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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).
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