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
Liens, mortgages and other forms of securities
In Hungary liens can be considered as the main forms of security. A lien may be established (i) as a mortgage (jelzálog), including charges determined by description (körülírással meghatározott zálogtárgyat terhelő zálogjog), (ii) as a possessory lien (kézizálog), or (iii) in the form of a security deposit (óvadék). As a general rule under Hungarian law, any asset of value (i.e. properties, rights and claims) can be pledged as security, with the following restrictions:
- only movable properties may be the subject matter of a possessory lien;
- immovable properties in general and movables or rights recorded in a separate public register (lajstrom) other than the Collateral Register (please see “Establishment of securities” below) may not be the subject matter of a charge determined by description. These types of assets can only be pledged on an individual basis (i.e. the pledge agreement or the consent for registration must uniquely identify the pledged property).
In case of unregistered movables and rights not registered in a separate public register, the charge determined by description pertains to – at all times – those assets identified by detailed description, over which the chargor has the right of disposition.
In addition to liens, fiduciary collaterals (fiduciárius hitelbiztosítékok) may also be considered as securities granted over immovable or movable property. From the entry into force of the new Hungarian Civil Code (15 March 2014), fiduciary collateral arrangements should have been considered as null and void, however, due to a recent amendment to the Civil Code it became available for parties [restricted to business-to-business (B2B) relationships] to agree upon the transfer of ownership, the transfer (assignment) of other rights or receivables by way of security, or the establishment of an option right by way of security.
In a broader sense, and from a functional point of view, the following arrangements and structures also contain security-like elements:
- retention of title clauses;
- financial leasing; and
Security over immovable property
In line with the above, mortgages (ingatlan jelzálog) are the main form of security over immovable property. However, due to the recent amendment of the Civil Code, option rights established by way of security can also be considered as securities (collaterals) granted over immovables, with the restriction that consumers shall not undertake such commitment (i.e. only B2B parties are entitled to provide such fiduciary collateral).
Security over movable property
The main forms of security over movable assets are (i) mortgages on moveables (ingó jelzálog), including charges determined by description (körülírással meghatározott zálogtárgyat terhelő jelzálog) and (ii) possessory liens (kézizálog). Registered movables may not be the subject matter of a charge determined by description. These types of assets can only be pledged on an individual basis (i.e. the pledge agreement or the consent for registration must uniquely identify the pledged property).
Regarding the circle of fiduciary collaterals, (i) transfer of ownership of movable assets, and (ii) option rights established by way of security may also qualify as securities (collaterals) granted over movable properties. Consumers shall also not undertake such commitments (i.e. only B2B parties are entitled to provide such fiduciary collaterals).
Security over rights and receivables
The main forms of security over rights and receivables are mortgages (jogokon ill. követeléseken alapított jelzálog), including charges determined by description (körülírással meghatározott zálogtárgyat terhelő zálogjog). Registered rights may not be the subject matter of a charge determined by description; they can only be pledged on an individual basis (i.e. the pledge agreement or the consent for registration must uniquely identify the given right to be pledged).
As regards fiduciary collaterals, (i) assignment of rights and receivables by way of security and (ii) option rights established by way of security may also qualify as securities (collaterals) granted over rights and receivables. Consumers shall also not undertake such commitments (i.e. only B2B parties are entitled to enter into such fiduciary collateral agreements).
Security deposit (óvadék) can be considered as a special form of liens. The two main characteristics which distinguishes security deposits from other forms of liens are (i) their partially distinct subject matter, and (ii) the right to direct satisfaction provided to the holder of the security deposit. Regarding the right to direct satisfaction please refer to Question 2.
Security deposits can be provided in the form of money, securities, payment account balances and other assets defined by law as eligible subject matter of a security deposit (e.g. financial instruments).
Establishment of securities, formal requirements
To be established, and in order to comply with the requirement of publicity, (i) the lien shall be registered in the relevant register (in case of mortgages, including charges determined by description), or (ii) the possession of, or the right of disposition over, the pledged property shall be transferred from the pledgor to the pledgee (in case of possessory liens and security deposits), with respect to the pledge agreement concluded between the lienor and the lien holder. To duly effect the establishment of a lien, the lienor must have the right of disposition over the pledged property. As a formal requirement, pledge agreements must be executed in writing. Notarization is not required, however, in the context of the enforceability of the given security, having the pledge agreement notarized is recommended (in this regard please refer to Question 2).
For the registration of a lien to the relevant register the pledgor has to grant approval for the registration. In case of immovable properties the relevant register is the Land Register (ingatlan-nyilvántartás), and in case of immovable properties, the Collateral Register (hitelbiztosítéki nyilvántartás). Where ownership of a movable property or a right is recorded in a separate public register (lajstrom), such as in case of aircrafts, vessels, IP rights, quotas of private limited-liability companies, etc. the pledge must be registered in that particular register in accordance with special legislation pertaining to the register.
