be complied with the registration of the pledge in the shareholders’ register of the company and the written acknowledgment from the bank where the bank account is opened.
There is no formal legal requirement to have a pledge agreement in writing. However, it is standard practice in Indonesia that pledges are embodied in a deed of pledge (notarized or executed privately) by and between the pledgor and the pledgee (and, under certain practice, the company which shares are pledged), setting forth the particulars of the pledge. Due to the application of the provision of the Law No. 24 of 2009 concerning National Flag, Language and Coat of Arm As Well As Anthem, the deed of pledge is in practice made in Bahasa Indonesia and/or bilingual.
For registered shares, the pledge of those shares is effected upon notification of the pledge of shares to the company in which the shares are held (normally evidenced by the company’s acknowledgment of receipt of the notice being issued to the pledgee) and the recording of the pledge in the company’s register of shareholders. For shares listed on a stock exchange in Indonesia (such as the Indonesia Stock Exchange), the company’s register of shareholders is kept by the Stock Administration Bureau appointed by the company. To create a pledge on listed shares, both the company and the Stock Administration Bureau must be notified of the pledge (normally evidenced by the company’s acknowledgment of receipt of the notice being issued to the pledgee), which will subsequently be recorded in the shareholders register held by the Stock Administration Bureau. For immobilized shares kept in the custody of the Indonesian Central Securities Depository (PT Kustodian Sentral Efek Indonesia or “PT KSEI”), PT KSEI will issue a confirmation letter certifying that the shares are pledged. For bank account, the pledge of bank account is effected upon notification of the pledge of shares to the bank which bank account is opened at and the bank will issue an acknowledgment letter to the pledgee certifying that the bank account is pledged.
Other than the registration of a pledge in the company’s register of shareholders for pledge of shares, and the acknowledgment letter from the bank for pledge of bank account, there is no registration system nor pledge registration office for security in the form of pledge.
A hypothec security right as regulated in the Indonesian Civil Code (Articles 1162 through 1232) initially can be created over immovable assets. However, since the enactment of the Mortgage Law and Law No. 1 of 2009 concerning Aviation (“Aviation Law”), land and/or real property as well as aircraft and helicopter are excluded from immovable assets which are subject to the provisions governing hypothec. Therefore, the objects of hypothec which are still applicable hitherto are registered vessels (having gross tonnage of more than 20 meter cubic or equivalent to 7 Gross Tonnage) (as regulated in Article 314 - 319 of the Indonesian Commercial Code as well as Law No. 17 of 2008 concerning Shipping (“Shipping Law”)).
The Shipping Law provides that hypothec over vessel may only be encumbered on the vessel that is registered in Indonesia. A vessel can be registered in Indonesia if it complies with the following requirements:
- The minimum gross tonnage of the ship is 7 (seven) GT or more;
- The ship is owned by Indonesian person or legal entity which is duly established under Indonesian law and domiciled in Indonesia.
- If the ship is owned by a joint venture company, the shareholding structure of the company must consist of at least 51% Indonesian shareholder.
The formalities that are required to establish the Hypothec over vessel is as follows:
- the signing of the hypothec deed by and between the hypothecor and the hypothecee made by the Vessel Registration and Ownership Recordation Officer (Pejabat Pendaftar dan Pencatat Balik Nama Kapal) with the jurisdiction over the place where the vessel is registered and recorded with the Vessel Main Registry (Daftar Induk Pendaftaran Kapal);
- the issuance of the Hypothec Deed Certificate (locally known as Grosse Akta Hipotek) to the hypothecee, evidencing the recordation of the hypothec deed with the Vessel Main Registry.
If the above mentioned formalities are not complied with, the impact would be that the security right holders would lose their priority and privileged rights to obtain the fulfillment of their claims from the sale proceeds of the security object ahead of other creditors. Their claims will still remain valid, however they will be treated as unsecured claims.
Since the scope of immovable property is a matter of provincial law, reference should be made to the applicable provincial laws in the jurisdiction where the property is situated and, in particular, if the property is situated in the Province of Québec. Generally, real estate is classified as immovable property, while fixtures attached to real property may or may not be considered immovable property.
Common Law Jurisdictions: Available Forms of Security and Required Formalities
In Canadian common law jurisdictions (all provinces except Québec), security over immovable property can be granted by way of a:
- Mortgage. This is generally used where there is a single piece of real property that is financed by a single lender.
- Debenture. This is commonly used in commercial lending transactions to cover multiple pieces of real property, as well as movable property. Like a mortgage, there is often only one lender.
- Trust deed. This is commonly used in sophisticated bond financings and syndicated loan transactions where many lenders are involved.
In addition to the above, in very rare circumstances a person without a registered mortgage may be able to assert an equitable mortgage or interest in immovable property. This can occur where the original mortgage documentation is defective in some way and the court is asked to deem the mortgage as an equitable mortgage.
A security interest granted over immovable property must be in writing and registered against title to real property to be enforceable. Each Canadian province has its own real property legislation and registry system governing the validity and enforceability of mortgages registered in its jurisdiction. Registration of a charge in the applicable real property registry system constitutes notice of a security interest.
In Canadian common law jurisdictions (all provinces except Québec), creditors can take security over movable property pursuant to a properly executed and registered security agreement. Types of security agreements include:
- General security agreements: whereby the debtor grants the secured party a security interest over all of the debtor's present and after-acquired personal property; or
- Chattel mortgages or equipment leases: using this method, the debtor grants a security interest over specific assets.
The most typical form of security over personal property is a general security agreement which is given legal effect by execution by the parties. Each provincial statute has rules governing how a security interest may attach to personal property. Perfection of a personal property security interest is governed by provincial statutes but typically takes the form of registration or possession.
