What practical issues do secured creditors face in enforcing their security (e.g. timing issues, requirement for court involvement)?
Restructuring & Insolvency (2nd Edition)
(a) If the pledge agreement is incorporated into a notarial deed, the pledge agreement is directly enforceable in Hungary as well as in the EU.
(b) If the pledge agreement is not incorporated into notarial deed, the creditor shall initiate a civil procedure before the court. Following the judgement (in favor of the creditor), the creditor can commence an enforcement proceeding against the debtor. Because of the long civil procedure, enforcing the claim is time consuming.
(c) Further, the mortgage and the pledge agreements may provide for an out of court sale of the secured asset which may expedite the enforcement.
In general the issues that the secured creditors face in enforcing their security outside the restructuring and insolvency proceedings can be summarized into the following:
All laws mentioned in our response to question 1, except for the Aviation Law, provides that in the event of the debtor’s default, the secured creditors will have the right to enforce their security rights based on:
a. the right of instant or direct execution (parate eksekutie)
The right of instant or direct execution is a right conferred by operation of law in which the secured creditors are entitled to sell the security object based directly on its own authority through a public auction without the consent from the collateral provider. In theory, based on this right of instant or direct execution, the secured creditors are entitled to have the security object sold by public auction and to apply the proceeds of the auction towards the repayment of any debt (without the need of an executorial title and without having to obtain a writ of execution (fiat executie) from an Indonesian court). Practically speaking, however, a parate executie can only be conducted if the collateral provider is cooperative. Further, in practice, parate executie has rarely been used since, among other reasons, the Indonesian State Auction Office will not allow a public auction without an Indonesian court order. The court order is also usually required by the purchaser of the security being auctioned / sold to prevent any future claims on the transaction. Therefore in practices, the secured creditor still has to submit petition for the issuance of the writ of execution for the enforcement of their security rights. The process to obtain this writ of execution from the district court, however, may take a relatively long time and involve complicated court bureaucracy. In addition, the public auction process would also take a considerable amount of time.
Particularly with regard to pledge of shares which are traded on a securities exchange in Indonesia, the law clearly specifies that disposal can be conducted in the market with the involvement of two brokers. In this case no court order is required so long as there is a power of attorney to dispose of the shares. However, there have been instances when there has a delay in transferring the title from the owner of the security being pledged to the buyer due to the reluctance of the registrar or broker to transfer the pledged shares on the grounds that they anticipated they would be sued if the transfer was conducted or the execution was contested in an Indonesian court by the owner of the asset in question.
b. the executory title in the Mortgage Certificate, Fiducia Certificate, Hypothec Deed Certificate
According to the Mortgage Law, Fiducia Law and Shipping Law, the Mortgage Certificate, Fiducia Certificate, Hypothec Deed Certificate possess executorial title which has the same status as a final and binding decision / judgement of an Indonesian court and confers on the holder the right to sell the security through a public auction after obtaining a writ of execution (fiat executie) from the relevant district court. The process of obtaining writ of execution and public auction will take a considerable amount of time.
c. the right to request the district court under Article 1156 of the Indonesian Civil Code in enforcing a pledge to:
a. determine the manner in which the pledged shares should be sold to repay the debt, plus interest and costs, or
b. permit the pledgee to acquire the pledged shares at such price to be determined by an Indonesian court.
The price thus determined by the court will be set off against the claim of pledgee. If, however, the court decides that the pledge must be enforced by public auction of the pledged shares, it will refer the matter to the State Auction Office. The pledgor will then be summoned by the court and the pledged shares will be sold in a public auction. If the pledgor is not the debtor, it is safe to assume that the pledgor or, as the case may be, the debtor will also be summoned.
d. private sale
The sale of the collateral in a private sale, may be effected based on the mutual consent of the collateral provider and the secured creditors after the debtor’s default. The Mortgage Law and Fiducia Law further requires that a private sale as collateral enforcement mechanism would only be allowed if the highest proceeds giving great benefit to both parties can be obtained.
The issues specific to Fiducia Security enforcement
Given the fact that the collateral are in the possession of the collateral provider, in order to enforce against the fiducia security object, the fiducia transferee / assignee must first obtain possession of the relevant goods from the fiducia transferor / assignor. According to the Fiduciary Law, the fiduciary transferor must deliver the fiduciary security object in the framework of implementation of the enforcement right over the fiduciary transfer. If the fiducia transferor / assignor does not deliver the fiduciary security object when the enforcement is performed, the fiducia transferee / assignee is entitled to take possession over the fiducia security object and if necessary may request the assistance of the authorized parties for taking possession over the fiduciary security object.
In the absence of cooperation of fiduciary transferor / assignor to deliver such goods to fiducia transferee / assignee, the fiduciary transferee / assignee in practice would have to obtain a court order for attachment against the fiduciary security object before being able to enforce against such fiduciary security object. Such court order may be requested by fiduciary transferee / assignee, through a submission of an application to the relevant district court and providing necessary evidence required by such district court with respect to the fiduciary security. Once fiducia security object is attached, such goods may be sold by public sale or, if possible, by private sale.
In practice, it is often that the process of taking the possession of the fiducia security object is very costly and takes a significant amount of time. In fact, it is also often that the fiducia security objects are in bad / heavily damaged condition and/or no longer completed.