The Collateral Register contains the relevant statements made in connection with:
- pledges established on unregistered movables, unregistered rights and claims (separately for each chargor);
- other security rights arising out of fiduciary collateral arrangements;
- retention of title clauses;
- financial leasing; and
Contrary to liens, fiduciary collaterals – in order to be duly established – do not have to be registered in the relevant register. Without the registration, however, they will not be enforceable in insolvency proceedings.
Registration fees are based on the registration proceeding and the rules applicable to the relevant registry. In most cases there is a flat fee, which is multiplied by the number of assets to be encumbered. Notarial fees will apply if the pledge agreement is incorporated into a notarial deed to effect simplified enforceability under Act LIII of 1994 on Judicial Enforcement (please refer to Question 2).
The most common forms of security are: mortgages over real estate assets or registered movable assets (e.g. aircrafts, vessels); pledges over movable assets (e.g. shares of joint stock companies, quotas of limited liability companies, bank account balances, receivables, claims, intellectual property rights, financial instruments, animals, crops and timber); assignments of receivables by way of security (e.g. VAT or trade receivables) and special liens on certain movable assets (e.g. a special lien can be created over certain unregistered movable assets of a borrower's business, including existing and future equipment, machinery, inventory, proceeds of sale of the assets, provided that (i) grantor is the borrower under a medium-long term loan or is the issuer of a note or other financial instruments and (ii) lender is a bank or financial institution authorised to carry out lending activities in Italy or the noteholders are qualified investors).
To be validly created, perfected and enforceable, mortgages must be executed before an Italian notary public and registered with the competent land register.
Each type of pledge has its own set of rules on creation, perfection, registration and enforcement, depending on the type of asset it covers.
A pledge is perfected by delivering the asset to the creditor (or a custodian) or, for certain assets, effectively notifying, filing or registering it.
However, Law Decree 59/2016 has introduced a form of non-possessory pledge over a vast array of movable assets of a business (including future assets) that does not require delivery of possession of the collateral to the secured creditor thus allowing the debtor to continue to use and/or dispose of the pledged assets (provided that the proceeds from such use and/or disposal shall automatically be subject to the pledge). This pledge can secure either existing or future claims towards a business registered in the Enterprise Register, provided that the security document must specify the maximum amount secured under it. This new security must be registered with a new online register held by the Italian Tax Revenue Office and is enforceable from the date of registration.
Some pledges (like those over intellectual property or quotas in a limited liability company) must be executed before an Italian notary public and their perfection requires the registration of the pledge with the relevant public register.
Other pledges do not require the execution before a notary public but it is important to prove that the pledge has been created in writing on a date certain at law in order to enforce the pledge against third parties and obtain priority in insolvency proceedings.
Standard securities under Spanish Law are the mortgage over immovable assets (e.g. buildings, plots or malls) and the ordinary pledges of credit rights arising from the main agreement of the debtor (e.g. concession agreement, sales agreement or lease agreements) or the pledge over the shares or quotas of a company with transfer of possession.
Chattel mortgages (hipoteca mobiliaria) and non-possessory pledges over certain valuable assets (e.g. patents, trademarks, industrial or commercial assets, machinery or equipment) are usually granted in specific financings related to companies belonging to the industrials sector.
Financial securities granted under the regime of Royal Decree-Law 5/2005 on urgent reforms to promote productivity and improve government contracting (“RDL 5/2005”), which implements the Directive 2002/47/CE regarding the financial security agreements, are usually shares pledges, pledge over certain credit rights and pledge over bank accounts.
Notarization plays an important role in the Spanish legal system, so securities granted under Spanish Law are always granted in a public document before a Spanish Notary although in cases where this formality is not required as the Financial securities granted under the regime of 5/2005 RDL.
The advantages of granting a security in a Notarial deed are: (i) benefit from an executive procedure in an enforcement scenario, as it will be considered as an enforcement title (título ejecutivo); and (ii) provide certainty of the date and content of the applicable security vis-à-vis third parties.
In addition, some of these types of securities are subject to compulsory entry on public registries, which requires the formality of public document, such as the land registry (Registro de la Propiedad) (e.g., real estate mortgage) or the chattel registry (Registro de Bienes Muebles) (e.g., mortgage on inventory), while registration is not required for other guarantees (e.g., pledge of unlisted shares).When the entry on public registry is compulsory, its non-compliance implies that the security is not completed and is null and void.