For movable property, most Canadian provinces have adopted a personal property security act (“PPSA”), which is loosely modelled on Article 9 of the Uniform Commercial Code and which is structured to apply to every transaction which creates (in substance) a security interest in personal property without regard to the particular type of security involved.
To be enforceable against third parties, a security interest in the debtor's personal property must be both attached and perfected.
Attachment of a security interest occurs when all of the following are performed:
- value is given;
- the debtor has acquired rights in the secured asset over which the security is being granted;
- a written security agreement is signed by the debtor; and
- the written security agreement provides a clear description of the secured asset over which the security interest has been granted.
Perfection of a security interest can be achieved through:
- Registration under the PPSA in the applicable electronic registration system; or
- Possession by the secured party, if the secured asset is any of the following: (a) chattel paper; (b) tangible goods; (c) instruments; or, (d) negotiable documents of title.
Investment property can be perfected by control. Control is obtained when a secured party can sell the property without any further action by the debtor. Depending on the type of investment property, this can be achieved by either becoming the entitlement holder, or entering into a control agreement.
Investment property includes certificated or uncertificated securities, a security entitlement, securities accounts, future contracts and future accounts.
Québec: Available Forms of Security and Required Formalities
Under Québec private law, it is said that all property of a debtor, whether moveable or immoveable, tangible or not, present or future, is the “common pledge of its creditors”. This means that, in principle, creditors may institute judicial proceedings to cause the property of their debtor to be seized and sold to the extent required to satisfy their claims. The two main exceptions to this principle are (i) property exempt from seizure, either by contract or by statutory effect, and (ii) the existence of “legal causes of preference”. “Legal causes of preference” are prior claims and hypothecs, and they are the main forms of security which may attach to both immovable and movable property in Québec.
Prior claims and hypothecs are, in general terms, the Québec equivalent of “liens”. Some prior claims and all hypothecs are “real rights” in that they attach to property regardless of who holds it, whether it be the debtor or otherwise. A phrase often said is that they “confer on the creditor the right to follow the property into whatever hands it may come”, as long as the obligation whose performance they secure subsists.
Prior claims are certain claims for satisfaction of which a creditor is preferred over all others, even the hypothecary creditors (discussed below). Under Québec private law, prior claims are the highest ranking claims, regardless of the moment at which they are created.
Prior claims exist by the effect of the law alone. One cannot contract into, or out of, prior claims, except, in that latter case, with the consent of the holder of the prior claim, which of course is rarely obtained without satisfaction of the entire claim.
Unlike hypothecs (with the exception of the “construction hypothec”, discussed hereafter), prior claims may exist even without being published in a public registry. This is why they are often called “occult security”, and why their existence sometimes poses great legal risks and is the subject of important legal opinions.
Among all prior claims, Government claims for amounts due under fiscal and taxation laws are those that are the most susceptible to attach to one’s property.
The term “hypothec” is, outside of Europe, almost exclusively used in Québec. It encompasses the common law equivalents of, inter alia, mortgages, non-possessory liens over movables or immovables, and legal or equitable charges.
In Québec private law, hypothecary claims rank senior to unsecured claims but junior to prior claims. Between themselves, in principle, hypothecary creditors rank according to the date of publication of their hypothec: the older the publication, the higher the rank. One major exception to this principle is the “construction hypothec”, as will be discussed below.
Hypothecs may be “legal” or “conventional”, depending on whether they are created (i) by the effect of the law alone (“legal”), for example, a construction hypothec, a legal hypothec of the State for sums due under fiscal and tax laws, a legal hypothec for the holder of a claim resulting from a judgment, etc., or (ii) by contract (“conventional”).
Conventional hypothecs vary depending of the property on which they attach. The most common types of conventional hypothecs are immoveable hypothecs, hypothecs on movable tangible property (with or without delivery), hypothecs on claims, hypothecs on securities, and floating hypothecs. Some may only be granted by businesses and all must comply with their own specific requirements; for example, an immoveable hypothec is not valid if it is not granted by notarial act en minute. However, all conventional hypothecs must satisfy the following conditions in order to be valid and enforceable: (i) the grantor (which could be the debtor or a third-party) must be able to validly alienate the hypothecated property (e.g. has valid title and may validly consent to its alienation); (ii) the contract must be in writing and expressly state the maximum amount of the hypothec, regardless of whether or not the secured obligation’s amount may be precisely determined; and (iii) the hypothec must be published in the appropriate public registry.
Effects of Non-Compliance
In all Canadian jurisdictions, if the required registration requirements are not complied with, the creditor’s security interest could be ineffective against the debtor’s property. That creditor would then rank as an unsecured creditor (except in relation to certain specific types of secured assets that can be perfected by possession or control) should the debtor become insolvent or bankrupt.
Securities over immovable property
- Mortgage (Hypothek)
- Land charge (Grundschuld)
Differences: While the land charge simply determines a specific amount to be paid out of the real estate, the mortgage is accessory to a specific secured payment claim. The mortgage thus elapses with the satisfaction of the secured claim and transfers together with the secured claim in case of an assignment. Therefore, the land charge is more flexible and the most common security instrument regarding real estate.
Generally speaking, any type of collateral over immovable property requires registration with the land register (Grundbuch). The security is void if it is not registered. Such registration requires a notarized authorization by the owner. If the collateral is registered as certificated, the completion of the security also requires the owner to hand over the certificate. Usually the secured party also requests that the real estate owner submits to immediate enforcement of the encumbrance by way of a notarial deed; otherwise, the secured party requires a judgement or other enforcement title in order to enforce its security.
