What practical issues do secured creditors face in enforcing their security (e.g. timing issues, requirement for court involvement)?

Restructuring & Insolvency (3rd edition)

Canada Small Flag Canada

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:

i) 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

ii) the waiver by the debtor(s) of such ten (10) day notice period.

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).

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).

Nothwithstanding the foregoing, if a debtor company is successful in obtaining an initial order pursuant to the CCAA (discussed at greater length in question 8), secured creditors are stayed from enforcing their security as against such debtor.

Québec

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:

(i) 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;

(ii) 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);

(iii) 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

(iv) 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.

British Virgin Islands Small Flag 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 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 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.

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

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 an asset.

Every mortgage, charge, or pledge contains an implied power of sale, and this may be exercised whether or not a receiver is appointed. There is also, for example, a power of sale implied by section 66(5)(a) of the BVI Business Companies Act 2004 where a mortgage or charge is granted over shares in a BVI company and the mortgage or charge is governed by BVI law.

In practice, the security documents will invariably include an express contractual power of sale, and it is the contractual power of sale which is the normal basis of exercise. . 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.

The holder of an equitable mortgage has the same remedies as the holder of a legal mortgage, save that; 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; and. 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.

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. The holder of a security interest is entitled to pursue all of its remedies concurrently or consecutively.

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 intact and they are able to enforce that security as normal. Additionally, the secured creditor can 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.

Cayman Islands Small Flag Cayman Islands

A secured creditor may enforce its security rights in accordance with the terms of the relevant security document(s) without reference to the Cayman Islands Grand Court (the "Cayman Court"). These rights are unaffected by the commencement of Cayman Islands law insolvency proceedings in respect of the debtor company, as the automatic stay that applies in provisional and official liquidation does not prevent the enforcement of security.

A receiver appointed pursuant to a security document is not subject to the supervision of the Cayman Court and will owe their primary duty to the secured creditor appointing them, and not to the debtor company or the general body of creditors.

China Small Flag China

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. But opinions are divided as to whether an unregistered mortgage on immovable property can frustrate the claim of an ordinary creditor in bankruptcy proceedings.

Denmark Small Flag Denmark

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.

France Small Flag France

N/A

Germany Small Flag Germany

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).

Public auction

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.

Freehand sale

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.

Bermuda Small Flag Bermuda

The creditor-friendly security enforcement regime in Bermuda typically limits the practical barriers to enforcement. Secured creditors are free to avail themselves of all out of court enforcement mechanisms to which they are entitled notwithstanding the commencement of insolvency proceedings. Equally, where court proceedings are required for enforcement, the Court will readily grant permission to a secured creditor to proceed notwithstanding the automatic stay of proceedings on the appointment of a liquidator.

Guernsey Small Flag Guernsey

Enforcement of Bonds

Bonds are classified as movable property in Guernsey and do not confer any legal title in the immovable property owned by the debtor at the date the bond is registered. However, any successor in title of that immovable property is, by virtue of the bond's prior registration, on notice of the creditor's claim and becomes guarantor to the creditor of the bond. Therefore, the successor will be made party to any enforcement proceedings to either make good the value of the claim or surrender the property to the enforcement proceedings.

However, any successor in title who was a bona fide purchaser for value at arm's length more than three years before commencement of proceedings can limit his liability to the price paid by him for the property to the defaulting debtor. In addition, a successor in title to immovable property acquired by the debtor after the bond's registration date is not held to be on notice and is, therefore, not subject to the rule which would otherwise make him guarantor.

Saise Procedure

The saisie process is rooted in ancient customary law and has developed over several hundred years. The procedure is set out in the Saisie Procedure (Simplification) (Bailiwick) Order, 1952 (1952 Order) which simplified the saisie procedure but did not change the underlying substantive law.

Saisie relates to realty (i.e. real estate) and is a procedure whereby the realty of an insolvent person or entity may be distributed between two or more creditors, who would otherwise be in competition. Saisie proceedings only concern realty, the appropriate procedure for personalty (i.e. moveable property) in Guernsey being désastre.