The issues specific to Hypothec of vessel enforcement
The vest territory of Indonesia will cause difficulty to detect the position of the hypotheced vessel. Under prevailing regulation, the writ of execution will be issued and commenced by the authorized court having legal jurisdiction in the area of hypothecor’s domicile. However the position of the hypotheced vessel may be located at the port outside the jurisdiction of court that rendered writ of execution. Since the execution shall be conducted at the port where the vessel is located, the court that issues writ of execution shall delegate the execution to another court having legal jurisdiction in the area of port where the vessel is located. This delegation may also incur some informal administrative court which needs to be paid by the hypothecee.
If the secured creditors attempt to enforce their security after the restructuring and insolvency proceedings have commenced, they may not be able to do so since their right to enforce their security are subject to a stay for the period of maximum 90 days as of a bankruptcy declaration is rendered in Bankruptcy Proceedings and during the entire period of the suspension of payments, which can reach up to maximum 270 days as of the suspension of payments decision is granted, in Suspension of Payments Proceedings.
Assuming there are no issues in connection with the execution, authorization and delivery of the relevant underlying security documents, secured creditors may enforce their security in accordance with the terms of the underlying security documents upon providing the debtor(s) with reasonable notice of its intention to do so. In such circumstances, debtors are typically deemed to have been afforded reasonable notice upon either:
- the expiration of the ten (10) day notice period following the delivery to the debtor(s) of a notice of intention to enforce security as required pursuant to section 244 of the BIA; or
- the waiver by the debtor(s) of such ten (10) day notice period.
Generally, security agreements provide secured creditors with rights to (i) appoint a private receiver over the assets and property of the debtor(s), which does not require court involvement, and/or (ii) seek the court-appointment of a receiver over the assets and property of the debtor(s).
In circumstances where there is concern that assets may be dissipated, depleted or impaired prior to the expiration of the ten (10) day notice period provided for under section 244 of the BIA, secured creditors may seek a court order appointing an interim receiver to monitor the management and operations of the debtor(s) with a view to preserving assets for the benefit of the secured creditor(s).
In Québec, hypothecary creditors (as well as the holders of most prior claims, mutatis mutandis) may only, apart from conservatory measures and a personal action against the debtor, exercise one of four (4) recourses as against the hypothecated property:
- taking possession of the hypothecated property for purposes of administration: the creditor is granted the right to collect the revenues generated by the hypothecated property until satisfaction of his claim;
- taking the hypothecated property in payment: the property is transferred to the creditor and, in return, the creditor’s claim is extinguished entirely (regardless of the actual value of the hypothecated property);
- sale of the hypothecated property by the creditor: the creditor sells the hypothecated property, either by agreement, by a call for tenders or by auction, and collects the proceeds of the sale up to the amount of the claim; and
- sale under judicial authority: the Court supervises, directly or indirectly, a sale process for the hypothecated property, the proceeds of which go to satisfy the hypothecary creditor. This is the most often preferred recourse, because the sale under court supervisions will purge most real rights attached to the property sold, which is not the case of a sale by the creditor.
It is important to note that none of these four recourses include the appointment of a private receiver. Private receivers are not used in Quebec. However, a hypothecary creditor may opt to take possession of the hypothecated property for purposes of administration and delegate this administration to a third-party manager; in practice, this resembles the appointment of a private receiver in common law jurisdictions.
Each of the aforementioned recourses must abide by specific rules, although each of them require the same preliminary conditions and measures.
First, the debtor must be in default, the claim must be liquidated and must be due. Second, the creditor must then file a prior notice with the appropriate public registry along with evidence that it has been served on the debtor and, if applicable, on any person against whom the creditor intends to exercise his real rights. Third, the creditor cannot exercise its rights before the expiry of the period specified in the prior notice. This period is 60 days if the hypothecary rights are exercised on immoveable property, but may be 10, 20, or 30 days in other cases. The period may be shortened by order of the Court, if the Court is satisfied that recovery of the creditor’s claim is in peril, or where the property may depreciate rapidly. Fourth, the prior notice must disclose the default(s) that the debtor has committed, the hypothecary right which is intended to be exercised, the hypothecated property on which the hypothecary right is to be exercised, and the amount of debt owed to the creditor.
After being served with the prior notice, the debtor (or any person against whom the creditor intends to exercise his real rights) may defeat the creditor’s recourse by remedying all the defaults specified in the prior notice as well as any subsequent default. They may do so until the moment that the creditor’s rights are fully affected, e.g. when the sale is perfected or the property is transferred to the creditor, either by agreement or by final judgment of a competent court. If the debtor or other person serviced with the prior notice cannot or refuses to remedy all the defaults, they must surrender the hypothecated property. Forced surrender may be obtained if the debtor or noticed party does not voluntarily surrender the property.
Subject to a few exceptions, such as a sale under Court supervision, and in the absence of contestation, it is possible that Courts will not be involved at all in the enforcement of hypothecary rights.
Immovable property with encumbrances
Encumbrances of immovable property can be enforced by means of
- Sale of the real estate through a public auction (Zwangsversteigerung),
- The real estate being mandated under forced administration (Zwangsverwaltung) or,
- Freehand sales (if agreed upon by the collateral provider and collateral taker).
In the case of a sale by public auction, several procedural prerequisites must be met. The first is the submission of a request of enforcement to the district court as the enforcement court (Vollstreckungsgericht). In most cases it takes at least two auction dates to sell the real estate because the minimum bid for the first auction date corresponds to 50% of the real estate’s market value. The cost incurred by the auction proceedings are to be paid from the proceeds.