Pursuant to article 1,863 of the Spanish Civil Code, ordinary pledges requires the transfer of possession to be valid granted. The transfer of possession could be fulfilled by an entry into the Companies shares book, endorsing the title of the shares certificates or sending a notice to the counterparty of the agreement which is pledged.
Pledge over listed shares requires to enter into the book entry register held by Iberclear (the Spanish Central Securities Depository that keeps accounting records in the form of book entries of securities traded in the Spanish Securities Markets) in order to be enforceable against third parties.
The non-compliance of the formalities will imply that the securities are not valid granted, will be considered null and void, non-enforceable against third parties and not recognized in an insolvency procedure.
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.
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 over-draft 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 credi-tor 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 receiva-bles 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 prem-ises 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 favour 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 dispos-session of the pledged assets.
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 title 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 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 by the failure to prefect 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 arrangement 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 now 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. This includes in relation to retention of title arrangements. 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 the retention of title 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-a-vie competing secured parties.
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 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 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 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.
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.
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 right of pledge 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.
Security over immovable property:
- A mortgage (Hypothek), a type of security which exists only as accessory to the secured debt.
- Land charges (Grundschulden), more common than mortgages, are independent from the secured debt. How they are used, depends on the security agreement that is drafted to complement the land charge.
Both are valid only if registered in the land register (Grundbuch); they normally require a notarized authorization of the owner of the land and are commonly created by a notarial deed in which the debtor submits to immediate enforcement in case of default, because otherwise the creditor would need to obtain a court order to initiate the public auction process.
Security over movable property:
- Security transfer of ownership (Sicherungsübereignung) is the most common collateral over movables, because the transferor may retain the actual possession of the movable.
- Chattel pledge over movables is less common because it requires the pledgor to deliver the actual possession of the movable to the pledgee.
- Retention of title as security for the claims of the seller.
Moreover, claims may be used as collateral by assigning them as security (Sicherungsabtretung). Security assignments may be made in respect of specific claims against specific third parties or all existing and future claims against all third parties (global assignment). Claims may also be pledged, but security assignments are more common, because, unlike pledges, security assignments are valid without being notified to the third party debtor.
While none of these security interests over movables and claims requires any specific formalities, in practice such collateral is granted in a written agreement.
Shares in companies and other transferable rights may be pledged. Such pledge requires the same formalities as a transfer of the relevant right. Hence, a pledge of shares in a German limited liability company (GmbH) is only valid if notarized.
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$76,315.00); 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).
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, and 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 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; and
- 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 navigated 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 a liquidation and the claims of preferential creditors, in reality there are very few preferential creditors; 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 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 share. 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, increases 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.
Mortgages and fixed charges are the most common form of security taken over immovable property. There are two forms of mortgage:
- Legal mortgages: 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).
In Greece security rights over movable and immovable property are granted in the form of in rem security, which gives secured creditors the privilege of preferred priority to the liquidation proceeds of the pledged assets or mortgaged property in all cases and an absolute right of collection in case of receivables, claims and rights, even post-bankruptcy since, according to the Greek Insolvency Code (Law 3588/2007) (“GIC”) the enforceability of individual security rights is generally not be prohibited or restricted as a result of the application of Greek insolvency rules. Moreover creditors benefiting from a security right in rem are entitled post-bankruptcy to liquidate the pledged property or direct collection and, to the extent the value of such pledged property does not suffice for the full satisfaction of their claims, to seek satisfaction from the remaining assets together with all other unsecured creditors.
Consequently, although the notion of assignment of claims/rights by way of security (“katapisteftiki ekhorisi”) also exists under Greek law, it is rarely used as it does not entail the same privileges as the in rem security.
The type of in rem security rights that a lender can acquire are exhaustively provided for under Greek law (the numerus clausus principle): real estate is subject to a mortgage; movable and intangible assets of the borrower (inventory, equipment, shares, trademarks, securities, bank accounts, all kind of trade receivables, rights etc) are subject to a pledge.
a) Mortgage and Mortgage pre-notation
The Greek Civil Code (GCC) provides that a mortgage can be established by a court decision or a notarial deed. Its establishment is quite costly as it entails registration, stamp duty and notarial fees calculated as a percentage aggregating to approximately 8-10% on the amount secured.
The common practice in Greece is for lenders to obtain a court decision ordering registration of a prenotation of a mortgage, i.e. register the pre-emptive right of a lender to obtain a mortgage established as of the date of registration of the prenotation, once the secured claim becomes final. The beneficiary of a pre-notation of mortgage is treated as a mortgagee but will only collect proceeds from an auction after its claim has become final.
A mortgage or a prenotation of mortgage is constituted as of its registration to the competent land registry or cadastrial office. The class of a mortgage (whether in the form of a full mortgage or of a prenotation), depends on the date it is registered. If two mortgages are registered on the same day, they have the same class and will share liquidation proceeds equally.