If a creditor commences or joins saisie proceedings, the creditor's right to be paid transfers from the debtor to the realty. Regardless of the extent to which the debt is satisfied, the creditor has no further remedy against the debtor and, in particular, no recourse against the debtor's personalty. In contrast, désastre proceedings do not extinguish recourse to any realty belonging to the debtor.

The saisie procedure involves the following three distinct stages:

  • Preliminary Vesting Order;
  • Interim Vesting Order; and
  • Final Vesting Order.

The broad effect of the process is to marshal all claims against a debtor's realty and allow each creditor, staring with lowest ranked, to elect if they wish to have the realty vested in them on the condition that they pay in full all higher ranking creditors. If they do not do so, they renounce any claim over the realty. The creditor who chooses to accept the realty is granted the final vesting order which acts as a conveyance of the property to the creditor. If the vesting results in a windfall to the creditor above its claim, it is entitled to retain the sum rather than repay to the debtor.

The saisie procedure contained in the 1952 Order can generally be completed within approximately six months. The process is court driven and places a substantive burden on the creditor that initiates it.

Enforcement of Security Interest Agreements

The Security Interests Law governs the manner in which security is created over Guernsey situs intangible moveable property (including shares but excluding leases) and the way in which such security may be enforced.

Prior to enforcement a secured party should check any factors which could affect the marketability/transferability of the collateral. This will also inform the methodology for valuation and manner of sale of the collateral.

A power of sale (or, in the case of a limited group of collateral e.g. money, application) is the only means of enforcing a security interest contemplated by the Security Interests Law. The ability of a secured party to enforce its security other than by exercising the statutory power of sale is untested in the Guernsey courts.

Quasi-enforcement: exercising rights under the shares/other security to take control

Where share security has been taken, such quasi enforcement may involve using voting rights under the share security to appoint new directors to the subject company, so that the new directors can cause the subject company to use whatever rights are available to it (as the case may be as a parent company) to procure a sale of the assets or underlying assets.

Commonly the security agreement will provide that voting rights are exercisable by the secured party after an event of default (or similar contractual trigger event). Those voting rights may be used to, amongst other things, replace a board of directors, amend articles or voluntarily liquidate a company.

It is worth bearing in mind that this action may be susceptible to legal challenge if the exercise by the secured party of its contractual rights enabling it to take control of a company can be characterised as an enforcement of security other than by exercising its power of sale under the Security Interests Law (and which may accordingly contravene Guernsey law) rather than a straightforward exercise of a contractual right.

There is very little if any Guernsey case law in the above areas, and none at all on the quasi-enforcement addressed above.

Guernsey security documents do not contain receivership provisions as receivers are not part of Guernsey law (save in respect of cellular companies).

Ireland Small Flag Ireland

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.

Jersey Small Flag Jersey

Tangible movables

  1. Enforcement of rights in tangible movables over which a security interest is created by pledge will be enforced under the terms of the pledge agreement and are not subject to statutory governance.
  2. Intangible movables

  3. The SIL provides for enforcement against collateral over which security has been given by way of:

    (i) appropriation (literally taking the collateral);

    (ii) sale to the secured party or a third party;

    (iii) taking ancillary actions such as:

    (a) taking control or possession of the collateral;

    (b) exercising rights arising from or in connection with the collateral; or

    (c) instructing any person who has an obligation in respect of the collateral to carry out that obligation; or

    (iv) taking any other step provided for in the security agreement which is not in conflict with the law. (SIL Art.43)

  4. Although there is no authority on the point, it is expected that the ancillary actions identified above must be exercised in good faith for the purpose of effecting the appropriation or sale of the collateral.
  5. The powers of enforcement can only be exercised once a notice of an event of default has been served in respect of an act or omission identified in the security interest agreement as an event of default.
  6. The SIL provides that save where the security interest agreement provides otherwise, the power of enforcement should only be exercised pursuant to an order of the Court. It is industry standard practice to exclude any obligation to seek an order of the Court in all security interest agreements.
  7. It follows that once a notice of an event of default has been delivered, the secured party can enforce against the collateral without any further reference to the grantor. An exception to this rule is that where a third party has created a new security interest by registration in the 21 days prior to enforcement, 14 days' notice must be given to that new secured party of the intention to enforce. (SIL Art.44)
  8. Post-enforcement the secured party is obliged to serve an account within 14 days after appropriation or sale of the collateral on the grantor and any inferior secured interest holders setting out:

    (i) the gross value of the value realized by appropriation or sale;

    (ii) the secured party's costs in respect of the appropriation or sale;

    (iii) the secured party's costs of enforcement' the net value of the collateral or the collateral; and

    (iv) the surplus or deficit arising. (SIL Art.48)

  9. The secured party is obliged to distribute any surplus to those holding inferior security interests and then to the grantor. (SIL Art.49)
  10. The Royal Court has a jurisdiction to make orders in support of or to assist an enforcing secured party. The Royal Court has also found that it can assist security trustees by making orders blessing transactions in advance to avoid security trustees, who have limited economic interest in the secured lending transaction, being vulnerable to actions by grantors post enforcement.
  11. On sale or appropriation the secured party owes a duty to the grantor to:

    (i) take all reasonable commercial steps to achieve fair value;

    (ii) act in a reasonable commercial manner; and

    (iii) in the case of a sale, contract on reasonably commercial terms. (SIL Art.46)

  12. There is no authority on the application of these duties but at the time of writing judgment is awaited on the first enforcement to be considered by the Royal Court.
  13. Enforcement of immovable property interests

  14. The enforcement of a secured party's rights in respect of obligations secured against immovable property is by way of a dégrèvement process.
  15. The process commences by a secured party obtaining judgment against the grantor, usually by way of a simple summons, although more complex pleadings may be ordered when the claim predicating enforcement is contested on substantial grounds.
  16. If the judgment is not satisfied within 1 month the secured party issues an application for a final demand to be issued by the Royal Court. This demand is known as the Acte Viscomte chargé d'écrire.
  17. If the final demand is not satisfied the matter will be listed before the Royal Court who will in the absence of any procedural irregularity, adjudge the grantors' property to be renounced and appoint to attournés to conduct the dégrèvement process, and to draw up lists of creditors and other parties interested in the secured property.
  18. The process at the dégrèvement hearing is as follows:

    (i) Unsecured creditors as a single body are called first and asked if they want to take the immovable property. If they do take the property they do so subject to having to pay off in full all senior creditors;

    (ii) If the unsecured creditors do not take, then each secured creditors is called in reverse chronological order according to the date of creation of their hypothec from the most recent through to the creditor with first-ranking security;

    (iii) Each creditor, when called, can either elect to "take" the grantor's immovable property subject to paying off all prior (i.e. earlier in time) obligations and the attournés fees or to renounce their claim and decline to "take" the immovable property;

    (iv) On "taking" the immovable property the creditor who takes, then goes back to court to be confirmed as the new owner of the immovable property by the court, at which point it will be free of all encumbrances and that creditor can keep it or sell it; and

    (v) The creditor who takes the immovable property has no obligation to account to the grantor for any value in the property over and above what that creditor is owed or has paid to other creditors: they keep all equity.

  19. There has not been a challenge to the dégrèvement process on human rights’ grounds in respect of the right of the creditor who takes the property to keep any surplus.
  20. A parallel process known as a realisation can be commenced at the same time as the adjudication of renunciation to collect in and sell all movable property of the grantor with any recovery being applied to increase the pot available to the creditor who takes the property.

Mexico Small Flag Mexico

Enforcing collateral can be a painful exercise in Mexico. Excess formalities and indifference or incompetence from the judiciary make it a hard endeavor.

Once a judgment that declares the debtor en concurso is entered, attachment and foreclosure on the debtor’s assets are generally stayed during the reorganization stage. Secured creditor may begin or continue foreclosing on assets that, in the opinion of the judge and the conciliator, are not essential for the ordinary course of debtor’s business.

Peru Small Flag Peru

In Peru, any security interest, whether on movable or immovable property, may be enforced in court or out of court, as the case may be. However, court proceedings to enforce such securities not only entail to spend lengthy years but also have unpredictable outcomes. Additionally, court proceedings to enforce a security interest can be filed provided that it has been perfected by completing all formalities established by law and that the secured obligation is included in the same document or in any other enforceable deed.