Mandating the real estate under forced administration
Upon application of a secured creditor or the insolvency administrator, the enforcement court will appoint an administrator (Zwangsverwalter) to manage the real estate, in particular by collecting rental charges. The revenue gained in this manner, less administrative costs, serves to satisfy the secured creditor.
The parties involved remain under no obligation to act according to the relatively strict regulations applicable to public auctions and forced administration and can also agree on a freehand sale. Doing so is often in the best interest of all parties, because a freehand sale can result in a significantly higher purchase price.
Movable property and receivables
Prior to the opening of insolvency proceedings, collateral holders can enforce their collateral dependent on the respective Security Purpose Agreement (Sicherungsvereinbarung) by either selling the property or enforcing the receivable against the respective debtor.
When a debtor files for insolvency, the insolvency court can issue orders preventing secured creditors from realizing their security over movable property in the debtor’s possession. After the opening of insolvency proceedings, only the insolvency administrator is authorized (i) to sell encumbered movable property that is in his or her possession and (ii) to collect claims that have been assigned as collateral. The proceeds of such enforcement will be paid out to the secured creditor up to the secured claim and minus statutorily fixed costs of the estate corresponding 9% of the proceeds.
Prior to liquidation:
- In case of real security (e.g. a mortgage bond, pledge, notarial bond, cession in security, landlord’s hypothec or liens), a secured creditor is entitled to enforce its security against the relevant assets if the debtor defaults. The creditor can procure the sale of the secured assets and apply the proceeds to satisfy the principal obligation.
- For general notarial bonds, before exercising the creditor’s rights, the security must first be perfected by taking possession of the assets, usually by way of attachment by the sheriff of the High Court of South Africa, under a court order.
- With special notarial bonds, provided that they are correctly registered and the property specifically described, the bond is deemed to have been pledged to the mortgagee as it had been pledged and delivered to the mortgagee which greatly assists the mortgagee in enforcing his rights upon a default.
- Security under a pledge can be enforced without a court order, and the secured creditor can simply agree with the debtor that the secured assets may be sold without the need for judicial execution (in terms of a parate executie or summary execution provision).
- Cessions in security, sureties and guarantees are enforced in accordance with contract, but should the security giver fail to perform, court involvement will be required.
- In general, court involvement in the enforcement of security may subject creditors to long, expensive and delayed processes of litigation due to the court’s capacity and stipulated procedural time periods.
- In liquidation proceedings, the assets subject to security continue to vest in the liquidated debtor. The liquidator will then realise the security and pay the proceeds to creditors in the applicable order (see question 5 on the ranking of creditors).
In an event of default, a secured creditor not subject to the debtor reorganization or insolvency proceeding is entitled to file an enforcement proceeding against the debtor seeking collection of the secured credit.
However if the credit is subject to the liquidation or reorganization of the debtor, such as the creditor holding a pledge or a mortgage, there are limitation to enforce the security. In a liquidation proceeding the court will order a permanent stay of the enforcement proceeding, while in a judicial reorganization the enforcement proceedings filed against the debtor will be stayed for a period of 180 days, counting from the granting of the processing of the judicial reorganization and only if the assets under a fiduciary lien are considered essential to the debtor’s business. In out-of-court proceedings, creditors subject to the reorganization plan, duly homologated, are prevented from enforcing their rights.
Creditors with a fiduciary lien as well as financial lessors can continue with the enforcement proceeding during and after the suspension period mentioned above.
As a general principle of Czech law, a mortgage, pledge and other types of security may be successfully enforced if the corresponding secured obligation is not performed duly and in time. In other words, as a matter of Czech law, it is necessary in cases of loan financings that the loans be declared due and payable before the secured creditor (or, in case of syndicated loan financing, the security agent acting for the benefit of the lenders) may enforce the pledges securing the loans.
In addition, official confirmation of the existence of the secured claims is also required for enforcement of the mortgage/pledge. This may take the form of (i) an enforceable court or arbitrational decision, (ii) an enforceable settlement reached within court or arbitration proceedings or (iii) an agreement on direct enforceability drawn up in the form of a notarial deed between the secured creditor and the debtor.
Provided that the above conditions are met, the secured creditor may seek satisfaction of the secured claims from the proceeds of enforcement of the pledge by virtue of a judicial or public auction (unless a different means of enforcement, e.g. the direct sale of assets, has been agreed between the parties). A judicial auction may be undertaken either by a court (i.e., by the court bailiff) or by a private bailiff chosen by the secured creditor and appointed by the court. A public auction is organized by a private licensed auctioneer. In certain, rather rare, cases, the creditor may be allowed to seize the secured assets.
As of the moment in which an insolvency petition has been filed, the execution and enforcement of any security instrument is automatically stayed for both types of insolvency proceedings, i.e. liquidation bankruptcy and reorganization proceedings.
A debtor company may seek to frustrate a secured creditor's attempts to secure the repayment of its debts by dissipating assets prior to enforcement. In such circumstances, a creditor may be required to issue proceedings to recover the debt, whilst at the same time issuing an application for an injunction for the purpose of freezing a company's assets pending the outcome of such proceedings. In order to obtain such relief, a secured creditor would be required to demonstrate to the Grand Court of the Cayman Islands (the "Cayman Court") that there was a substantial risk of dissipation of assets on the part of the company.
The legal rights of a secured creditor will be unaffected by the commencement of winding up proceedings in respect of a debtor company. Accordingly, a secured creditor will retain the ability to enforce its security and sell the charged property to obtain payment of the debt. If the sale proceeds of the charged asset are insufficient to discharge the debt, a secured creditor can rank as an unsecured creditor in the liquidation in respect of the balance of the debt.