Securities over movable property and receivables:
The retention of title right (Eigentumsvorbehalt) allows a seller to retain title over the respective movable property as security for its claims until the agreed secured claims have been settled. The seller and purchaser must agree on the retention of title right in the purchase agreement. Depending on the specific structure, the retention of title right can provide a right for segregation of the relevant asset if the purchaser becomes insolvent.
Transfer of ownership by way of security of movable property (Sicherungsübereignung) is the most common type of security over movable property, because the debtor / buyer may retain the possession of the movable asset and keep using and producing with it. Such arrangement requires both a transfer agreement and a security purpose agreement. Moreover, the assets serving as security must be clearly identifiable.
The (chattel) pledge (Faustpfandrecht) regarding movable property is less common, as the possession of the asset must not remain with the debtor. This arrangement requires a pledge agreement and the transfer of possession of the movable property, and the security is accessory to a specific secured payment claim.
The assignment of receivables for security purposes (Sicherungsabtretung) is an arrangement whereby security is granted over receivables owed to the debtor.
Receivables may also be pledged for security purposes. Such arrangement is less common, because– in contrast to security assignments, – third parties must be notified of the pledge in order to complete this security. Moreover, this arrangement is not practicable for rolling receivable portfolios
Other transferable rights may be pledged, and the specifics depend on the nature of the right. For example, pledges over shares in a German limited liability company (GmbH) are only valid if notarized.
Security may take one of two forms under South African law:
- a right to have the secured assets applied to the satisfaction of the claim of a creditor to the exclusion of the claims of other creditors – known as real security, created by means of instruments such as a mortgage bond, a pledge, notarial bond, a cession in securitatem debiti, landlord’s hypothec and a lien; or
- a right to turn to a third party to carry out the debtor’s performance – known as personal security, created by suretyship or guarantee agreements between the creditor and a third party.
On this basis, the most common forms of security available are:
- Security over immovable assets:
- Mortgage bond: This is created by a mortgage bond, but title in the mortgaged property does not transfer to the creditor. The secured creditor has a right to have the property sold in execution (upon the debtor’s default) and thereafter to apply the proceeds to settle the debt.
- Security over movable assets:
- Pledge: A pledge is security granted by a debtor (pledgor) in favour of a creditor (pledgee) by delivery of the secured property to the creditor. Title remains with the debtor, but is subject to the creditor’s restricted real right – an exclusive right to enforce the pledged right in the event of non-performance of the principal obligation.
- Cession: Under a cession a right is transferred from a debtor (cedent) to a creditor (cessionary). A security cession is known as a cession in securitatem debiti (i.e. as security for debt). A right is ceded in security and is pledged to the cessionary, but title remains with the cedent. Until a default occurs, the cedent can exercise all of its rights.
- Notarial bonds: A notarial bond is registered and physical delivery of assets is not required. A notarial bond can take the form of a special notarial bond or a general notarial bond. The former is a notarial bond over specific and identifiable movable assets and the latter a notarial bond over all the debtor’s movable assets. Once an special notarial bond has been registered it constitutes real security as effectively as if it had been expressly pledged and delivered to the creditor. Under a general notarial bond, the debtor can deal with the assets as they wish, therefor the creditor is not a secured creditor and cannot prevent encumbering of the assets.
- Landlord’s hypothec: a landlord that is owed rent has security over the tenant’s moveable property on the premises.
- Liens: A lien arises where the creditor (lienholder) is already in possession of the property of the debtor by virtue of an underlying contract e.g. where the creditor is contracted to do work in relation to the moveable property in is owed money in relation to such services. The lienholder may retain possession until compensated.
- Personal security:
- Surety: Under a suretyship contract one party (the surety) undertakes to the other (the creditor) that it will discharge an obligation (the principal debt) owed by another person (the principal debtor), if the principal debtor defaults. This gives rise to a personal right, but is accessory to the principal obligation and generally the release/termination of the principal obligation results in termination/release of the surety.
- Guarantee: A guarantee creates an obligation on the guarantor to perform on behalf of the debtor if the debtor does not discharge its obligation. A guarantee is an independent, principal obligation which exists separately from the underlying obligations.
Failing to comply with the formalities set out below will result in the creditor having no security.
- Mortgage bond: A mortgage bond is created when the parties enter into an agreement and is perfected by its registration at the deeds registry where the relevant immovable property is registered. The mortgage bond document must be:
- valid and show an intention to grant real security for performance of the principal obligation;
- prepared by a conveyancer; and
- executed by a conveyancer in the presence of, and attested to by, a Registrar of Deeds.
- Pledge: A pledge agreement must be concluded and the pledged property must be delivered to the creditor to perfect it.
- Cession: There are no formality requirements for the validity and perfection of this form of security as it is created contractually.
- Notarial bonds: All notarial bonds must be attested to by a notary public and registered, within three months after execution, at the applicable deeds registry. In addition, special notarial bond must meet the requirements set out in the Security by Means of Movable Property Act, 1993, the most important of which is that all assets must be readily recognisable from its description.
Notarial bonds are perfected once registered, however, the creditor only acquires a right over the bonded property under a general notarial bond upon taking possession of the property.
- Liens: There are no formality requirements for the validity and perfection of this form of security and it arises by operation of law.
- Surety: In order to be valid, a surety must be recorded in writing and signed by the surety.
- Guarantee: There are no formality requirements for the validity and perfection of this form of security as it is created contractually.
Among the several types of security over immovable and movable property in Brazil, the most common are mortgages (security over real property), pledges (security over movable assets) and fiduciary liens.
