What impact does the insolvency process have on the ability of a lender to enforce its rights as a secured party over the security?
Lending & Secured Finance
In accordance with the Bankruptcy Act, enforcement proceedings of secured creditors shall be continued by the court, which conducts the bankruptcy proceedings. After the opening of bankruptcy proceedings, initiating enforcement proceedings against the debtor is not permitted but lenders with secured claims have the right for their claim to be reimbursed from the proceeds of the sale of collateral.
A lender as secured creditor shall register its claims and collateral in the insolvency proceedings. Secured creditors have the right to satisfaction from the assets serving as security according to their rank (usually depending on the time of establishing the security). Secured creditors may give instructions to the insolvency administrators to the disposal of collateral. After liquidation of the collateral, the secured creditor receives the net proceeds (trustee’s fees and costs are approx. 10% of the gross proceeds). Any surplus is left to the junior ranking secured creditors (if any), or as the case may be, to unsecured creditors.
The impact of the insolvency proceedings on a secured lenders ability to enforce will depend on the type of security interest.
As regards pledges of movable property, a pledgee can enforce a valid pledge despite the pending bankruptcy proceedings of the pledgor, but must notify the bankruptcy liquidator of the intended enforcement at least two weeks in advance of such enforcement and the bankruptcy liquidator has the right to postpone/prohibit enforcement for a maximum period of two months in certain circumstances.
As regards mortgage over real estate, after bankruptcy proceedings have been initiated, there are four options available for the enforcement of a real estate mortgage, with the most straightforward being a private (or public) sale by the bankruptcy liquidator with the consent of the mortgagee(s).
As regards floating charges, after bankruptcy proceedings have been initiated against the debtor, a floating charge can no longer be enforced separate from the bankruptcy proceedings. The bankruptcy liquidator will sell the assets covered by the floating charge and will then distribute the net proceeds. Depending on the bankrupt company, this can take a long time. Further, only 50 % of the net proceeds of the assets covered by the floating charge, which remain after secured claims of creditors with better priority than the holders of floating charge (in particular debts secured by pledges on specific assets) have been satisfied, will be applied to satisfy the floating charge holders, whilst the balance (50 %) will be applied to satisfy the unsecured creditors. Holders of floating charges will stand pari passu with (other) unsecured creditors for satisfaction of their excess claims from the balance of the proceeds.
In the event that a Finnish obligor is placed in administration, an automatic stay against enforcement action applies. The automatic stay shall continue until the administration program is approved, after which repayment of debt (including enforcement) will be covered and regulated by the administration programme.
Land charges may generally be enforced also in insolvency proceedings (with few exceptions). The same applies to claims and shares which have been pledged to creditors.
Inventory, other moveable assets and receivables may be enforced by the administrator. The enforcement proceeds (minus an amount representing app. 11 per cent. of such proceedings to cover the administrator’s cost) will be turned over to the secured creditors.
According to the Spanish Insolvency Act, secured creditors are considered privileged creditors (acreedores con privilegio especial) which may initiate separate proceedings, though subject to certain restrictions derived from a waiting period as stated below.
The declaration of insolvency would, in principle, prevent creditors from enforcing such security or would suspend enforcement currently underway. Enforcement would become possible when:
- one year has elapsed after the declaration of insolvency and the liquidation stage has not yet been initiated; or
- an arrangement has been accepted and approved, which does not prevent the secured creditor from enforcing its security (this would be the general rule except if such creditor has decided to support the arrangement).
Privileged creditors are not subject to the "convenio", or arrangement under statutory insolvency procedures, except if they give their express support by voting in favour of the arrangement. In the event of liquidation, they will be the first to collect payment against the attached assets.
During the insolvency process, the lender is not able to freely exercise its right as a secured party over the security because the court generally issues a stay order that suspends all actions or proceedings for the enforcement of claims and judgment against the debtor including security enforcement.
