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Trends and regulatory climate
Trends What is the current state of the lending market in your jurisdiction and have any new trends emerged over the last 12 months? Austria
According to the Austrian National Bank, the Austrian lending market amounted to €758 billion in 2015, having decreased from €774 billion in 2014 (see www.oenb.at/isaweb/report.do?lang=DE&report=3.6.1).
Due to the latest economic and banking crisis, it is difficult for small and medium-sized companies to finance new projects through financial institutions. As an emerging alternative to standard financing, different forms of crowdfunding have become more attractive. Crowdfunding – regulated by the Alternative Finance Act – allows the public to finance projects, mostly via the Internet, through:
- monetary contributions in exchange for rewards;
- product pre-ordering;
- lending; and
Crowdfunding is becoming an increasingly popular way to connect entrepreneurs in need of financing with investors. However, under the Alternative Finance Act, the entrepreneur in need of financing can issue alternative financial instruments only if:
- the total amount of publicly available financial instruments does not exceed €1.5 million; and
- the investor is limited to a maximum contribution of €5,000 over 12 months (unless the investor is a professional investor or is not deemed a ‘consumer’ under the Consumer Protection Act).
However, the main trends in the Austrian lending market over the past years reflect the trends in the lending markets throughout the European Union – namely:
- new Loan Market Association templates;
- the applicability of the Foreign Account Tax Compliance Act – the US federal law requiring foreign financial institutions to report to the US Internal Revenue Service about their US clients (among other things); and
- the ongoing implementation of the Third Basel Accord, which is intended to strengthen bank capital requirements.
Regulatory activity Is secured lending a regulated activity in your jurisdiction? The conclusion of money-lending agreements and the extension of monetary loans (ie, lending business) qualifies as ‘banking business’ in accordance with Section 1(3) of the Banking Act. ‘Lending business’ – which includes both secured and unsecured lending – is a regulated activity in Austria if performed on a commercial basis. Therefore, under Section 4 of the Banking Act, an Austrian banking licence or an ‘EU passport’ (ie, a banking licence of another EU member state) is required. However, the Financial Market Authority is rather strict when it comes to determining whether an activity is performed on a commercial basis. Therefore, it is possible that even the granting of a single loan may qualify as ‘commercial activity’ and require a banking licence.
Are there any specific regulatory issues which a prospective borrower should consider when arranging or entering into a secured loan facility? In general, a lender must have a banking licence or an EU passport if it grants loans on a commercial basis. Borrowers are not subject to the licensing requirement – however, if a borrower takes a loan from a non-bank this could constitute ‘deposit business’, which would require a banking licence.
Are there any specific regulatory issues which a prospective lender should consider when arranging or entering into a secured loan facility? A prospective lender that conducts lending business on a commercial basis must have an Austrian banking licence or an EU passport for banking business. A lender with a banking licence can enter and arrange loan facilities and must comply with the Banking Act and the EU Capital Requirements Regulation (575/2013), among other things. Applicable rules include rating the borrower's creditworthiness and examining whether the borrower's risk of default is at an adequate level in respect of the lender’s risk portfolio.
Lenders entering into a secured loan with consumers must also observe the Consumer Credit Act and the Mortgage and Real Estate Credit Act. These laws require the lender to specifically determine the creditworthiness of the borrower and provide the consumer with detailed information about the loan. Further, they determine the consumer's right of withdrawal and right to early repayment before maturity.
In general, only the arrangement of loan facilities does not qualify as ‘lending business’. According to Section 1(1)(18)(b) of the Banking Act, the arrangement of mortgages or personal loans by real estate agents, personal loan and mortgage brokers and investment advisers is regarded as ‘banking activity’, and therefore triggers the requirement to obtain a respective banking licence. However, under Section 94(75) of the Trade Code, such a licence is not required if the arranger has a trade licence.
Are there plans or proposals for reform or significant changes to the regulatory landscape in this area? Besides the recently adopted EU Anti-money Laundering Directive and Regulation, no significant changes are planned.
The amended anti-money laundering regime implements a risk-based legal framework that aims to counter new threats and achieve consistency across all member states. Among other things, the regime focuses on terrorist financing and imposes heightened customer identification and verification requirements. It also focuses on the promotion of financial stability within the EU internal market by protecting the proper functioning and integrity of its financial systems and economic prosperity, as well as reducing regulatory cross-border complexities.