The Greek Civil Code (GCC) provides that a pledge is constituted by a private agreement having a certain date and delivery of the pledged assets to the secured creditor or a jointly appointed custodian by the pledgor and the pledgee. A pledge over rights, claims and receivables is permitted, provided that such rights, claims or receivables are assignable, and the pledge will result to an assignment of the pledged claim or receivable to the lender.
Certain date is achieved by having the agreement executed before a notary public (but this involves notarial fees and costs) or by service of the pledge agreement by a Court Bailiff to the pledgee or the third party (in case of pledge of thirty party assets) which entails only the cost of bailiff.
As regards the pledge of claims and receivables, the service by bailiff is necessary in order to establish a direct right of the pledgee to collect the pledged receivables by the third party debtors as the third party becomes obliged to pay directly the assignee, only if the latter is duly notified.
i) Non listed shares
The pledge on shares of a non listed limited liability company in the form of a societe anonyme (SA) must be registered in the societe anonyme’s shareholders books and the share certificates have to be delivered endorsed due to the pledge, to the pledgee. Monetary rights of the pledged shares are assigned to the pledge but voting rights are to be exercised by the pledgor unless otherwise agreed.
ii) Security rights created under law 3301/2004
Law 3301/2004 transposing into Greek law Directive 2002/47/EC (the Collateral Directive) on financial collateral arrangements, both as amended and in force, (the Financial Collateral Law) creates security rights which benefit from the appropriation right over the asset on which security has been granted provided the parties specifically agree to it in the relevant arrangements.
The financial collateral to be provided must consist of cash, financial instruments (including listed shares (but excluding non-listed shares ) or other listed securities) or credit claims. The financial collateral arrangement itself as well as the provision of the financial collateral under such arrangement must be evidenced in writing, or in a legally equivalent manner (as opposed to pledges or assignments perfected under the Greek Civil Code, for which a notarial deed or an agreement bearing certain date is required). The evidencing of the provision of the financial collateral must allow for the identification of the financial collateral to which it applies. The Financial Collateral Law prevails over all previous laws in its field of application, including all general and specific insolvency law provisions. The Financial Collateral Law eliminates all risk of recharacterisation of title transfer collateral within its field of application. Greece has opted for the wide implementation of the collateral directive, including in the scope of application of the Financial Collateral Law to repurchase agreements.
iii) Security granted under Legislative Decree 1923
Greek Banks and Banks within the EU can be granted a mortgage over real property or a pledge over claims, receivables and bank accounts in accordance with the legislative decree of 1923. Such special legislation grants the bank a direct right of immediate enforcement by way of a simple notification of a payment request and as regards the pledge it results to a direct assignment by way of security and the immediate legal protection of a quasi-onwer of the pledged claims and rights.
iv) Fixed and Floating Charge under law 2844/2000
Group of assets and inventory which remain in the possession of the Pledgor and general trade receivables including future business receivables (other than claims against consumers) that can be identified in detail, can be pledged in accordance with Law 2844/2000 on “taking of security by using personal property, or, in certain cases, rights or claims as collateral in the form of a charge, fixed or floating”.
In addition to the pledge agreement and in order to establish the pledge, the parties have to fill in the special form provided by the Pledge Registry, where the particulars of the pledge are stated (the names of the parties concerned, the loan amount and the amount secured, the nature and specific terms of the underlying pledge agreement, whether the charge is fixed or floating etc.) and the object of security is described. The special form is registered with the Land Registry (acting for this purpose as the Pledge Registry), which is the registry of the residence or seat of the person granting the security or, if the Pledgor does not have residence or seat in Greece, the Athens Land (Pledge) Registry.
v) Trade marks
For trademarks security a registration of the relevant security agreement in the Trademarks registry is needed.
Singapore law adopts the English common law forms of security interest, i.e. the mortgage, charge, pledge and lien. For immovable property, the principal types of security are mortgages (either legal or equitable). For movable property, the most common types of security are fixed or floating charges. Pledges and liens are less prevalent.
A mortgage provides not only rights of appropriation over the asset but also involves a transfer of ownership of equitable or legal title to the mortgagee. This is commonly used for land and shares.
A charge is created when the chargor agrees to make available a property towards the satisfaction of the debt so that the creditor is entitled, in the event of default of repayment of the debt, to take possession of the property, sell it and apply the proceeds in satisfaction of the debt. Unlike a mortgage, both ownership and possession of the property remains with the chargor.
A pledge is created when the pledgor transfers possession of goods owned by him to the creditor with the intention of using the goods as security for the sum owed. A crucial requirement for the creation of a pledge is the transfer of possession of the goods. This is undertaken via actual physical delivery or constructive delivery.