In case of mortgages and pledges, the debtor encumbers an asset to secure the performance of an obligation, which is subject to reorganization and insolvency proceedings (as secured creditors), meaning that the ownership of the asset remains with the debtor after constitution of the mortgage or the pledge. These kinds of securities create a priority over the asset that can be opposed to unsecured creditors.
In case of the fiduciary lien the debtor must transfer the ownership over an asset to the creditor to secure the payment of the debt and, in the event of default, the creditor may consolidate ownership over the asset to repossess further and sell it to satisfy the credit. If the debtor is under any reorganization or liquidation proceeding, the creditor may still repossess and sell the asset, as long as this type of creditor is not subject to the effects of such proceedings.
To be enforceable all securities must be executed in writing through a private or public deed and, under the penalty of not being valid, shall be registered in the proper Public Register in Brazil and state the amount of the debt; the term fixed for payment, the interest rate, if any, and the property given as security..
The fundamental types of security instruments include (i) mortgages over real estate, (ii) pledges of movable assets and other kinds of assets, such as receivables, a functioning business in its entirety, securities or intellectual property rights, (iii) security transfers of rights, (iv) guarantees (suretyship), and (v) financial guarantees.
Czech law distinguishes between the creation and perfection of security. While security over assets is created when a security agreement is concluded, the perfection of security usually entails either registration in the relevant registry and/or the handover of the secured assets.
A mortgage over real estate is perfected by means of its registration in the Cadastral Register. Regional Cadastral Offices review both the content and form of the mortgage agreement before deciding whether to register it. The date of registration is decisive in terms of priority of satisfaction; the earlier in time, the higher the priority.
The pledge of movable assets is perfected upon the transfer of possession of the property to the pledgee or a third-party custodian. A pledge of movable assets may also be perfected by virtue of the registration of the pledge in the Register of Pledges, subject to the pledge agreement being concluded in the form of a notarial deed.
A contractual pledge over a business operating as a going concern requires the execution of a pledge agreement in the form of a notarial deed. The pledge is perfected upon its registration in the Register of Pledges.
The pledge of receivables is not effective towards the debtor until the debtor has been notified in writing by the pledgor, or until the pledgee has proven the existence of the pledge to the debtor. If the underlying agreement concerning the pledged receivables restricts the assignment or pledge of such receivable, the consent of the relevant debtor is required for the pledge of the account receivable.
A pledge of a share in a limited liability company is perfected by means of its registration in the Commercial Register. A pledge of shares in a joint-stock company is perfected by (i) pledge endorsement (in Czech: zástavní rubopis) marked on the share certificates, and (ii) handover of the shares (in case of a joint-stock company with certificated shares) or registration with the Central Securities Depository (in case of a joint-stock company with book-entry shares). The Articles of Association of the company at hand may stipulate further conditions for the creation of pledge of its shares.
Furthermore, financial claims may be secured by so-called financial collateral. Directive 2002/47/EC of the European Parliament and of the Council on financial collateral arrangements has been fully implemented in the Czech Republic.
Failure to comply with all formalities may result in the security being deemed invalid or ineffective. In any case, such non-observance may (among other things) significantly decrease the chances for the creditor i) to receive any proceeds from the security or ii) initiate the relevant enforcement proceedings.
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 with the creditor 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 formalities 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 of 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.
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.
Singapore adopts the common law forms of security interests. Mortgages and charges (both fixed and floating) are the most common types of security, while pledges and liens are less common. Each type of security requires different legal formalities. Where a charge or mortgage has been created by a company, it must be registered with the Accounting and Corporate Regulatory Authority in Singapore. Failure to register will result in the security becoming void against the liquidator and other creditor upon liquidation. In addition, officers of a company who fail to comply with the registration requirements specified in the Companies Act may be fined.
Mortgages (both legal and equitable) are typically used to secure immovable property. Mortgages must be created by deed, and most comply with the formalities in the Land Titles Act.
Charges are often used to secure chattel (e.g. plant and machinery), as well as choses in action (e.g. streams of income). A charge by itself does not transfer a legal or equitable interest in the charged property, although it is not uncommon for a fixed charged to be fortified by a legal or equitable assignment.
Whether a charge is construed as a fixed or floating charge will depend on the terms of the debenture – where a chargor has the power to dispose of the charged assets without the chargee’s consent, a charge will be found to a floating charge notwithstanding any labels to the contrary.
A pledge is created when a debtor transfers possession of goods owned by him to the creditor until payment for the debt. While there are no formalities for the creation of a pledge at common law, pledges with pawnbrokers are regulated by the Pawnbrokers Act.
A lien is a right to retain possession of a property until full payment is made by a debtor. A lien may arise from the application of the common law, contract, or certain provisions in the Sale of Goods Act.
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, 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 BVI 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.
- 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 overcome 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 liquidation and the claims of preferential creditors, in reality the likelihood of there being any preferential creditors is small; 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 at a time 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 shares. 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, increase 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.
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 overdraft 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 creditor 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 receivables 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 premises 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 favor 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 dispossession of the pledged assets.
Under Chinese law, the forms of security that can be granted over movable property are mortgage, pledge and statutory lien, whereas the very form of security over immovable property is mortgage. The effectiveness of a mortgage on immovable property is conditioned upon registration of the mortgage with the competent authority, and failure to complete the registration will disqualify the creditor from being compensated in priority. For movable property, registration of mortgage is not a prerequisite for its effectiveness, but a registered mortgage may protect the creditor from a claim of a bona fide third party. Pledge over movable property will not come into effect until the property is transferred to the pledgee, and without the transfer, the pledge will be deemed not granted. Lien can only be created under law, and the lien holder of movable property must legally take possession of the property.