The extent and effect of the stay order varies for each process. In rehabilitation proceedings, a Suspension or Stay Order is issued to (a) suspend all actions or proceedings for the enforcement of claims against the debtor, (b) suspend all actions to enforce any judgment, attachment or other provisional remedies against the debtor, (c) prohibit the debtor from disposing any of its properties except in the ordinary course of business, and (d) prohibit the debtor from making any payment of its liabilities outstanding. Any effort to foreclose on the security or otherwise collect or enforce a claim against the debtor is punishable as indirect contempt of court
In certain cases, however, the court may (a) allow a secured creditor to enforce his security or lien, or foreclose upon property of the debtor securing its claim, if the said property is not necessary for the rehabilitation of the debtor, or (b) terminate, modify or set conditions for the continuance of suspension of payment, or relieve a claim from the coverage thereof, upon showing that: a creditor does not have adequate protection over the property securing its claim; or the value of a claim secured by a lien, on property which is not necessary for rehabilitation of the debtor, exceeds the fair market value of the said property. In liquidation proceedings, a secured creditor has the option of (a) waiving his right under the security or lien, proving his claim in the liquidation proceedings and sharing in the distribution of the assets of the debtor; or (b) maintaining his rights under the security or lien. In the proceedings for suspension of payments of individual debtors, properties held as security by secured creditors are exempt from the suspension order.
In general, no independent enforcement is available for a secured party following the bankrupcty order. However, regarding a security provided by way of a pledge on movable assets (Sw. handpanträtt), enforcement through private enforcement procedures is permitted (i.e. the secured party may itself sell the pledged asset at a public auction, subject to such auction occurring no earlier than four weeks after the meeting for administration of oaths and the receiver in bankruptcy having been offered to purchase the relevant collateral). Security over financial instruments, currency, gold provided as security in favor of a central counterparty and certain monetary claims may further be immediately sold or enforced through private enforcement procedures by the secured party, provided it is carried out in a commercially reasonable way. As regards security over shares not admitted to trading in a subsidiary of the bankrupt debtor, the secured party must first offer such shares to the receiver in bankruptcy.
Once a debtor is declared bankrupt, all debts (save for receivables secured by mortgage) become payable and the creditors become entitled to use their right of set-off against such amounts. In addition, all pending enforcement or attachment proceedings in respect of the bankrupt entity are stayed. However, secured lenders (i.e. lenders with pledge or mortgage security) may initiate enforcement proceedings after the announcement of bankruptcy or concordat. In case of bankruptcy, lenders are entitled to sell the pledged assets during the bankruptcy process.
In case of concordat, all ongoing enforcement proceedings against the debtors are suspended and the creditors cannot initiate new enforcement proceedings. However, the creditors may enforce their security, although they cannot request sale (foreclosure) of the secured assets.
In respect of restructuring of stock companies by way of conciliation, the court may suspend all enforcement proceedings initiated by the relevant creditors and prevent initiation of new enforcement proceedings in the interim period during which the restructuring project is evaluated.
With limited exceptions, the filing of a bankruptcy petition in the Federal court system results in an immediate automatic stay that immediately enjoins creditors from enforcing almost all rights against the debtor. Certain qualified financial and securities transactions are ‘safe-harbored’ from the automatic stay, but, as a general proposition, it has broad reach. Examples of actions enjoined by the automatic stay include, without limitation:
- pursuing judicial proceedings against the debtor
- enforcing a pre-petition-judgment against the debtor
- obtaining possession of or exercising control over debtors’ property (including attempts at pursuing payment of debts)
- creating, perfecting or enforcing liens, and
- applying set off
Creditors may request the court for relief from the automatic stay under certain limited circumstances, including when there is a lack of adequate protection of collateral value, and if the debtor does not have any equity in the property at issue, and such property is not necessary for an effective reorganization. Creditors should be cautious in undertaking any action which might be stayed because courts can impose sanctions in respect of actions that are found to have been taken in violation.
After an insolvency has been declared assets which are subject to a pledge and similar security rights are considered to be part of the debtor’s estate (Konkursmasse) and will be realised by the insolvency administration (except for intermediary-held securities). Realisation proceedings are governed by Swiss insolvency laws which provide for a public auction, or, subject to certain conditions, a private sale. Proceeds from enforcement are used to cover (i) enforcement costs, (ii) the claims of the secured creditors and (iii) any excess proceeds will be used to satisfy unsecured creditors.
Future claims and rights, which have been assigned for security purposes or pledged but have come into existence only after opening of bankruptcy proceedings against the Swiss assignor or pledgor, respectively, will fall into the Swiss assignor’s or pledgor’s estate and will not pass over to the secured party/ies. Similarly, there is uncertainty as to whether, in case of an insolvency of a security provider, a secured creditor may apply or use collateral received in discharge of secured obligations which qualify, pursuant to the evolving (and not always consistent) jurisprudence of the courts, as future claims.