A lien confers a right to retain lawful possession of a property owned by the debtor until the claim by the person in possession against the debtor has been satisfied. A lien may be created by common law, contract or statute.
Different legal formalities apply to each type of security interest. A registrable security which is not properly registered under the Companies Act is void against the liquidator and other creditors of the company but remains valid until liquidation. Other than registration under the Companies Act, there may be additional registration requirements depending on the nature of the collateral. For instance, a charge over real property governed by the Land Titles Act must be in the prescribed form and registered with the Singapore Land Authority. Other requirements apply to security over other assets such as ships, aircraft and intellectual property rights.
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 require the greatest formality: they 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 secures fixed assets and requires the security provider (the chargor) to hold the 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 (e.g. chattels), 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 also both easier to create 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 in the 21-day period immediately after the security is created or it may be void on insolvency and against other creditors. Other types of security, e.g. over intellectual property, require further formalities.
Under Indonesian law, security rights over immovable property are the following:
a. Hak Tanggungan (Land Mortgage) under Law No. 4 of 1996 on Security Rights Over Land and Objects attached to Land (“Land Mortgage Law”). By issuing the Land Mortgage Law, the Government of the Republic of Indonesia effectively replaced the previous security system, ie hypothec land security with the concept of a “Hak Tanggungan”, a real security right over land and land-related objects and the nearest equivalent to a “mortgage” as understood in other jurisdictions.
This security right only applies to land under hak milik (ownership right, like freehold) title, hak guna bangunan (a right to build) title or hak pakai (a right of use) title. Hak Tanggungan does not grant ownership of the secured land to its holder. However, it can give the holder the right to sell the land, either privately or at public auction, to settle the unpaid debts.
Multiple security rights are also allowed over a single plot of land by several creditors, which will be ranked according to the respective dates of registration and/or the date specified in the respective Hak Tanggungan deed.
The procedure for creating a Land Mortgage is the following:
- the parties (ie the grantor / creditor and the grantee / debtor) first sign a mortgage deed (Akta Pemberian Hak Tanggungan) before a Land Deed Official (Pejabat Pembuat Akta Tanah/PPAT) followed by its registration with the relevant Land Office (Badan Pertanahan Nasional/BPN) within 7 (seven) working days of the signing date of the mortgage deed;
- the BPN then registers the mortgage in the land book upon receipt of a complete application, and subsequently it is perfected. The Land Mortgage becomes effective as of the date of its registration in the BPN land book.
- The BPN issues a land mortgage certificate under the name of the grantee as evidence of the land mortgage’s registration. The BPN also places a mortgage notation on the land certificate.
If the mortgage deed is not registered under the land book of the relevant Land Office, the land mortgage will not be perfected and the Land Office will not issue a mortgage certificate.
b. Hypothec for Vessels. A Hypothec is a form of security over immoveable assets that are provided under the Indonesian Civil Code (“ICC”). As advised above, before the issuance of the Land Mortgage Law in 1996, land and objects related to land were secured under a hypothec. However, since the issuance of the Land Mortgage Law, a hypothec is mainly used as security for ships with a minimum gross displacement of 20 metric tons as further regulated under Law No. 17 of 2008 on Shipping (“Shipping Law”). According to the Shipping Law, a hypothec for vessels is defined as collateral over a registered vessel to guarantee settlement of a debt that may provide a priority right to certain creditors over other creditors. Further, under the Shipping Law, a vessel is a form of water transportation of any shape or type, driven by wind power, mechanical power, or pulled or tugged, including vehicles with dynamic support power, submarines, and floating equipment and buildings that do not move.
A hyphotec is only possible for vessels registered in Indonesia and considered Indonesian flagged vessels. Otherwise, they must be encumbered under the laws of their country of registration. Alternatively, they can be re-registered under the Indonesian flag and included in the Vessel Registration Master List (Daftar Induk Kapal) (“Vessel Master List”).
A hypothec over a vessel is created by the signing of a deed of hypothec prepared by a Vessel Registration and Transfer of Ownership Listing Official (Pejabat Pendaftar dan Pencatat Balik Nama Kapal - “Registration Official”) at the relevant Directorate General of Marine Transportation office. Once the Hypothec is registered in the List of Indonesian Vessels (Buku Daftar Kapal Indonesia), it comes into effect. Without it (ie registration), the hypothec is not considered perfected. Under the Shipping Law, a vessel may be encumbered under more than one (1) hypothec which will be ranked according to the date of the deed of hypothec.