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 titles 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 expressed 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 the failure to perfect 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 arrangements 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 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. 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 such 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-à-vis competing secured parties.
Security over immovable property – mortgage
A security interest on immovable property can only be granted by way of a mortgage. A mortgage is granted by way of a notarial deed and will be perfected and take rank as from the date of inscription in the registers of the mortgage keeper office. Taxes (1% registration tax and 0.3% mortgage rights on the secured amount) and mortgage keeper and notary fees will be due following the execution of the mortgage deed.
To reduce the large burden of the registration tax and mortgage keeper fees, parties often agree to only take a mortgage for a certain percentage of the obligations to be secured and to grant a mortgage mandate for the balance, allowing the beneficiary to increase the mortgage at any time he deems fit (at which time the costs referred to above are due). A mortgage mandate does not create any security right in rem until it has been exercised.
Security over movable property
The type of security interest over movable property and the relevant perfection requirements for such security interest depends on the underlying asset. The entry into force as of 1 January 2018 of the Pledge Act of 11 July 2013 (the Pledge Act) has fundamentally amended the previously existing security regime with respect to movable assets.
Security on shares, bonds and other financial instruments can be created by way of (i) a pledge, or (ii) a security assignment. The creation (and perfection) of a pledge/security assignment on shares, bonds and other financial instruments requires an agreement between the pledgor/assignor and the pledgee/assignee and the dispossession of the pledged/assigned securities. The formalities for effecting delivery of possession vary according to the type of financial instrument in question (e.g. for a security on shares, an entry in the share register).
Security on bank accounts can be created by way of (i) a pledge over bank accounts, or (ii) a security assignment of bank accounts. Both security interests will be valid, perfected and enforceable against third parties as of the moment a valid pledge or assignment agreement is entered into. A pledge or security assignment of a bank account will become enforceable against the account bank and third parties with a concurrent right in rem once the pledge or assignment has been notified to, or acknowledged by, the account bank.
Security on receivables and contractual claims (not constituting financial collateral) is created by way of a pledge. Specific conditions apply to a pledge over certain receivables (e.g. consumer receivables, credit insurance policies, mortgage backed receivables). Creation and perfection are the same as for bank accounts. There is one additional requirement however: the pledgee is required to be authorised to notify the underlying debtor of the pledge for the pledge to be perfected and enforceable against third parties, save for the underlying debtor and third parties with a concurrent right in rem. By having such right to notify the debtor, dispossession is deemed to be achieved. Finally, the receivables pledge agreement will have to include a maximum aggregate amount up to which the secured liabilities are secured by the pledge, incl. principal, interest and any accessories.
Security over tangible movable assets can be granted by way of a pledge agreement which is perfected either through (i) registration in the National Pledge Register; or (ii) dispossession. Registration in the National Pledge Register entails a limited cost (capped at EUR 500) based on the secured amount. Perfection through dispossession is achieved when the pledgor hands over possession of the pledged assets to the pledgee or a third party pledgeholder agreed upon by the parties. To the extent the pledged assets must be used in the production process, a possessory pledge is highly impractical. The pledge agreement will in both cases also have to include a maximum aggregate amount up to which the secured liabilities are secured by the pledge.
Security over a business (or any type of universality) can be granted by way of a pledge and is perfected against third parties by way of registration in the National Pledge Register, entailing a maximum registration cost of EUR 500. The requirement for inclusion of a maximum aggregate secured amount also applies here.
Security on intellectual property is created by way of a pledge and is in principle perfected by registration in the National Pledge Register. However, as the Pledge Act leaves unaffected any special legislation on IP rights, a pledge over certain types of intellectual property (e.g. patents) may also need to be notified to the relevant IP registry and registered in such registry to ensure enforceability of the pledge against third parties. The requirement for inclusion of a maximum aggregate secured amount also applies here.
The types of security that can be granted under Dutch can be divided into a right of mortgage and a right of pledge. A right of mortgage is granted over registered assets (including immovable property), while a right of pledge is granted over all other assets.
The security right created over movable assets is a right of pledge. A pledge over movable assets can either be possessory or non-possessory, which is typically created by way of a private deed and registration thereof with the tax authorities.
A right of mortgage is the only form of security that can be granted over immovable property, registered ships and aircrafts. To create a mortgage, a deed must be executed before a civil law notary and must be registered in the public registers of the Netherlands land registry.
If the formalities regarding a right of pledge or right of mortgage are not complied with, the applicable security will not be valid.
Generally, Article 9 of the Uniform Commercial Code (the “UCC”) – enacted in all fifty states – governs secured transactions in which security interests are created and perfected over movable or immovable property. In order to perfect a security interest, the secured party must file a UCC-1 financing statement (the “UCC-1”). While each state has different, specific filing requirements, the UCC-1 is generally filed with the secretary of state in the state where the debtor is located and often needs only three pieces of information: (i) the debtor’s name and address, (ii) the creditor’s name and address and (iii) a description of the collateral. By filing the UCC-1, the creditor is deemed to have provided public notice that it has an interest in the property of said debtor. The filing of a UCC-1 remains in effect until it is terminated by law (which in most cases, occurs five years after the initial filing unless continued by the filing of a continuation statement) or by the filing of a termination statement. A creditor can also extend the effectiveness of a UCC-1 beyond five years with a UCC-3 Continuation Statement.