Structuring a lending transaction
General Who are the active providers of secured finance in your jurisdiction (eg, international banks, local banks or non-bank financial institutions)? In general, international and local banks and local insurance companies provide for secured financing in Austria. It is difficult for other institutions to provide such services due to the licensing requirements.
Is well-established market-standard facility documentation used in your jurisdiction for secured lending transactions? In addition to the Civil Code, the Corporate Code and the Consumer Protection Act affect loan facilities. Therefore, general market-standard documents are rarely used. However, all banks uses their own standardised documentation for lending business (although these documents usually have similar content). For international loan agreements (ie, international syndicated loans), Loan Market Association documentation is mostly used.
Syndication Are syndicated secured loan facilities typical in your jurisdiction? Syndicated loan agreements are common for large investments (eg, infrastructure, large restructuring and financing projects). In terms of risk mitigation and required equity, multiple investors (mostly banks) forming a syndicate will grant loans.
How are syndicated facilities normally structured? Does the law in your jurisdiction allow a facility agent to be appointed to act on behalf of other banking syndicate members? Austrian law provides for two types of syndicated loan. An internal consortium will provide a syndicated loan to a prospective borrower, for which only one bank is the contractual partner. Usually, one of the lenders is appointed as ‘mandated lead arranger’ and will:
- represent the consortium;
- manage the syndicated loan;
- lead the group of investors (ie, lenders); and
- hold the consortium’s security.
A loan granted by an external consortium is different as every participating investor will become a contractual partner of the borrower, with the effect that every lender will receive security.
A syndicate can qualify as a ‘civil law partnership’ if the parties agree to work only on a defined project for a limited period. In general, every lender is then entitled to represent the syndicate under Section 1197 of the Civil Code. However, it is common to provide only the mandated lead arranger with the power to act on behalf of the syndicate (as set out above).
Does the law in your jurisdiction allow security and guarantees to be held on trust by a security trustee for the benefit of the banking syndicate? Austrian law does not recognise the concept of ‘security trustees’. Where security is governed by Austrian law, specific formalities must be observed in order to ensure the validity of the security. An accessory security interest (eg, a surety or pledge) cannot be separated from the underlying loan or the security interest will be extinguished (the same applies in cases of novation). A security trustee can hold accessory security only for his or her share of the loan. It is therefore market practice to include a parallel debt structure for the security trustee concerning security governed by Austrian law. In order not to breach the principle of accessory, a security trustee will have a parallel claim in the entire loan, so that he or she can enforce the security interest for the full amount (and not only his or her part of the claim).
For non-accessory security interests (eg, guarantees), the above is not applicable. As non-accessory and therefore abstract security interests are legally not connected to the loan, a security trustee could hold this kind of security interest without a parallel debt claim, if agreed in the documentation. However, as most loan facilities include accessory and abstract security interests, a parallel debt claim will still be necessary.
Special purpose vehicle financing Is it common in secured finance transactions for special purpose vehicles (SPVs) to be used to hold the assets being financed? Would security generally be given over the shares in the SPV or would lenders require direct asset security? An ‘SPV’ is a legal entity created to fulfil only specific or temporary objectives. Companies often use SPVs to finance large projects without putting the entire undertaking at risk. The SPV purchases and holds the assets and the lenders grant the SPV the loan necessary for the project.
While it is common to structure a financial transaction in this way and to take security over the shares of the SPV, lenders usually also take security over the SPV's assets to avoid structural subordination and third-party creditor access to such assets.
Interest Is interest most commonly calculated by reference to a bank base rate or a market standard variable reference rate (eg, LIBOR, EURIBOR or HIBOR)? If the latter, which is the most commonly used reference rate in your jurisdiction? In general, it is up to the parties to agree on a calculation model and the reference rate. Usually, the main interest rate is calculated by a variable reference rate increased by a margin. The margin depends on the rating of the creditor and the project, while the reference rate normally depends on the currency of the loan. The Euro Interbank Offered Rate (EURIBOR) is the most common reference rate in Austria. For foreign currency loans, a different reference rate is frequently agreed on (eg, the London Interbank Offered Rate for pound sterling loans).
Are there any regulatory restrictions on the rate of interest that can be charged on bank loans? In general, the parties are free to agree on the amount of interest to be paid.
Default interest for consumer loans cannot exceed the agreed interest rate by more than 5 percentage points.