Poland Small Flag Poland

Entering the security into the respective register, in majority of situations, is executed within judicial proceedings, hence the biggest practical issue is the necessity to involve the Court in order to create (establish) a security. That is the reason why establishing the security may take a lot of time. Moreover application for entering security into the respective register submitted to the Court, may be accompanied by application for granting interim injunction for the period of judicial proceeding, which also affects duration of proceedings.

In particular legal circumstances it is also possible to enforce security within extrajudicial proceedings, e.g. in the case of a notarial deed in which the debtor submits to enforcement, or in the case of taking over ownership of the pledged property.

Singapore Small Flag Singapore

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.

Sweden Small Flag Sweden

Secured creditors can exercise their rights and enforce a pledge over property even during bankruptcy or reorganization proceedings. A floating charge, however, being a general security may normally not be exercised once reorganization protection has been granted or if bankruptcy proceedings are commenced.

Enforcement of a real estate mortgage or a floating charge is done by application to the Swedish Enforcement Authority (Sw. Kronofogdemyndigheten) and requires a formal procedure which can be somewhat time consuming.

Enforcement of a pledge over specific property which is held by the pledge holder is more straight forward, and the procedure for this is normally regulated in the security agreement or rules otherwise provided for in the Swedish Commercial Act.

Switzerland Small Flag Switzerland

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.

Spain Small Flag Spain

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.

United States Small Flag United States

As discussed below, once a party granting a security interest (i.e., the debtor) files a bankruptcy case under the U.S. Bankruptcy Code (the “Code”), a statutory automatic stay is immediately imposed as a matter of law which prohibits creditors from taking actions to enforce their security interests or to exercise control over the property in which they may claim a security interest. In order to obtain modification of the automatic stay, a secured creditor must obtain bankruptcy court approval.

United Kingdom Small Flag United Kingdom

Enforcement options depend on the nature of the security and the provisions of the security document, amongst other matters.

Receivership: A secured creditor may enforce its security by appointing a receiver (usually an insolvency practitioner) over the specific secured asset(s), in accordance with the terms of the security document. The appointment can be made without court involvement. Following the appointment, the receiver will have broad powers specified in the security document, including to collect in any income from the asset and to sell it. (Administrative receivership - which involves the appointment of an insolvency practitioner over the whole of the company’s property - is now available in only limited circumstances.)

Power of sale: A creditor may also exercise its power of sale under the security document (if they have a legal mortgage or if the terms of the security document otherwise permit). This permits the creditor to sell the secured asset, without needing to apply to court, and use the proceeds to settle the secured liabilities. A receiver or a creditor selling secured assets is obliged to get the best price reasonably obtainable in the circumstances; 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.

Administration: If a creditor has security over all or substantially all of the company's assets (including a floating charge), the creditor would usually have a “qualifying floating charge” (or QFC). Once their security becomes enforceable, a QFC holder may appoint an administrator (a licensed 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.

Appropriation: Where the security constitutes a “financial collateral arrangement”, under the Financial Collateral Arrangements (No. 2) Regulations 2003, the enforcement option of appropriation is available. “Financial collateral” includes cash and financial instruments (including shares); the security arrangement must constitute the requisite degree of “possession or control” to qualify as a “financial collateral arrangement”. The remedy of appropriation permits the secured creditor to appropriate (essentially, take possession of) the financial collateral, without applying to court. The power depends on the terms of the security document. If the value of the financial collateral appropriated exceeds the secured debt, the secured creditor must account to the security provider for the excess.

Foreclosure: In theory, the possibility of foreclosure constitutes an additional enforcement option, but this is uncommon in practice for various reasons.

Hungary Small Flag Hungary

(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.

Belgium Small Flag Belgium

- Mortgage

Under Belgian law, a mortgage over real estate is enforced by a sale of the secured property. In order to enforce the mortgage, the mortgagee will need to have an executable title, i.e. enforceable court decision or notarised deed. The sale of the property needs to occur via a public auction under the supervision of a court appointed notary which makes the procedure rather onerous and lengthy.

- Financial collateral

Provided the security is properly constituted, there is no notification requirement or prior authorisation of a court procedure for the enforcement of a pledge over financial collateral.