If a creditor fails to properly record its interest under the relevant state law requirements, the filing may be considered insufficient to provide the requisite notice to other creditors and thus deemed unenforceable against them, and the security interest may be avoided in bankruptcy. Common mistakes in filing include failure to file under the debtor’s correct legal name, failure to file in the appropriate jurisdiction or failure to list the debtor’s address. Even small mistakes in the debtor’s name, such as a single incorrect letter or punctuation mark may be deemed insufficient.
Article 8 of the UCC governs the ownership of investment property such as securities and provides that a security interest is generally granted through control or possession. With regards to real property, security is generally effectuated through the relevant state and local laws, such as a real estate deed of trust or mortgage filing.
- Security on real estate property
The two most common types of security over real estate property are the mortgage (“hypothèque”) and the lender’s lien (“privilège du prêteur de deniers”). Both require a notarial deed and must be registered in order to take rank. A mortgage only takes rank upon the date of its registration, while a lender’s lien takes rank from the date of the acquisition provided that it is registered within two months (if not, it takes rank upon registration, like a mortgage). In either case, enforcement is effected by means of a court-supervised public auction or by court-ordered attribution of the property to the secured creditor (subject to the creditor paying the amount, if any, by which the value of the property as appraised independently exceeds the secured amount). In the case of a mortgage only, enforcement may also, if agreed in the mortgage deed (or at the time of enforcement), result from the direct appropriation of the secured property by the secured creditor (subject to payment of any excess as in the case of court-ordered attribution). Direct appropriation is seldom agreed by borrowers in normal financing circumstances, but may more likely be imposed in a restructuring context. A French trust arrangement (fiducie) may also be used for security purposes in relation to real estate. In a fiducie, one or several settlers transfer assets, rights or security interests to a trustee that manages those assets, according to the terms of the fiducie agreement, for the benefit of designated beneficiaries.
The fiducie must be registered with the French tax authorities within one month of signing. Compliance with this filing obligation is necessary to ensure validity and perfection of the security.
- Security on movable property
One of the main types of security over movable property is the pledge (known as “gage” in respect of tangible assets and “nantissement” in respect of intangible assets). Failing performance of the secured obligation, the pledged assets may be sold. Enforcement of the pledge against third parties is subject to a written instrument so enabling the debtor to gain priority in insolvency proceedings. A “Dailly assignment of professional receivables” or a French trust arrangement may also be used to secure a payment.
- Security on shares
The most usual types of security are the pledge over shares (“nantissement de parts”) or over company’s securities accounts (“nantissement de comptes-titres”) depending on the corporate form of the company. As such, pledgors will fictitiously retain the shares/financial securities until they are fully paid up by the debtor.
As regards securities over immoveable property, mortgages are the most common form of security. They may be granted in a legal, judicial or contractual manner. For the latter to be validly established, i.e. the contractual mortgage, it must be created through a notarial deed indicating the nature and situation of each immovable property over which the mortgage is granted and it must be granted for a certain amount determined by the notarial deed. The mortgage is rendered legally binding and effective against third parties through registration with the Luxembourg mortgage register in the district where the immovable property is located. The registration is valid for ten years and is renewable in unlimited ten years increments, provided that neither the underlying debt for which the mortgage was created nor the 10 year term itself, are extinguished.
Non-compliance with the requirement of a notarial deed renders a mortgage invalid, and the courts can declare such a mortgage void at any time. Failure to register a mortgage in the Luxembourg mortgage register does not affect its validity, but results in the absence of an effective preference right for the creditor.
As for movable property, financial collateral arrangements are the most commonly used form of security. These are agreements governed by the Law on Financial Collateral Arrangements dated 5 August 2005, as amended (Financial Collateral Law), implementing Directive 2002/47/EC on financial collateral arrangements (Financial Collateral Arrangements Directive).
Financial collateral arrangements under the Financial Collateral Law cover any pledge or assignment by way of security of financial instruments and receivables (including most types of shares and bonds). The Financial Collateral Law allows any party (even non-commercial, non-regulated parties) to grant or benefit from this kind of security, and provides extensive contractual freedom. This type of security is very cost effective, subject to few formalities (usually just a notification or a registration in a shareholder or bondholder register), easy to put in place and to enforce as well as “bankruptcy remote”.
Non-compliance with the required formalities may lead to perfection not being made and the security not being enforceable towards third parties.
Apart from financial collateral agreements, there are other less common types of securities over moveable property such as assignments by way of security, civil pledges and commercial pledges including the business pledge.
Immovable Property (real property/land)
In New Zealand, most land ownership is governed by the Torrens title system and security is generally taken by way of a registered mortgage over the freehold or leasehold interest in the land. Registration is not mandatory, and a failure to register a mortgage will generally not affect the validity of the mortgage security as against the mortgagor.
However, registered mortgage interests generally have priority over unregistered and subsequently registered interests, and failure to register may lead to postponement and potentially extinguishment of the secured party’s mortgage interest in land.
Land Information New Zealand (LINZ) maintains the land register as an electronic record of all land ownership and registered interests in New Zealand land (including security). The LINZ register is publicly searchable.
Moveable property (personal property)
Security over personal property (including goods and chattels, inventory, shares and other investment instruments, bank accounts and intellectual property) typically constitute ‘security interests’ for the purposes of the Personal Properties Securities Act 1999 (PPSA).
As a general rule such security interests must be perfected either by: (i) the secured party taking possession of the collateral; or (ii) the secured party registering a financing statement in respect of any such security interests with the New Zealand Personal Property Securities Register (PPSR), within the relevant time periods. Failure to perfect the security will generally not affect the validity of security as against the grantor.
However, perfected interests generally have priority over unperfected interests, and failure to register may lead to postponement and potentially extinguishment of the secured party’s interest. The timing of any perfection (or failure to do so) can also affect the secured party’s priority in respect of other security interests.