Reference interest rates such as the EURIBOR have recently turned negative. Loan facilities generally state that the overall interest rate to be paid by the borrower will be the respective reference rate increased by the agreed margin. Thus, following a strict interpretation of the loan agreement, the interest rate paid by the borrower could also be negative and the lender could actually get less than the margin or could have to pay the borrower. As this is a major issue for lending business, several court procedures on this subject are pending.
A district court has decided that in negative interest rate cases the borrower must pay at least the agreed margin – even though the reference rate is negative (BGHS Wien 15 C 344/15w). However, the Austrian Supreme Court has not yet ruled on this matter and the district court’s decision may still be overruled.
Apart from this, Austrian law does not foresee any regulations as to the admissible amount of interest. However, certain restrictions apply with respect to interest and consideration for credit arising from the following principles:
In accordance with the civil law morality clauses in the Civil Code and the Usury Law, a contract is partially void if one party exploits, for example, the carelessness, financial situation, inexperience or a similar circumstance of the other party and demands a consideration that is disproportional to the obligation. In addition, the Exploitation Regulation prohibits – among other things – the granting of credit against a disproportionate consideration. A consideration is regarded as ‘disproportionate’ if the total amount to be paid by the borrower (including interest, costs and charges) substantially exceeds the normal market consideration and is not justified by specific circumstances. A violation may lead not only to the possibility of claiming back the disproportionate part of the consideration, but also to imprisonment of up to six months, a maximum fine of €1,450 and revocation of the banking licence. Another limitation arises from the laesio enormis principle, according to which the obligation may not be less than the half the consideration. Though these provisions are not consumer specific, they have a mandatory nature under Austrian law and, as such, can be derogated from by choice of law only in contracts between entrepreneurs (ie, non-consumers).
Use and creation of guarantees Are guarantees used in your jurisdiction? Guarantees are commonly used in Austria and are created by way of an agreement between the guarantor and the beneficiary or by the guarantor’s unilateral declaration. Austrian law recognises two types of guarantee:
- a personal guarantee or surety agreement – the guarantor undertakes to settle certain debtor obligations in the event of default (Section 1346 of the Civil Code). This is an accessory security and is therefore conditional on:
- the debtor's default; and
- a valid and existing underlying debtor obligation; and
- an abstract guarantee – the guarantor promises to pay a certain amount on formal request of the beneficiary under the guarantee (Section 880a of the Civil Code). The guarantor's obligation is abstract and therefore (unlike a personal guarantee) independent from any underlying legal relationship between the beneficiary as creditor and the debtor.
What is the procedure for their creation? In accordance with Section 1346(2) of the Civil Code, guarantees and sureties generally must be issued in writing (ie, signed by the parties). In the case of an abstract guarantee, it must ensure that the guarantor undertakes to pay the amount due under the guarantee unconditionally, irrevocably, on first demand and without raising any defences.
However, Section 1(6) of the Banking Act specifies that guarantees issued by a bank do not have to be in writing, meaning that a personal signature on the document is unnecessary. This exception applies explicitly for banks, due to the fact that issuing a guarantee within the Society for Worldwide Interbank Financial Telecommunication framework would not be considered to be ‘in writing’.
Abstract guarantees are usually issued only for a certain period.
Do any laws affect or restrict the granting or enforceability of guarantees in your jurisdiction (eg, upstream guarantees)? Securities granted for loans by a subsidiary to their parent company or affiliate beneficiary (ie, sidestream or upstream securities) could be void if they qualify as ‘repayments of equity’ restricted by law (Section 82 of the Limited Liability Company Act and Section 52 of the Stock Corporation Act).
Shareholders can receive only the company’s profit; the equity must not be repaid to the shareholders or third parties. Payments from the company to its shareholders referring to any kind of contract (eg, lease agreements) which are not ‘at arm's length’ qualify as repayments of equity. Payments to third parties that are made only because of a shareholder's order are also considered repayments of equity if they are not at arm's length (eg, if a guarantee is issued for the shareholder's benefit).
Therefore, guarantees or surety agreements and all other forms of security interest within a group of companies to a shareholder or to subsidiaries of the shareholder may be granted only at arm's length. ‘At arm's length’ means that the guarantor would have concluded the same deal with anyone else on the same terms.
Subordination and priority Describe the most common methods of structuring the priority of debts and security. Debts are structured in the following layers, starting with the lowest in terms of payment priority in insolvency proceedings:
- hybrid (eg, convertible bonds);
- subordinated (ie, junior) debt (eg, subordinated bonds);
- senior debt (eg, unsecured corporate bonds); and
- senior secured debt (eg, secured bank loans).