A secured creditor may appoint a receiver over a charged asset for the purpose of enforcing their security rights under the relevant security document. A receiver is not subject to supervision by the Cayman Court and their primary duty will be to the secured creditor, as opposed to the general body of creditors.
Security enforcement is generally governed by the Civil Execution Act. Although the specific steps for enforcing security differ across the different types of security interests and different types of assets, the process generally is controlled by the court. In the case of a mortgage over immovable property, for example, the court will hold a compulsory auction to convert the property into cash. However, in certain exceptional circumstances (in particular with respect to non-statutory security), secured creditors can exercise their security interests without the court’s involvement.
It should be noted that once a corporate reorganisation procedure is commenced with respect to the debtor corporation, enforcement of security interests will be subject to certain limitations as contemplated in the Corporate Reorganisation Act. Commencement of other types of insolvency proceedings (i.e. bankruptcy, civil rehabilitation and special liquidation) does not automatically affect a secured creditor’s right to enforce their security interests; provided, however, that in exceptional circumstances, the court can impose certain restrictions on the secured creditors’ right to enforcement.
The ability of a security holder to realise their security is governed by the terms of document creating the security. Debentures often provide the security-holder the right to appoint a receiver, which can be done without court involvement.
A creditors’ ability to obtain vacant possession or to exercise its power of sale under a mortgage is regulated by the Land Titles Act and Conveyancing and Law of Property Act. A mortgagee is also under a duty to make reasonable efforts to obtain the true market value of the mortgaged property at the date on which he wishes to sell it.
It is possible for a distressed debtor to obtain a moratorium preventing secured creditors from enforcing their security – either by obtaining an automatic moratorium in support of a scheme, or by filing an application for judicial management. In such a scenario, a secured creditor would need leave of court to enforce its security, or with the consent of the judicial manager.
Floating charge holders should also note that judicial managers have the power to dispose of any assets subject to a charge that was created as a floating charge. If a floating charge holder wishes to protect its security, it should take steps to contest the appointment of a judicial manager.
British Virgin Islands
The enforcement of security interests is normally conducted in the jurisdiction where the relevant collateral is located. In most cases concerning the enforcement of security in assets located within the BVI, the assets in question are will be shares in BVI companies. As such, most of the legal issues that arise in this context are in relation to security over shares. In practice, the common-law remedies available in the BVI are similar to those remedies available under the laws of other common-law jurisdictions.
As to what remedies may be available to the security holder, this question depends to a degree upon the type of security interest. In the event that there is a default on the secured obligations, the holder of a security interest over shares may have up to four primary remedies (depending upon the type of interest they hold): foreclosure; power of sale; receivership; and taking possession.
As in many other jurisdictions, foreclosure is a draconian equitable remedy that is only available to a legal mortgagee. The mortgagee must obtain an interim order and then a final order from the court before the mortgage can be foreclosed and the mortgagor’s beneficial ownership extinguished. This can be time consuming, and the courts are reluctant to grant this remedy. In some cases, the court may reopen the foreclosure, though this does not affect the title of a bona fide third-party purchaser. If the debt owed to the creditor is less than the value of the collateral, the court will generally order the sale of the asset and an account of the proceeds rather than foreclosure. In order to seek foreclosure, a payment must be due and owing to the creditor in law. Because foreclosure, if granted, extinguishes subsequent mortgages, any mortgagees with lower priority must be joined to the claim.
A secured creditor may be entitled to appoint a receiver over the collateral, whether out of court (if the terms of the security instrument permit it) or by order of the court. A receiver appointed over a company’s shares has the power to exercise voting rights attached to them, to sell the shares, and to receive any income derived from them, such as dividends or redemption proceeds. In practice, receivers frequently exercise the shareholder’s power to replace the company’s directors in order to effect the sale of the company’s underlying assets and distribute the proceeds by way of dividends or as direct repayment of the debt. Alternatively, the receiver may be entitled to exercise a power of sale of the asset, in which case they must obtain the best price for the asset that is reasonably obtainable.
If the creditor appointing the receiver over shares in a BVI company is another BVI company, they must file notice of the receivership with the BVI Registrar of Companies. This rule applies whether the receiver was appointed by court order or out of court; however, if the creditor is a natural person or a foreign company no notice is required.
Every mortgage, charge, or pledge contains an implied power of sale, and this may be exercised whether or not a receiver is appointed. The creditor may apply to the court for a judicial sale, or may alternatively conduct the sale privately, and there is no need for a court order before the power may be exercised. Where the collateral is in the form of shares in private BVI companies, the sale process can be lengthy because of extensive due diligence exercises; however, if the BVI company is publicly listed, or if it operates as a joint-venture vehicle in relation to which a market exists (ie, the other joint venture partner(s)), the process may be quicker.
Whether the power of sale is exercised by the creditor or a receiver they have appointed, the asset must be sold for the best price that is reasonably obtainable, and any surplus must be accounted for to the debtor. If the sale is conducted by a receiver, the creditor may be able to purchase the shares by way of a credit bid. This is not something the creditor could do if selling the shares themselves.