The PPSR is publicly searchable by reference to a particular debtor
Pursuant to Romanian insolvency legislation, secured receivables are those receivables accompanied by a preference right over the assets from the debtor’s patrimony regardless of whether this is a main debtor or a third-party guarantor towards the creditor benefiting from the security. Retention title clauses, redemption pacts or receivable assignments concluded as securities are considered securities assimilated to mortgages. Preference rights imply the registration with the public registries (for example, the land book of the immovable in the case if the immovable assets, the electronic archive of for security interests in movable property), except for pledge without dispossession. The sanction for the failure to fulfil the formality of registration with the public registries, when the law requires so, is the lack of enforceability of the security on third parties.
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.
An assignment for security purposes is the standard form of security for uncertificated receivables. The assignment must be in writing. Notice to debtors is required for perfection of the assignment and to preclude the debtors from making payments to the assignor.
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 security interest 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.
Forms of Securities
The Pledge Law, 1967 (the "Pledge Law"), is the general legislation governing the creation and perfection of pledge of property and rights under the Israeli law, and it is subject to the specific provisions of various other laws relating to the creation of collaterals on specific assets or with respect to certain types of debtors.
The provisions relating to the creation of collaterals with respect to assets of companies are regulated under the Companies Ordinance [New Version], 1984 (the "Companies Ordinance"), allowing for the creation of floating charge. Therefore, a floating charge can be created and registered only with respect to the assets of companies and not with respect to assets of individuals or partnerships.
A mortgage can be registered only on immovable properties that are registered in the Land Registry, in accordance with the provisions of the Land Law, 1969 (the "Land Law"). Collaterals with respect to right in immovable properties unregistered with the Land Registry are governed by the provisions of the Pledge law.
There are several registries other laws setting forth specific instructions with respect to specific properties such as the Patent Law, 1967, with respect to the creating and perfection of pledge of patents, and certain instruction with respect to pledge of vehicles.
Generally, a creation of pledge under the Pledge Law is made by way of an agreement; however creation of pledge over land registered in the Land Registry (under the Land Law), floating charges and patents must be in writing.
The creation of a pledge creates a binding obligation between the parties, but only the perfection of the pledge, by registration in the relevant registry of assets, has a binding effect towards third parties, except towards a creditor who knew or should of known of the existence of the pledge; alternatively certain tangible assets and securities can be physically deposited with the creditor or a custodian on its behalf.
A registration of collaterals with respect to the rights of companies is made with the Registrar of Companies and must be filed within 21 days of the creation of the pledge in order to have force and effect towards creditors and the company's liquidator. Registration of a floating charge shall also include details with respect to any limitations on transfer or use of the company's assets.
Registration of pledges with respect the assets of individuals, partnerships or foreign companies (unregistered in Israel) is made with the Registrar of Pledges.
There are several other designated registries such as the Patent Registry, the Vehicle Registry, and the Engineering Equipment Registry.
Mortgages and fixed charges are the most common form of security taken over immovable property. There are two forms of mortgage:
- Legal mortgage: 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).
The most common forms of security granted over property in Ireland are summarised below:
- Fixed Charge: this is a charge created by an obligor in favour of a creditor over a specifically identifiable asset to secure compliance with a debt or obligation owing by that obligor.
- Mortgage: this involves the transfer of an obligor’s legal or equitable title to a property to a creditor or mortgagee to secure a debt or other obligation of the obligor, but subject to the obligor’s right to the return of the legal title once the secured obligation has been satisfied or the relevant debt has been redeemed (known as the “equitable right of redemption”).
- Floating charge: this is an equitable charge created over all or specific categories of assets of a company only which converts or “crystallises” into a quasi-fixed charge either automatically or on notice of the occurrence of a specified event of default - a floating charge is usually granted over trading assets which change in quantity and value from time to time, such as stock, cash or receivables.
- Pledge: this arises where the debtor delivers possession of goods to a creditor pending satisfaction of the debtor’s obligations – a creditor will usually have the power to sell the pledged assets where an event of default occurs.
- Lien: a lien arises where a creditor has a lawful right to retain possession of an asset owned by another until the creditor has been paid in full by that person for services rendered – possession is critical to the existence of a lien and once possession is relinquished so is the lien.
- Security assignment: this arises where a debtor assigns its rights under a contract to a creditor as security for a debt or obligation owing to that creditor – the assignment can be equitable (i.e. not on notice to the contractual counterparty) or legal in which case the assignment is perfected and notice is given to the counterparty.
Security over certain types of property must be filed with the Companies Registration Office in Ireland (the “CRO”) within 21 days of its creation. Failure to do so renders the charge void against any creditor or liquidator of the company. Where charges of the same nature are created over the same asset in favour of multiple creditors, priority is given to the creditor who files the notice first in time.
In the case of registered land, security interests must be registered with the Land Registry in Ireland. A floating charge over registered land is not registrable until after the charge has crystallised. Where security is provided in respect of unregistered land a notice must be registered in the Registry of Deeds. These registration give notice to third party purchasers that the property is secured in favour of a creditor.
The type of security granted over an asset in England and Wales largely depends on whether legal title (i.e. ownership in the ordinary sense) to the secured asset is intended to be transferred to the secured party. Security can be in the form of a mortgage or security assignment (transfer of title, security provider retains possession) or a charge (no transfer of title, security provider retains possession). There are also other types of security which apply where the secured party is in possession of the secured asset, e.g. liens and pledges.