- Share pledge

Pursuant to the new company code, the articles of association of a private limited liability company (BV/SRL) may provide for the free transfer of shares doing away with the old requirement of amending the articles of the pledgor before grating the share pledge.

- Right of pledge

The pledgee is entitled, in the event of non-payment, to enforce its security by selling or renting the pledged goods in whole or in part in order to settle the claim. The execution must be carried out in good faith and in an economically responsible manner. The pledgee cannot limit or exclude his liability in this regard. The parties can agree on the execution method at the conclusion of the pledge agreement or at a later date.

If the pledgee is in default, the pledgee is entitled to set off a debt comparison with the guaranteed claim and he must refund the balance to the pledgee.

- Pledged claims

Unless otherwise agreed, the pledgee is authorized to demand compliance with the pledged claim, both in and out of court. The pledgee can thereby exercise all ancillary rights of the claim. The pledgee settles the amounts collected on the guaranteed claim when it is due and pays the balance to the pledger.

- Retention of title

The transfer of ownership will only take place after the full purchase price has been paid. The secured creditor remains therefor the owner.

Israel Small Flag Israel

Currently (May 2019), the issue of involvement and supervision on the process of collateral realization by a secured creditor is not sufficiently governed by the Legislator. However, the Supreme Court has specified the principles to be followed by a secured creditor when realizing their collateral, and has specified guidelines for supervision of collateral realization.

Thus, the Supreme Court ruled that a secured creditor wishing to realize their collateral separately from the insolvency proceedings, must report to the Officer or to the Official Receiver in conformity with statutory provisions.

It was also stipulated, that in general, if the value of the pledged asset is lower than the debt owed to the secured creditor, there is no need for prolonged Court supervision over the realization proceeding. However, if the value of the pledged asset exceeds the debt amount, Court supervision would be generally applied (through the Officer). The goal of such supervision is to protect the debtor's interest and that of unsecured creditors from abuse of the power of the secured creditor.

It was further stipulated that in exceptional cases, such as deliberate avoidance by a secured creditor of conducting realization proceedings or significant delay in such proceedings, the Court is authorized to apply stricter supervision, even instruct the joint realization of collateral – by the Officer and by the Receiver on behalf of the secured creditor, but only in truly exceptional cases.

Note, that in recovery proceedings, unlike in dissolution proceedings, the Officer may use or even sell a pledged asset (subject to consent of the secured creditor and to Court approval) provided that such use or sale is required for company recovery and appropriate protection has been granted to the secured creditor.

In September 2019, the Insolvency and Economic Recovery law, 2018 (hereinafter: "the Insolvency law") will become effective – a new codification which consolidates all insolvency legislation, which is currently governed by multiple laws.

The Insolvency law posits the economic rehabilitation of the debtor as a primary value. For this reason, the Insolvency Law stipulates restrictions on collateral realization of debtor assets, in order to secure this primary value.

Thus, for example, the Insolvency Law stipulates that if the Court instructed that the corporation will be operated in an attempt to reach its economic recovery – secured creditors may only realize the pledged asset subject to the Court approval. The Insolvency law also governs the procedure whereby a pledged asset may be realized, after permission was granted by the Court. The new law further stipulates that the Officer may, at any time, redeem the pledged asset and that such redemption would be subject to provisions of the Pledges Law.

Moreover, the new Insolvency Law stipulates that a floating pledge would only apply to assets held by the company upon issue of the order to initiate proceedings, and that a creditor secured by a floating pledge would be repaid out of company assets at up to 75% of the proceeds from realization.

Romania Small Flag Romania

As a rule, once the insolvency procedure has been opened, all judicial, extrajudicial and individual enforcement measures are stayed.

Secured creditors may initiate or continue the enforcement proceeding against those persons who are co-guarantors or personal guarantors for the debtor.

A secured creditor may request that he be granted appropriate protective measures if there is a risk of:

a) The reduction of the value of the collateral or the existence of a real danger that it will suffer an appreciable reduction in value;

b) The reduction of the value of the secured part of a lower-ranking debt, as a result of the accumulation of interests, increases and penalties of any kind on a secured senior claim;

c) The lack of insurance of the object of the security against the risk of destruction or damage.

Updated: June 5, 2019