The holder of an equitable mortgage has the same remedies as the holder of a legal mortgage, subject to two points. Firstly, the equitable mortgagee will not be able to enforce their rights against a bona fide purchaser of the asset for value without notice of the security interest. Secondly, they must seek the conveyance of the asset into their name before they can resort to remedies that are available only to a legal mortgagee, such as foreclosure. The security instrument should include an express entitlement to possession of the collateral when the security is in jeopardy. If it fails to do so, the equitable mortgagee will only be able to seek possession where the debtor is actually in default. If there is no default but the asset is imperilled, the creditor should seek the appointment of a receiver.
Neither a chargee nor a pledgee has a right to seek foreclosure, but may be able to exercise a power of sale. The holder of a pledge cannot appoint a receiver.
A secured creditor can usually sue upon the covenant to pay that appears in most security documents. There are other remedies available, in particular to the holder of a mortgage, but they relate predominantly to land and are rarely exercised in relation to shares. The holder of a security interest is entitled to pursue all of its remedies concurrently or consecutively.
A liquidator of a company in insolvent liquidation has the power to borrow money in the company’s name, if doing so is likely to be in the interests of the company’s creditors. In such circumstances the liquidator can grant post-commencement lenders security or higher priority than other creditors: section 186 and Schedule II, paragraph 11, of the Insolvency Act 2003 (IA). A liquidator of a company in solvent liquidation also has the power to grant lenders security over the company’s assets; however, as stated above the liquidator is required to keep the question of the company’s solvency under review and be careful that borrowing does not cause the company to become insolvent. Unlike in some other jurisdictions, however, there is no provision in BVI legislation for the grant of super-priority status in respect of post-commencement finance, or for the grant of security over already-secured assets.
There are no insolvency procedures in the BVI that result in the imposition of a moratorium on secured creditors’ rights to enforce their security. If a company goes into liquidation, the rights of secured creditors remain unaffected, unless there is a dispute over the validity of the security. After the commencement of the liquidation, the secured creditor can either value the assets subject to the security interest and, if there is a shortfall, prove for the balance as an unsecured creditor in the liquidation, or surrender his security interest to the liquidator and prove as a wholly unsecured creditor.
If the liquidator does not agree with the value placed on the asset by the secured creditor, he can require that the asset be offered for sale. The secured creditor will be paid his debt out of the proceeds of sale, and any surplus funds will be paid to the liquidator for the benefit of the general body of unsecured creditors.
In respect of a mortgage secured on the debtor’s immovable property, the creditor may commence a forced sale procedure before the enforcement court of the debtor’s jurisdiction if the debtor defaults on the debt. However, it is a condition that the creditor levies execution on the debtor’s immovable property and subsequently the creditor may file a request for a forced sale with the enforcement court of the debtor’s jurisdiction.
In case of a charge on movable property, it is also possible for the creditor to request that execution be levied on the charged item. Based on the execution the creditor may dispossess the item as security for the creditor’s agreement with the debtor and the creditor may sell the item in question for the purpose of covering the arrears. The creditor’s request for execution may also be filed with the enforcement court of the debtor’s jurisdiction.
Recovery through the enforcement court assumes that the creditor has obtained a basis for the recovery, for instance a judgment, instrument of debt, settlement etc.
In bankruptcy proceedings, security interests in collateral rank higher than taxes due and employees’ claims to the extent of the value of the collateral. But this general rule does not apply to employees’ claims established before August 27, 2006. During restructuring, the exercise of security interests in collateral is suspended, unless the collateral is in danger of damage or significant decrease in its value. In bankruptcy liquidation or settlement proceedings, a secured creditor may at any time request the administrator to dispose of the collateral and repay debts owed to the creditor in priority to other subordinate creditors with the proceeds obtained from the proposal. In bankruptcy of real estate companies, claims of housing purchasers and those for construction costs take precedence over security interests.
In a voluntary administration, a statutory moratorium under section 440B of the Corporations Act 2001 (Cth) (Corporations Act) prevents a security interest from being enforced against the company’s assets without the administrator’s consent or leave of the court.
There are exceptions to this general rule, the primary one being where a secured creditor has security over the whole or substantially the whole of the company’s property. Where this occurs, the secured creditor may enforce its security and appoint a receiver within 13 business days’ following the date the administrator gave notice of his or her appointment. If a secured creditor does not enforce its security within this time period, the section 440B moratorium will attach preventing enforcement during the period of administration. Notwithstanding this short window available to secured creditors to enforce their security, there are often practical difficulties associated with being satisfied that the security is ‘over the whole or substantially the whole’ of the company’s assets.
A similar moratorium on enforcement operates in a liquidation (under section 471B of the Corporations Act), however secured creditors are usually granted immunity from this process (by section 471C), assuming their security is valid, as they remain entitled to realise their security despite the liquidation.
A mortgage over real estate is enforced by the sale of the mortgaged property. The mortgagee must have an executory title, which requires an enforceable court judgment or a notarised executory deed. The mortgagee has no right to appropriate the property. A court-appointed notary public will be charged with effecting the (public or private) sale, and the distribution of proceeds in accordance with the ranking of creditors. The time required for enforcement will depend on the debtor’s attitude and the court’s strain.
Unless agreed otherwise, the pledgee of financial collateral is entitled to enforce the security without prior court approval or prior notification. For financial instruments, enforcement will occur by selling or (if agreed by the pledgor in the pledge agreement or at a later time) appropriating the financial instruments, and for bank accounts by appropriating the amounts standing to the credit of the bank account. Appropriation may only occur in accordance with agreed valuation rules between parties.
Any sale of shares might be subject to limitations by law, in the articles of association or in contracts. These transfer restrictions are opposable to third parties, if not waived at the time of the creation or enforcement of the pledge.