A loan can be granted on security in rem (eg, in a mortgage or pledge) or in personam.
In general, mortgages and pledges are valid only if the underlying contract is also valid. The property which is mortgaged or pledged must be specified and the obligation for which the property is pledged or mortgaged must be sufficiently determined in the contract on which the mortgage or pledge is based. This gives creditors the right to obtain satisfaction out of the property before all other creditors of the property owner. In the case of insolvency, the right to obtain satisfaction follows a chronological order.
Security in personam consists of an obligation of a third party other than the borrower. All creditors are treated equally, meaning that no priority exists among them. Insolvency creditors will only obtain satisfaction proportionally.
Documentary taxes and stamp duty Are any taxes, stamp duty or other fees payable on the granting of a loan, guarantee or security interest, or on its enforcement? Stamp duty is determined in the Stamp Duty Act and follows a strict civil approach. Stamp duty is levied on various legal transactions concluded in written form physically or electronically (eg, via email). In general, it is not the legal transaction as such that triggers stamp duty, but rather the written instrument executed to document such transaction (with a few exceptions). Even legal documents executed abroad can be subject to Austrian stamp duty. Stamp duty is levied either when both parties to an agreement are Austrian residents or when the written document evidencing the transaction is brought to Austria in its original form or in the form of a notarised copy, provided that;
- the legal transaction has legal effect in Austria; or
- a legal obligation is assumed under the legal document or will be performed in Austria.
If – based on the legal instrument concerned – another legally binding action will be undertaken in Austria or use is made of the document in Austria before government authorities or courts, stamp duty will also be levied.
No taxes or stamp duty will apply when granting loans or guarantees. However, banks charge internal fees for granting loans, guarantees and other security interests.
For surety agreements and mortgages not linked to loans, stamp duty at the rate of 1% will apply. For assignments not linked to loans, stamp duty at the rate of 0.8% will apply.
Further, notary fees are payable with respect to real estate and the creation of mortgages, which must be notarised for registration and will depend on the transaction value. In addition, the registration of a mortgage in the Land Register will incur a registration fee of 1.1% of the mortgage.
Governing law Is it more common for local law to govern the terms of the facility documentation or is the law of another jurisdiction often elected by the parties (eg, English law or New York law)? As a general rule, the applicable governing law is often linked to the financial institution granting the loan. For consumer loans, it is prohibited to deviate from the law of the country where the consumer is located if the other jurisdiction has a lower level of consumer protection (EU Regulation 593/2008 and the Consumer Protection Act).
While it is common to agree on a choice of law other than Austrian in cases of international transactions – such as UK law for loan market associations – it is unusual to choose US law for any such transaction.
Restrictions Are there any restrictions on the making of loans by foreign lenders or the granting of security or guarantees to foreign lenders? There are no explicit rules for the granting of loans by foreign lenders or the granting of securities or guarantees to foreign lenders. Thus, the banking licence requirements – as set out above – apply in these cases. An exception may apply only in cases of reverse solicitation, which must be assessed on a case-by-case basis.
Are there any exchange controls that restrict payments to a foreign lender under a security document, guarantee or loan agreement? In practice, there are no restrictions on moving capital or making payments abroad. However, aaccording to the Foreign Exchange Act and the related regulations, foreign lenders must submit information about the specified loan facilities to the National Bank on a regular basis. However, no further exchange controls restricting payments to foreign lenders under a security document, guarantee or loan agreement exist.
Security – general
Security agreements Is it possible to create a security interest over all assets of an entity? If so, would a single security agreement suffice or is a separate agreement required for each type of asset? In general, the specialty principle for security in rem prevails in Austria, which means that a security interest over all assets of an entity is inadmissible. Security can be granted only over individual assets. Therefore, each asset subject to a security interest must be included in the security agreement individually and perfection is required for each asset individually. The shares of a company may be subject to a security interest, whereas the company assets as a whole cannot be subject to security in rem. It is possible to grant security over more than one asset in a single security agreement, but perfection is required for each asset individually.
According to Austrian law, the dead pledge principle applies to movable assets. This is the appropriate perfection mode as no pledge register exists in Austria. A pledge is valid only when the property to be pledged is physically delivered to the pledgee. A pledge may be effected by declaration (ie, by attaching plates, marks or other signs on the assets publicly evidencing the pledge) only when physical delivery is impossible or unsuitable.