Indonesian law also recognizes the following security rights over movable property/assets:
a. Pledge. Under the ICC, a pledge is a right of a creditor over a movable property that is physically transferred into the possession of the creditor by the debtor. In a pledge, the debtor also provides the creditor a priority right to the proceeds from the sale of the object over other creditors. The pledged object should be in the possession of the creditor or a third party acting on behalf of the creditor (eg a security agent).
To create the pledge, the parties enter into a pledge agreement followed by the delivery of the pledged object by the debtor to the creditor (both the object and its ownership certificate, if any, eg the Proof of Vehicle Ownership Certificate/BPKB-Bukti Pemilikan Kendaraan Bermotor). A pledge can only be used to secure movable property, either tangible (such as machinery, vehicles, inventories, etc.) or intangible (such as accounts receivable, shares, patent rights, etc.).
One key requirement of a pledge under Indonesian law is that it requires the pledged goods to be in the possession of the creditor. Otherwise, the pledge will not be perfected.
The establishment of a pledge is subject to the nature of the object. It can be classified as follows:
- a tangible movable object – by delivery of the object into the physical possession of the creditor or a third party agreed to by the parties;
- an order instrument – by the endorsement of the instrument and delivery of the same to the creditor; and
- an intangible movable object – by notification of the party against whom the rights pledged will have to be enforced of the pledge. In addition, if the pledged assets are in the form of shares, a note must be placed in the register of shareholders (Daftar Pemegang Saham/DPS) of the relevant company. If it is script-less shares, the shareholder must instruct the account holder to block the relevant share account with Indonesia’s central securities repository (PT Kustodian Sentral Efek Indonesia – also known as KSEI).
The ICC does not require a pledge agreement to be made in writing. However, in practice, a pledge arrangement is always documented in writing for evidentiary purposes. Moreover, in the pledge agreement, the law prohibits the creditor from becoming the owner of the pledged good if the debtor is in default.
b. Fiduciary Security. Under Law No. 42 of 1999 on Fiduciary Security (“Fiduciary Law”), fiduciary security is a security interest over movable assets, either tangible or intangible, and immovable goods that are not under:
- a Hak Tanggungan under the Land Mortgage Law;
- a hypothec for a vessel with a gross displacement of 20 or more metric tons; or
- a pledge.
For fiduciary security, the possession of the goods remains under the debtor’s control. Fiduciary Security also provides its holder priority over other creditors.
Fiduciary security is created by signing a deed of fiduciary security by and between the debtor and the creditor before a notary public. It is perfected by registration with the relevant fiduciary registration office. Otherwise, the fiduciary security is not perfected and is considered not valid. The Fiduciary Law also prohibits there being two fiduciary security’s holders over the same secured goods.
Government Regulation No. 21 of 2015 regarding The Procedure for Registering Fiduciary Security and the Fee for Drawing Up a Fiduciary Security Deed (“GR 21/2015″) allows registration through electronic registration and an amendment to a Fiduciary Security Certificate (“Fiduciary Certificate”).
Under GR 21/2015, the application should be submitted to the Ministry of Law and Human Rights within 30 days of the signing of the Fiduciary Security Deed. The deed must contain the following information:
- the identities of the parties; the online system will require the Fiduciary Security holder to have an Indonesian address even for a foreign company or alternatively, it may use the its subsidiary’s address or the address of its attorney;
- the date and number of the Fiduciary Security Deed, and the name and address of the notary public who prepares the Deed;
- the data of the underlying agreement, ie the loan agreement;
- a description of the Fiduciary Security object;
- the security value; and
- the value of the Fiduciary Security object.
c. Collateral Right over Warehouse Receipts. Under Law No. 9 of 2006 regarding The Warehouse Receipts System, to create this right a warehouse receipt issued by a warehouse manager proving the ownership of commodities that are stored in the warehouse for a certain period (up to three months) is required.
To be effective, the warehouse receipt must be delivered to, or be in the possession of, the creditor. Warehouse receipts may be in the form of (a) non-negotiable warehouse receipts, which state the name of the party entitled to delivery of the stored commodities, or (b) negotiable warehouse receipts, which state an order/instruction for a party to receive the stored commodities. Both receipts must contain certain information, including among others, a description of the goods, the location of the goods, and the expiry date of the receipt. Upon the expiry of a warehouse receipt, the warehouse manager is required to deliver the goods to the current owner of the warehouse receipt, who may not be the original owner.
The procedure for the above is the following: the creditor/grantee first notifies the Warehouse Receipt Registration Centre (Pusat Registrasi Resi Gudang) and the warehouse manager of the existence of the warehouse receipt. In addition, the warehouse receipt security must be documented in a deed of security. If the debtor/grantor is in breach of contract, the creditor/grantee is entitled to sell the secured objects at public auction or a private sale. The creditor/grantee is entitled to use the proceeds from the sale to settle the debtor/grantor's debt.