As regards the enforcement of pledges granted by pledgors that are not consumers over other movable assets such as tangibles, trade receivables, IP rights or a business, foreclosure is subject to notice that the pledgee intends to enforce the pledge, triggering a 10 day waiting period (which is shortened to 3 days in case of perishable goods or goods subject to fast value reductions), after which the pledgee is entitled to instruct a bailiff to rent out the goods or sell them by way of a public or private sale. In addition, the pledgee may appropriate the goods if agreed by the pledgor in the pledge agreement or at any later time, subject to the condition that the agreement states that the value of the goods at the moment of appropriation will be determined by an expert or, for goods traded on a market, according to the market price.
In case of a non-possessory pledge, the pledgee will need to obtain the pledged goods from the pledgor. Hence, the pledgor’s cooperation will be required. If the pledgor does not cooperate, the pledgee will need to obtain a court order, ordering the pledgor to deliver the assets to the pledgee.
Upon request by the pledgor, the pledgee or any other third party with an interest, a dispute in relation to the enforcement may be brought before a court (i.e. the attachment judge). Such court proceedings suspend the enforcement of the pledge but will be decided by the judge as a matter of priority.
The holder of a security right qualifies as a secured creditor. Secured creditors are in principle not affected by a suspension of payments or bankruptcy of the pledgor. The holder of security right may in these cases enforce its security rights as if there were no suspension of payments or bankruptcy. The exceptions to this are outlined below.
- Ad (i) Cooling off period: In bankruptcy of the pledgor a cooling off period (maximum of 4 months) may apply, during which the right to enforce is temporarily suspended.
- Ad (ii) Reasonable term: The trustee in bankruptcy may set a reasonable term to the mortgagee in which the mortgagee should complete enforcement of the mortgage. In case enforcement is not timely completed, the trustee may sell the property himself.
Enforcement can take place by way of (i) auction, (ii) private sale with court approval or (iii) only in case of movable assets, private sale with approval from the pledger. Depending on the type of asset, and the circumstances of the case, enforcement is usually completed in a period of 1-3 months.
A secured creditor may enforce its security in a number of ways, most of which are governed by state law. As noted above, for the security interest to be valid, it must first be validly perfected through the applicable process – usually through the filing of a UCC-1, by taking possession, or through a mortgage or trust deed. If a creditor fails to properly perfect its security interest, its claim will be stripped of secured status and instead be deemed an unsecured claim against the debtor’s estate. Article 9 of the UCC also permits a secured party to repossess collateral through self-help measures when doing so would not breach the peace.
Once a debtor is in bankruptcy proceedings, however, as discussed more thoroughly below, section 362 of the United States Bankruptcy Code (the “Bankruptcy Code” or the “Code” ) – the automatic stay – generally prohibits creditors from taking action to enforce their security interests. In certain circumstances, upon filing a motion and a hearing, the court may provide a creditor relief from the stay.
Unlike amicable proceedings, insolvency proceedings trigger an automatic stay on claims which prevents creditors from suing the debtor and enforcing the securities. However, there are a few exceptions:
- Claims secured by a security interest may confer a lien (droit de retention) over the collateral. During the observation period, at the request of the judicial administrator, the insolvency court may exceptionally authorise the payment of a pre-filing secured creditor to obtain the surrender of the retained pledged asset to the estate to the extent that the pledged asset may be necessary to the debtor’s pursuit of its business activity.
- Claims assigned by way of Dailly assignment of professional receivables. The creditor to which the debtor's receivables have been assigned by way of Dailly assignment, can directly seek payment of those assigned receivables despite any filing.
- Claims secured by a fiducie agreement. The creditor can enforce its rights over the assets transferred to the trust, except where the creditor initially agreed, at the time the fiducie agreement was executed, that those assets would remain in the debtor's possession.
Enforcement of financial collateral security is quick and not very costly (except for valuation) and may be done out of court even in a bankruptcy scenario.
Other security interests are more burdensome, time consuming and costly to enforce and will normally, in case of bankruptcy, require court involvement.
The timing requirements that secured creditors are faced with will depends on the nature of the procedure in which they are involved.
Secured creditor direct enforcement
If a registered mortgage has been granted over real property, and the mortgagor has defaulted under the mortgage, the mortgagee may be entitled to exercise its powers of enforcement, which may include taking possession of the real property and/or exercising its powers of sale. It is not necessary under New Zealand law for a mortgagee to enter into possession of the subject property in order for a mortgagee to exercise the power of sale.
A statutory default notice (in accordance with the requirements of the Property Law Act 2007) must be given to the relevant mortgagor and any other guarantors or parties with a subsequent registered interest in the land, and time must be given for the mortgagor to remedy the default (usually at least 20 business days), before any mortgagee powers of possession and/or sale can be exercised. Expiry of that default notice is also a pre-condition to the exercise of any power to accelerate amounts outstanding which are secured by a registered mortgage.
Mortgagee sale (and entry into possession where applicable) is a self-help method where Court approval is not required (other than in rare circumstances of a mortgagee sale conducted through a Court registrar process), and the powers of enforcement arise by virtue of the mortgage documents.
In addition Part 9 of the PPSA and the Property Law Act 2007 contain provisions that allow a secured party to exercise direct enforcement remedies (including taking possession and selling the collateral) against personal property collateral when a debtor is in default.
A receiver, mortgagee or secured party must act in good faith in relation to any sale it conducts and is subject to a statutory duty to obtain the best price reasonably obtainable as at the time of sale.
