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)
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.