The procedure/formalities for all security rights (whether the property is movable or immovable) must be followed. Otherwise, the security right in question will be voidable or will be considered not to exist. The above security rights are special security rights because their holder has priority over holders of general security. General security is security provided by law (Article 1131 of the ICC) to all of a debtor’s creditors. As a general rule, all of the debtor’s assets are considered the debtor’s security to all its creditors.
In addition, a security agreement is an accessory agreement attached to a main agreement such as a loan agreement. If the main agreement is terminated and/or the loan secured under the security right has been settled in full, then the security agreement will automatically be terminated.
- 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.
- Mortgage. Can only be granted over property that is registered with the Land Registry.
- Pledge. This right relates only to assets that are not registered in the Land Registry. Pursuant to Israeli law this is a contractual right, and therefore liens on mobile property are considered and registered as pledges. (see below, Pledge) A “pledge” and a “fixed charge” are interchangeable terms.
Mortgages and pledges are similar in most of their legal characteristics. The main differences are in the registration procedure (see below, Formalities).
- Floating charge. A company can grant a floating charge over any or all of its immovable property. A floating charge is governed by the Companies Ordinance (New Version) 1983 (the “Companies Ordinance”).
A floating charge ranks lower in priority than a pledge.
- Pledge. Pledges are the most common form of security interest over movable property. Pledges are governed primarily by the Pledge Law 1967 (Pledge Law), which defines a pledge as a charge over an asset to secure repayment of a debt. A pledge entitles the lender to be repaid out of the proceeds of the sale of the pledged asset if the debt is not repaid.
- Floating charge. Companies can grant a floating charge over all or part of their assets (see above, Immovable property: Floating charge).
Formalities and impact:
Perfection of a security interest implies making the security interest effective against third parties. Perfection, or any defect in perfection, does not affect the relationship between the debtor and the secured creditor. Pursuant to the Pledge Law, a security interest that is not duly perfected is not effective against the debtor's other creditors, except for creditors who knew or should have known about the creation of the security interest. In particular, a security interest that was not duly perfected has no force and effect, and will be deemed invalid by a liquidator or administrator in case of insolvency.
The primary method of perfecting a security interest is by registration with the applicable registrar:
- Pursuant to the Companies Ordinance, security interests over corporate assets are registered with the Registrar of Companies. Documents must be filed within 21 days of creation of the security interest. If filed within this period, the security interest is retroactively valid against third parties from the date it was initially created. This also applies to floating charges.
- Security interests over assets of individuals, partnerships and companies incorporated outside of Israel may be registered with the Registrar of Pledges at any time following creation of the security interest, and are valid against third parties from the date of registration.
Additional formalities may apply, depending on the type of asset and type of security. For example:
- A mortgage over immovable property must be registered with the Land Registry.
- A pledge or floating charge over an asset of a company, or over immovable property, must be evidenced by a written instrument.
For tangible movable assets and for certain securities and commercial instruments, an alternative method of perfection is to physically deposit the assets with the secured creditor or a custodian on its behalf.
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.
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.
Security over immovable property – mortgage. A security interest on immovable property can only be granted by way of a mortgage. A mortgage will be perfected and take rank as from the date of inscription in the registers of the mortgage keeper office.
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.
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. A pledge or security assignment of bank accounts 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 providing bank or third parties once the pledge or assignment has been notified to, or been acknowledged by, the account providing 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. The Act of 11 July 2013 amending the Civil Code regarding security interests on movable assets (the New Pledge Act) introduces an additional perfection requirement. In addition to the current regime, the pledgee is required to be authorised to notify the underlying debtor of the pledge. By having such right to notify the debtor, dispossession is deemed to be achieved.
Security over a business can be granted as a pledge over a commercial business (the whole of tangible and intangible assets brought together by a merchant for the purposes of attracting and maintaining clientele). For perfection, a pledge over a commercial business must be entered in the registers of the mortgage keeper’s offices (the date of entry will determine the ranking). The New Pledge Act fundamentally amends the current regime. The existing law governing pledges on a commercial business will be abolished and a pledge on the business will also be perfected through a registration in the National Pledge Register.
To the extent they qualify as a movable assets, security on plant, machinery and equipment should be created by way of a possessory pledge. If they are considered immovable by nature (e.g. fixtures), a mortgage and/or other additional rights in rem are required. The New Pledge Act will allow for taking a non-possessory (registered) pledge. Perfection will be achieved by registration in the National Pledge Register.
Security on intellectual property is created by way of a pledge. However, there are dissenting views and little case law on whether IP rights, other than trademarks, can be validly pledged by way of a possessory pledge. Leaving unaffected any special legislation on and perfection/registration requirements for pledging IP rights, the New Pledge Act allows to pledge IP rights without any dispossession requirement, by registering the pledge in the National Pledge Register.