Receivership is one of the main methods of enforcing security in respect of real and personal property in New Zealand and is discussed further in relation to question 4 below.
Almost all receivers are appointed by a secured creditor, pursuant to a contractual power to do so in a security agreement. No Court approval for such appointment by virtue of the security document is required, subject to compliance with the requirements of that security document for default by the relevant debtor to trigger the power of appointment.
As discussed above in the context of direct secured creditor enforcement, a statutory default notice (in accordance with the requirements of the Property Law Act 2007) may also be required to be given in a receivership context, before any receivers power of sale can be exercised. Where required, notice must be served upon the relevant obligor and any other guarantors or parties with a subsequent registered interest in the relevant assets, and time must be given for the obligor to satisfy the demand (usually at least 20 business days), before any receiver's power of sale can be exercised. This requirement is most commonly relevant in the context of a receiver's sale of real property.
Where the relevant obligor is a body corporate and the receiver is appointed pursuant to an all asset security agreement, then any required statutory default notices can be issued after the appointment of receivers (i.e. management of the relevant property by receivers in such circumstances is not restrained) however no sale of the subject assets can be completed by receivers until such time as the relevant default notices have been served and expired un-remedied. Where the debtor is not a body corporate (e.g an individual, unincorporated partnership or trust) the relevant notices must have been served and expire un-remedied as a pre-condition to acceleration of the subject debt and before any receiver's power of management or sale can be exercised.
The insolvency procedure is a concurrent procedure, so that also secured creditors may recover their receivable only in the conditions of the insolvency law, any enforcement procedure existing at the moment of opening of the insolvency procedure being stayed de jure. Sometimes this may imply a longer time for the recovery of the receivables than in individual enforcement, but the insolvency legislation provides as remedy for certain situations in which the court of law may order the lifting of the above-mentioned stay and the immediate sale, in the same insolvency procedure, of the asset that is the object of the security, provided that the proceeding expenses are paid.
If security is enforced outside of formal proceedings on the basis of a relevant contractual authorization, Swiss law does not establish major obstacles for secured creditors. A robust and clear authorization language is particularly important for enforcement by way of appropriation, though. In any event, appropriation without proper accounting of the value of the relevant collateral against the secured obligations is prohibited under Swiss law. Secured creditors could become liable to the provider of the security if the security is not being enforced in good faith. To our knowledge, such proceedings are very exceptional, though.
Enforcing security through debt enforcement proceedings is only available for pledge type of security interests and requires the involvement of the authorities. This may significantly slow down the enforcement process. Also, the statutory default enforcement route of a public auction does often yield a depressed result below the fair value of the collateral. Secured creditors, thus, have a preference for sales outside of an auction process which generally requires the consent of all relevant parties.
In a bankruptcy context, secured creditors benefitting from a regular pledge type of security interest are under a general obligation to hand in the collateral to the insolvency practitioner who would then sell the relevant asset. This results in a significant delay. Exceptions apply (i) for book-entry / intermediated securities with a value which may be determined objectively and (ii) under insolvency regimes for certain regulated entities (such as banks). Again, the standard enforcement route is a public auction but sales outside of an auction process are permissible with the consent of the relevant parties. No obligation to hand in the collateral exists for secured parties benefitting from a transfer or assignment for security purposes or from an irregular pledge.
In a composition proceeding, there would not be an obligation to hand in the collateral to the insolvency practitioner. However, during the moratorium phase enforcement in the collateral would generally not be permissible. Again, the exceptions referred to above apply.
We should mention as a general note that on March 2018, the new Israeli Insolvency and Economic Rehabilitation law, 2018 (the "Insolvency law") has been approved. The provisions of the Insolvency Law will generally become affective with respect to proceedings commenced or collaterals registered 18 months after the legislation. Therefore, the provisions of the Insolvency Law shall not apply in the present Q&A period.
However, as the new Insolvency Law effectively replaces and/or amends the entire existing Israeli insolvency regime, we would include a general note at the end of each chapter where the new Insolvency Law materially differs from the existing laws. In general, the provisions relating to the creation and perfection of collaterals remains unchanged under the new Insolvency Law.
Self-foreclosure of collaterals permitted under the Israeli law in very limited circumstances, only by Israeli banks or financial institutions, and only with respect to certain tangible assets and traded securities, deposited with such institutions.
Any other foreclosure of collaterals will be reported and supervised by the court, execution office or court officer, depends on the type of proceedings and the assets value/debt amount ratio:
(a) Receivership – the Law Enforcement and Collection System Authority appoints receivers and they will report to it. A receiver may be required to deposit a guarantee to secure performance of his duties.
(b) Liquidation – a creditor is entitled to foreclose his pledge independently from the insolvency proceeding, subject to appropriate notices to the debtor trustee or the liquidation court. However where the value of the collateral exceeds the debt, the court may supervise the foreclosure process and may even get involved where there is a concern that the process will not protect the residual value of the collateral, for example, where the creditor makes a "fire sale" that may generate lower values.
(c) Recovery and Re-organization – In the event of a recovery arrangement in accordance with Section 350 of the Companies Law, 1999 (the "Companies Law", and an "Arrangement", in short – a court-run settle¬ment between a company and its creditors and sharehold¬ers, similar in essence to U.S. "Chapter 11" proceed¬ings), there is no automatic stay ("freezing") order, and the court may grant such a stay order if the court is satisfied that a stay of proceedings would help facilitate the preparation or approval of a recovery plan, for a period of up to nine months (which may be extended).