A pledge over receivables or rights can be created either by notifying the debtor or by attaching appropriate markings on the debtor's account that clearly show when and in whose favour the pledge was made. Austrian law and court rulings are strict on these requirements.
For immovable assets, the security agreement must be in writing and notarised in order to register a mortgage in the Land Register.
Release of security What are the formalities for releasing security over the most common forms of assets? Securities automatically cease to exist on full and complete satisfaction of the secured obligation. However, under certain conditions the securities must be released when the security contract expires or the parties agree to release the security. Further, if a loan is novated any accessory security interest will be extinguished.
However, if the creation of the pledge requires a physical transfer of the assets to be effected, these assets must be returned to the former pledgor on discharge of the secured debt. All signs used to perfect a pledge that are unsuitable for physical transfer must be removed.
A mortgage exists for as long as it is registered in the Land Register, despite fulfilment of the secured obligations. On fulfilment of the secured obligations, the lender must issue a cancellation order for the mortgage, which the owner of the mortgaged property must file with the Land Register to deregister the mortgage. From the moment of deregistration, the mortgage ceases to exist.
Asset classes used as collateral for security
Real estate Can security be granted over real estate? If so, what are the most common forms of security granted over real estate and what is the procedure? A mortgage is the only form of security over real estate. A ‘mortgage’ is the right granted to a creditor concerning a debt to obtain preferential satisfaction from real estate if the debtor does not meet its payment obligations. The existence of a mortgage depends on the actual existence of the underlying debt that the mortgage secures.
To create a mortgage, the mortgagor and the mortgagee must enter into a mortgage deed. In order to be admissible for registration in the Land Register, the signatures on the deed must be notarised. For the mortgage to be effected, it must be registered in Schedule C of the relevant entry in the Land Register. The security right comes into existence on the date of registration. More than one mortgage can be registered over a real estate, but priority is determined by the date of the filings for registration in the Land Register.
A mortgage can be registered for a fixed amount as a ‘regular mortgage’, including a percentage of the interest, an interest on default and a fixed amount of ancillary costs. Alternatively, a mortgage can be registered with a maximum amount for loans granted, warranties or damages as a ‘maximum amount mortgage’. The secured obligations under a maximum amount mortgage can vary over the lifetime of the mortgage, with the amount actually secured being the outstanding amount owed by the debtor from time to time.
In addition, a ‘simultaneous mortgage’ (ie, a mortgage that extends to more than one piece of land) may be granted for certain transactions.
Machinery and equipment Can security be granted over machinery and equipment? If so, what are the most common forms of security granted over this kind of property and what is the procedure? The granting of security over machinery and equipment is admissible in Austria and extremely common. As Austrian law follows the dead pledge principle, court rulings are strict on the requirements for forms of delivery other than physical. However, if it is inappropriate to physically deliver the assets, the pledge can be perfected through a symbolic delivery. In such cases, attaching plates, marks or other signs to the assets to publicly evidence the pledge is permissible.
Receivables Can security be granted over receivables? If so, what are the most common forms of security granted over this kind of property and what is the procedure? Security granted over receivables is common for consumer loans (eg, security over an employee’s salary). These receivables may be secured by a pledge or an assignment. In order to be enforceable, assignments and pledges are subject to:
- annotation of the assignment or pledge in the pledger or assignor’s accounting books; and/or
- notification of the third-party debtor.
Annotation must be made in both the customer account and outstanding receivables lists. Typically, no notice is required in respect of non-affiliated debtors unless an event of default has occurred.
Financial instruments and cash Can security be granted over financial instruments? If so, what are the most common forms of security granted over this kind of property and what is the procedure? Security can be granted only over financial instruments. Financial instruments are tradable assets negotiable in capital markets, such as:
- a cash instrument;
- a derivative instrument;
- evidence of an ownership interest in an entity; and
- a contractual right to receive or deliver cash or another financial instrument.
Securities can be pledged by physical delivery or by notification and instruction to the depository bank to hold the securities as pledged property of the pledge.
The required form to pledge shares of a stock corporation in Austria depends on the type of share in question and how the pledge is evidenced. As a general rule, the shares must be delivered to the pledgee. If the shares are held in a securities account, the depositor will be notified and will hold the shares as pledged property. The company will also be notified of the pledge, which will be evidenced in its shareholder register.