In Argentina we have different types of securities over immovable and movable property.
The most popular security is the mortgage (hypothec) which can be used for immovable property and also for ships and planes (movable property).
A hypothec is merely an encumbrance giving a creditor a non-possessory security interest in a debtor’s property and preferential right to have claims paid out of that property as last recourse when the debtor is in default.
The most commonly used is the mortgage over immovable property, which must be issued by a mortgage deed before a Public Notary. Not complying with that requirement means that there is no mortgage. Additionally, the mortgage must be registered before the Real Estate Registry. Failing to do so makes the mortgage unenforceable against third parties, although it will be valid between the parties to the contract.
As mentioned, there are also mortgages that can be used over ships and planes. In both cases, special laws (Aviation Code and Navigation Act) regulate their formalities which are quite similar to the mortgage over real property. Again, an essential element is the non-possessory preference right.
The pledge is a guarantee over a movable asset in security of a credit. There are basically 2 types of pledges: possessory and non-possessory. Whereas in the first case the asset is placed in the creditor’s possession, in the latter the asset remains in the debtor’s possession and consequently it has to be registered properly (Registry of Non-Possessory Right).
In order to have effects as regards third parties, the pledge must be issued by a deed before a Public Notary or through a written contract with a fixed date. Not complying makes the pledge unenforceable against third parties, although it will be valid between the parties to the contract.
Finally, it is worth mentioning trusts. A security trust is another way to secure creditor’s interests. In trusts, certain property or rights of the debtor are transferred to the trustee to ensure the compliance with the obligations assumed. Trusts must be issued through a written contract (and through a deed if the assets to be transferred are subject to that formality for their transference) and registered before the Public Registry of Commerce.
The advantage of the trust is that property of the asset is transferred to the trustee who ensures the fulfillment of the debtor’s obligations.
There are some other forms of securities. However, the most commonly used are the above mentioned.
A security interest may be granted over property in a variety of ways. Pursuant to Article 9 of the Uniform Commercial Code (the “UCC”) — a standardized law adopted in all 50 states that governs secured transactions with respect to personal property — a security interest may be granted via (a) a UCC filing and/or a UCC fixture filing, or (b) control or possession (including via “control” obtained through a control agreement). Additionally, a security interest pursuant to Article 8 of the UCC — which generally only applies to certain types of investment property such as securities — may be granted via control or possession. For example, if a limited liability company or partnership has elected into Article 8, a lender can only obtain a security interest in that entity’s stock via possession and endorsement and, if done properly, can obtain “protected purchaser” status and obtain the collateral free of adverse claims. Finally, security interests in real property are effectuated via a real estate deed of trust and/or mortgage filing at the state or local level.
If a filer does not adhere to the UCC’s or the state law specific filing requirements—such as using the appropriate form, appropriately identifying the collateral subject to the security interest on the form, listing the debtor’s correct legal name and street address, and listing the creditor’s correct legal name and street address—the filing may be insufficient to provide required notice to interested parties and the security interest may not be enforceable.
The following are examples of issues that may arise with respect to the formalities surrounding granting security interests.
- A secured party can usually only get the benefit of the interest held by the grantee of the security interest; therefore, if the grantee doesn’t hold full and unencumbered title to the property either as a result of title issues (more common in real estate) or because the property is subject to purchase money or other liens, then the secured party faces issues on both valuation and collection/realization on collateral.
- Procedural issues that may arise range from, among other things, the failure to pay proper filing fees/taxes or stamp taxes and thus not properly recording and perfecting the security interests; failure to file relevant record of security interest in proper jurisdiction; technical failures in the filing itself related to wrong names, commas, periods, and/or misspellings; inadvertent releases of security interests; failure to file proper security instrument; and/or failure to file security interest within the statutory period due to changes in name or jurisdiction, etc.
The most common form of security over immovable property is a mortgage. The establishment of a valid mortgage requires its execution by the owner of the property in the form of a notarial deed (however, if the mortgage is established in favour of a bank, simple written form would be sufficient) and registration in the land and mortgage register.
The most common form of security over movable property is a registered pledge. The establishment of a valid registered pledge requires a written agreement between the pledgor and the pledgee and registration in the pledge register.
Often, the pledge agreement also contemplates the establishment of an ordinary pledge over the same asset (such security merely functions as bridge security protecting the pledgee until registration of the registered pledge). However, the valid establishment of such ordinary pledge generally requires the hand-over of the pledged asset to a creditor or an agreed third party. Further, a pledge agreement will be effective towards the pledgor’s creditors if it is executed in writing with a date certified by a notary.
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.