When such stay order is granted, a secured creditor must apply to the court in order to realize an asset charged in its favor, and according to the provisions of the Companies Law the court shall permit such realization if: (a) it is satisfied that the creditor's rights in the asset have not been properly protected, or (b) the realization of the charged asset is not likely to have an adverse effect on the possibility to recovery of the company.
Furthermore, a court may, under certain circumstances, allow the trustee to create additional pledges in any rank of seniority including on pledged assets, or even to sell such pledged assets without the secured creditor's consent, all provided that such creditor's rights are properly secured and that such action is essential for the Arrangement proceedings.
The new Insolvency Law generally maintains the previously mentioned principles, but subjects the consideration from foreclosure of the floating charge to a 75% limit of recovery in favor of the secured creditor. To the extent any debt remaining, it shall be treated as unsecured debt.
There are three methods by which a secured creditor may enforce its security:
- A sale of the secured property through appointment of a receiver out of court pursuant to the terms of the security documents.
- A sale of the secured property pursuant to statutory provisions, where available, governing a sale (for example, a statutory sale of mortgaged real property under the Conveyancing Act 1983).
- Commencing debt recovery proceedings against the creditor, and on procuring a judgment, obtaining an order for the sale of the secured property. Such a process is only relevant where the security documents for the debt do not allow for a sale of the secured property or where the security is faulty.
The effect of registration of security interests on priorities is an important practical issue. The date of registration of the security governs the order of priority for security interests capable of registration. Mortgages and charges over immovable property in Bermuda must be registered with the Registrar General. Fixed charges and floating charges over moveable property can be registered with the Registrar of Companies, as can a charge on assets outside of Bermuda. Specific statutory registration rules apply to mortgages over certain other moveable assets such as ships and aircraft.
The extent of the rights and powers of a secured creditor arising on enforcement will depend on the terms of the agreement creating the security and, to a lesser extent, applicable statute, and therefore can vary considerably. However, in most instances it is not necessary for a secured creditor to initiate legal proceedings (i.e., go to Court) before enforcement provided that it is clear that an event of default has occurred under the terms of the security instrument which entitles the secured creditor to take immediate enforcement action.
Most successful challenges to enforcement action arise due to one or more deficiency in the procedure followed by the secured creditor (such as notice of default not having been properly delivered, insufficient time having been given for payment and / or a failure to execute the instrument of appointment in accordance with the terms of the security and finance documents).
Therefore, in order to reduce the risk of a challenge by the obligor, a secured creditor that wishes to enforce should take care to ensure that the enforcement steps required by the security and finance documents are followed precisely.
If a lender has security over a particular asset or group of assets (for example, the company's real estate or its shares), they will often enforce their security by appointing a receiver (usually an insolvency practitioner) over the asset. The appointment can be made without court involvement provided that the security document has been properly drafted and executed. Following the appointment, the receiver will have power to collect in any income from the asset and to sell it.
A lender may also exercise their own power of sale if they have a legal mortgage or if the terms of the security document otherwise permit. A receiver or a lender making a sale is obliged to get the best price reasonably obtainable in the circumstances but no public auction is required (unless required by the security document). One advantage of appointing a receiver is that the lender is not usually responsible for the receiver's conduct.
If a lender has security over all or substantially all of the company's assets (including a floating charge), the lender would usually have a “qualifying floating charge” (or QFC). Once their security becomes enforceable, a QFC holder may appoint an administrator (usually an insolvency practitioner) over the company quickly and easily without going to court. This is a popular enforcement option as it creates a moratorium on other enforcement action against the company (see also Question 7) and potentially allows a sale of the business as a going concern, thereby maximising value.
Except for the security trust (which could contemplate an extrajudicial foreclosure procedure), enforcement of all these collateral structures needs to take place by means of a judicial procedure. As in many other jurisdictions, judicial enforcement tends to be costly and lengthy. No self-help remedies are available in Mexico.
First of all, it shall be demonstrated that the credit complies with the mandatory provisions that the applicable Act requires to establish the security. Once the credit is qualified as a claim with special preference, in order to execute the encumbrance, the credit will have to follow the insolvency rules. It means that, if before the declaration of the insolvency proceeding (“DIP”) the creditor had initiated an execution, the creditor could only continue it, if the encumbered asset is declared as an asset which is not necessary to continue with the debtor’s professional or business activity (art. 56 SIA). On the other hand, if the asset is declared as a necessary asset to continue the debtor’s professional or business activity, the creditor shall wait to the approval of a composition or the liquidation phase is commenced.
By contrast, if after the DIP the creditor has not initiated an execution, the creditor will be able to initiate an execution upon approval of a composition where the credit is not affected by it or once it has elapsed 1 year since the DIP without the liquidation phase was commenced. Perhaps, this execution will be developed in the same commercial court where is processing the Insolvency proceeding (art. 56 SIA).
As a conclusion, a creditor with a preference claim has to bear the same timing (phases) as the others creditors. Nevertheless, these creditors will be satisfied by the liquidation of the encumbered asset either in the insolvency proceeding or in an execution proceeding.
As a general principal, creditors have to file enforcement proceedings in court to enforce their securities. The exception is this regard is the enforcement of financial collateral arrangements, which can be enforced by the creditor directly once there is a breach by the debtor. As a matter of rule, enforcement proceedings in Portugal are expedite, particularly when there is already a security granted. If a mortgage is enforced and there are no incidents, the proceedings may take only 6 months from beginning to end.