Mortgages are most commonly granted over real estate, but are also seen in movable property such as ships and airplanes. Legal mortgages must be in writing and executed as a deed by the security provider (the mortgagor). To take effect as a legal mortgage, a mortgage over registered title must be registered at the Land Registry. If the security is not registered, it will usually take effect as an equitable mortgage, which can undermine the strength of the security in the case of competing claims.
A charge may be either “fixed” or “floating”. A fixed charge requires the security provider (the chargor) to hold the charged asset to the order of the secured party (the chargee); while a floating charge permits the chargor to deal with the asset in the ordinary course of business (e.g. cash in an account, stock and inventory). Charges are more commonly found in the case of movable property, receivables and shares. Fixed charges over real estate most commonly arise as part of an “all asset” security package. Lenders often take a fixed charge over any real estate acquired after the security has been granted. They are both easier to grant than legal mortgages as there are fewer formalities involved. Charges must be in writing and signed by the security provider.
Security granted by an English company or LLP must be registered at Companies House within 21 days of creation or it may be void on insolvency and against other creditors. Other types of security, e.g. over intellectual property, require further formalities.
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$80,000.00); 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).
In the Spanish legal system, exist the followings forms of security over immovable and movable property:
Mortgage property: It is regulated by article 1857 and subsequent of the Spanish Civil Code (“SCC”) and article 104 and subsequent of the Spanish Mortgage Act (“MA”). In order to establish a mortgage property it is required:
- The mortgage must guarantee a legal obligation (art. 1857 SCC).
- The encumbered immovable property must be property of the debtor (it also exists the non-debtor mortgagor) (art. 1857 SCC).
- The mortgagor has not restrictions about his free disposal of the immovable property. Or he has the appropriate authorization (art. 1857 SCC).
- It is mandatory to register the mortgage property in the Property Register. If the mortgage property is not registered, the mortgage will not exist (art. 1875 SCC).
Antichresis: It is regulated by article 1881of the SCC. This form of security implies that (i) the debtor or the owner of the immovable property has to make a profitable use of the asset and that (ii) the debtor has to allocate the obtained results to pay to the creditor. The results will be firstly destined to satisfy the interests and then the capital.
In order to establish a chattel mortgage it is required:
- Signature in a public deed before Public Notary. If the antichresis is not registered, it will not produce effects against third parties.
- Chattel mortgage: It is regulated by the Law on Chattel Mortgages and Non-dispossessory Pledges (“CMNDP”). It is only possible to establish this type of mortgage over (i) commercial establishments, (ii) cars and others motor vehicles, tram and private carriage, (iii) aircraft, (iv) industrial machinery and (v) Intellectual and/or Industrial Property (art. 1 and 12 CMNDP).
In order to establish a chattel mortgage the following requirements must be fulfilled:
- It must be signed in a public deed before Public Notary (art. 3 CMNDP).
- It is mandatory to register the chattel mortgage in the Moveable Property Registry (art. 3 CMNDP). If the chattel mortgage is not registered, the creditor shall not enjoy of his rights as a creditor .
Non-dispossessory Pledges: It is only possible to establish this type of pledges over (i) pending fruits and harvests expected within the agricultural year in which the contract is concluded, (ii) individual fruits and the products of the misuse, (iii) animals, their offspring as well as their products, (iv) machines and tool, (v) merchandise and raw materials, (vi) objects of artistic and historic value, (vii) credits, license, concession, administrative subsidiaries and (viii) credit claim (art. 52, 53, 54 CMNDP).
In order to establish a Non-dispossessory Pledges the following requirements must be fulfilled:
- It must be signed in a public deed before Public Notary (art. 3 CMNDP).
- The pledge over bank transactions could be established by commercial policy.
- It is mandatory to register the chattel mortgage in the Moveable Property Registry (art. 3 CMNDP). If the chattel mortgage is not registered, the creditor shall not enjoy of his rights as a creditor .
Pledges: It is regulated by article 1857 and subsequent of the Spanish Civil Code. It is only possible to establish this type of pledges over any asset subject to be possessed and commercialized.
In order to establish a pledge the following requirements must be fulfilled:
- The pledge has to guarantee a legal obligation (art. 1857 SCC).
- The encumbered object shall to be property of the debtor (it also exists the non-debtor mortgagor) (art. 1857 SCC).
- The mortgagor has not restrictions with respect to the free disposal of the immovable property; or counts with the appropriate authorization (art. 1857 SCC).
- It is not mandatory register the pledge in the Moveable property registry. If the pledge is not registered, it will not produce effects against third parties.
- The owner of the encumber object must deliver the possession to the creditor or a third party (art. 1863 SCC).
According to article 90 of the Spanish Insolvency Act (“SIA”) all the credits guaranteed by these securities shall be qualified as claims with special preference. However, it is necessary that these securities have been established fulfilling the mandatory provisions that are required by the correspondent specific Act. If the security does not respect the requisites established by the applicable Act, the credit will not be qualified with a special preference. As a consequence, the credit will not enjoy the benefits of this condition.
The most frequent security established in relation to loans is a mortgage over immoveable property. This type of security entitles the creditor to be paid with priority over unsecured creditors from the value of the property concerned. A mortgage over immoveable property can only be validly constituted by notarial deed and is subject to registration, otherwise producing no effects.
The main type of security taken over moveable property is a pledge. A pledge entitles the creditor to be paid, with priority over unsecured creditors, against the value of certain existing movable assets or rights (including shares, patents or trademarks). It is advisable to establish a pledge in writing, although this is not a requirement. A pledge over moveable things is only validly granted with the delivery of the asset. It is also possible to grant a mortgage over certain moveable assets which have a legal regime similar to that of immoveable property, namely regarding registry requirements (e.g.: vehicles, ships, aircrafts).