Although shares in a limited liability company are not considered ‘financial instruments’ under Section 1(6) of the Securities Supervision Act, they may still be subject to a security interest (eg, a pledge). Such a pledge will typically be effected by giving notice to the company’s managing directors.
Can security be granted over cash deposits? If so, what are the most common forms of security granted over this kind of property and what is the procedure? Cash deposits may be subject to a pledge, provided that the cash is deposited in a bank account when pledged. The following must occur in order for such pledges to be enforceable:
- an annotation of the pledge must be made in the pledger or assignor’s accounting books; and
- the third party holding the deposit must be notified.
Intellectual property Can security be granted over intellectual property? If so, what are the most common forms of security granted over this kind of property and what is the procedure? Intellectual property can be subject to a security interest, the most common form of which is an IP pledge or assignment. For patents, trademarks and protected designs, a pledge or assignment is created through registration in the Austrian Patent Office’s Patent, Trademark or Protected Design Registers. However, a certain level of risk remains as registration in the respective register has only a declaratory effect.
Further, copyrights cannot be subject to security interests as they are non-transferable. However, exploitation rights of a copyright may be subject to a pledge or assignment. In such cases, the agreement will create the pledge or assignment; no further perfection is necessary.
Criteria for enforcement What are the common enforcement triggers for loans, guarantees and security documents? The circumstances in which a lender can enforce its loan depend on the individual contractual arrangements. Generally, it is agreed that a lender can declare a loan due at any time after an event of default has occurred, unless it is remedied or waived within a specified grace period. However, the courts may rule that such a termination is invalid if the lenders have not considered the borrower’s legitimate interests.
A guarantee is usually callable if the secured claim is due and has not been paid in full by the borrower.
A security interest can be enforced only if the secured obligation is unpaid, due and payable.
In each case, the lender must give the relevant security grantor reasonable prior written notice of an intended enforcement (the minimum period agreed on is usually one week). This notice and grace period is not required if the security grantor has ceased or refused to make payments or has filed an application to commence insolvency proceedings, or if such proceedings have commenced.
The Consumer Protection Act includes specific restrictions for the enforcement of consumer loans.
Process for enforcement What are the most common procedures for enforcement? Are there any specific requirements with which lenders must comply? The first step of the enforcement procedure is to give the debtor notice of an intended enforcement. If the debtor still fails to pay the debt, action for payment may be filed. With an execution title the debt may be enforced. If enforcement does not lead to the creditor’s satisfaction, insolvency proceedings may follow.
Security and guarantees are enforced as follows.
Mortgages A mortgage is usually enforced by a court through:
- forced administration; or
- public auction.
Alternatively, the parties can agree (in the relevant security document) on an out-of-court enforcement – either through a public auction or private sale. In all cases, the lender must inform the borrower that a public auction or private sale will occur if the obligation is not fully paid within a period of at least seven days.
Movable assets Tangible movable assets A pledge over a tangible movable asset can be enforced through a public auction by the courts or through a private sale if the asset has an exchange or market price.
Shares or saving certificates A pledge over shares or saving certificates that have an exchange or market price can be enforced only through private sales, not public auctions. Otherwise, they can be enforced by public auction or – subject to valuation – private sale.
Receivables The lender realises the collateral by collecting the receivables from the third-party debtor.
Intellectual property IP rights can be enforced by the security holder by public auction or private sale.
Ranking in insolvency In what order do creditors rank in case of the insolvency of a borrower? Creditors are paid in the following order:
- A secured creditor that benefits from a pledge, security assignment agreement or mortgage is entitled to separate and preferential satisfaction. Such a creditor has the right to enforce its security, unless enforcement would jeopardise the continuation of the company. In such case, the creditor will be prevented from exercising its right to enforce its security for a maximum of six months, unless this would cause substantial personal or economic damage to the creditor. The ranking of several creditors regarding the same asset is determined according to the priority principle. If the proceeds are insufficient to cover all secured creditor claims, the secured creditors will be treated as unsecured creditors for their outstanding claims.
- Unsecured creditors are paid from the insolvency estate after the deduction of bankruptcy expenses, which include:
- insolvency proceeding costs;
- the insolvency administrator’s remuneration; and
- the insolvent company’s employee remuneration.
- Subordinated creditors are paid after unsecured creditors (a lender’s claims are regarded as subordinate – for example, if the loan is regarded as equity replacing).