In respect of administration, as soon as the appointment process is commenced, the company becomes subject to a statutory moratorium which stays all litigation against the company and prevents the enforcement (without the administrator’s consent or the court’s permission) of any security or quasi-security.
In a compulsory liquidation, or where a provisional liquidator is appointed, the company becomes subject to a statutory moratorium, preventing actions or proceedings continuing or being raised without the leave of the court. This moratorium does not, however, prevent the enforcement of security. No automatic moratorium arises in voluntary liquidations, however the court may, on request, make an order to restrict the commencement or continuation of actions.
If a debtor owns property in Jersey, orders can be sought one month following the issue of an unsatisfied court judgment for an Acte Vicomte charge d’ecrire. Following this act of the Jersey court, if the judgment is not satisfied within a further two months, the debtor’s property will be deemed to have been renounced. At that time, a creditor can seek orders for a degrevement (immovable property) and realisation (movable property).
In a degrevement the real estate of the debtor is offered firstly to its unsecured creditors and then to its secured creditors (those who hold a judicial or conventional hypothec registered against its immovable property in Jersey) in reverse order of the creation of the hypothecs but subject to the interests of the holders of the prior hypothecs.
If a debtor who owns immovable property in Jersey is declared en desastre (another form of Jersey insolvency) title to that property vests automatically in the Viscount who will then realise the assets of the debtor. The holder of a registered hypothec will be secured and will be entitled to be repaid from the realisation.
In the case of intangible movable property, the SIL provides that the grantor of the security becoming bankrupt (as a matter of Jersey law) or the grantor or its property becoming subject, whether in Jersey or elsewhere, to any other insolvency proceedings, will not affect the power of the secured party to appropriate or sell, or otherwise act in relation to, collateral under the SIL.
However, the SIL provides that where the grantor is bankrupt, the security interest is void against the Viscount (an insolvency practitioner in Jersey) or liquidator and the grantor’s creditors unless the security interest is perfected before the grantor becomes bankrupt. A perfected security interest could nonetheless be challenged as a transaction at an undervalue or preference under insolvency legislation or other grounds.
Where collateral is subject to security under the SIL, the proceeds of enforcement are applied in accordance with the provisions of that law. Any surplus after deduction of the enforcing security party's reasonable costs and the monetary value of the secured obligations will be used to pay:
a) any person with a subordinate security interest;
b) any other person (other than the grantor) who has given the secured party notice of a proprietary interest in the collateral; and
c) finally the grantor (or, in the case of the grantor's insolvency, the relevant official).
The commencement of insolvency procedures generally does not affect a secured creditor's rights to enforce its security, unless the security transaction is voidable or payments can be clawed back by the liquidator (see Question 24 below).
All creditors have to be treated equally and receive a quote of their claim in the insolvency process under the Austrian Insolvency Act (Insolvenzordnung). However, secured creditors have priority in the settlement of their claims regarding the assets in which they hold a security right. Such secured creditors are entitled to enforce their right of separation (Absonderung) – meaning the right of an e.g. pledgee to be satisfied preferentially from the realization of the pledge - in the course of the insolvency proceedings.
According to the Austrian Insolvency Act, this right of separation is not affected by the opening of insolvency proceedings. However, secured creditors are barred from exercising their rights for a maximum period of 6 months after the opening of insolvency proceedings if the exercise of such rights would endanger the continuation of the debtor´s business. Further, separation rights, acquired within 60 days before the opening of insolvency proceedings by way of execution for indemnification or settlement, expire upon the opening of insolvency proceedings, but may be revived after the suspension of insolvency proceedings.
In the course of the insolvency proceeding the assets of the insolvency estate (Insolvenzmasse) will be sold and any proceeds which remain after settlement of the secured creditor´s claims will be distributed among the creditors. The insolvency liquidator is responsible for the liquidation of the insolvency estate.
The insolvency process has impact on the ability of a lender (creditor) to enforce its rights and collect any payment from its debtor. In this regard and in accordance with Ley de Concursos Mercantiles (LCM), creditors of a bankrupted company or individual have preference based on a marshalling set forth in such law, and the creditor's seniority to determine the payment preference will be based on the type of credit and/or the collateral securing such credit.
Also, in case of an insolvency process of any debtor, unsecured obligations in foreign currency must be converted into Mexican currency at the rate of exchange in force on the date of the respective court's judgment and then converted into inflation indexed units on the same date.
Bosnia & Herzegovina
A lender has the ability to enforce its rights as a secured party over the security, including the principal claim, interest and other expenses.