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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?
Yes. Under the Civil Code, there are two types of security which may be created over immovable property: hypothecs and privileges. A common feature between both forms of security is that they both give a creditor preference over the property encumbered and priority over other creditors of the same debtor. However, a privilege confers on a creditor a right of preference over hypothecary creditors in virtue of a specific legal provision. In contrast, a hypothec arises through contractual agreement between the lender on the one hand and the borrower or guarantor on the other.
Both privileges and hypothecs can be either general or special. A general hypothec or privilege is a floating type of security, which attaches to no specific asset of the security grantor, but instead attaches to a fluctuating pool of assets comprising all of a debtor’s present and future property.
On the other hand, a special hypothec or special privilege is directly registered over and connected to one or more specific immovables. A special hypothec or a special privilege grants a droit de suite to the lender or security holder, meaning that such security will continue to affect the immovable property to which it is subject even if the immovable property passes into the hands of a third party.
A hypothec can be one of three types:
- a legal hypothec, arising by operation of the law;
- a judicial hypothec, originating from a judgment; and
- a conventional hypothec, created by a public deed.
Each type of hypothec is not valid unless it is registered in the Public Registry. There is no time limit for registration of a hypothec, but its ranking is taken from the date of its registration under the prior in tempore potior in iure principle (‘earlier in time, stronger in law’).
Special privileges over immovables and certain specified movables are ineffectual unless they are registered in the Public Registry within two months.
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?
Yes, security can be granted over machinery and equipment. The common forms of security granted over machinery and equipment are general hypothecs, pledges and security by title transfer. Pledges and security by title transfer are possible insofar as the machinery and the equipment do not become part of the immovable property to which they are attached by operation of the law.
A general hypothec is a floating type of security which attaches to the fluctuating pool of assets comprising the debtor’s present and future property. A hypothec must be registered in the Public Registry and must be created by public deed.
A pledge, on the other hand, is constituted by delivery to the creditor of the thing pledged or of the document conferring the exclusive right to the disposal of the thing. A pledge of movables confers on the creditor the right to obtain payment from the thing pledged over other creditors (including other privileged and hypothecary creditors), since the law grants the pledgee a special privilege over the pledged assets. This special privilege exists over the thing pledged once the thing has been delivered.
Security by title transfer is a contract under which a debtor, or a third party for the debtor, agrees to transfer or assign one or more specified movable things to an existing or future creditor or creditors to secure the debtor's existing or future obligation. The security taker (the lender) will be deemed to be the owner of the movable until the secured obligations are discharged at which time the lender will return the asset to the debtor.
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?
Yes, security can be granted over receivables. The most common types of receivable are trade and loan receivables, and the most common forms of security granted over such receivables is a pledge.
Security over receivables by way of a pledge is created by way of a pledge agreement. Pledge agreements are enforceable against third-party debtors when the debtors are notified of the pledge or the debtors acknowledge the pledge in writing.
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?
The most common financial instruments over which security is granted in Malta are company shares or debentures. Security over such financial instruments is most commonly taken in the form of a pledge.
A pledge of financial instruments is created by way of a private written agreement between the pledgor and the pledgee, and is generally governed by the Companies Act. In the case of pledging of shares in a private company, the company’s memorandum and articles of association must explicitly permit the granting of such pledge.
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The company whose securities have been pledged must be notified of such pledge within 14 days of the granting of the pledge. Notice of the pledge must also be delivered to the Registry of Companies for registration within the same period and the company will record the pledge in its register of members. The pledge of shares will be effective in relation to third parties after the registrar registers the notice of the pledge.
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?
Yes, security can be granted over cash deposits. A pledge is the most common form of security taken over cash deposits, and this takes the form of pledging bank accounts where cash deposits are held.
The procedure governing the pledging of bank accounts is invariably by way of a private written agreement and, in most cases, this agreement is in the house format of each individual banking institution with which the debtor or guarantor holds the accounts that are so pledged. The relevant bank must be notified of the pledge of the bank account.
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?
Security can be granted over intellectual property. The most common forms of security granted over intellectual property is also by way of pledge. A pledge over intellectual property is validly constituted by means of a private writing; in the case of intellectual property that is formally registered or pending registration, such pledge should be inscribed and annotated in the relevant register to safeguard the lender’s interest erga omnes.