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Criteria for enforcement
What are the common enforcement triggers for loans, guarantees and security documents?
The common enforcement triggers include:
- payment default;
- deterioration of security;
- false representations; and
- any changes in law making borrowing unlawful.
Domestic loans usually have fewer sophisticated triggers compared to cross-border lending.
Guarantees and other security (pledges and hypothecs) are enforced following a default by a principal debtor under the secured obligation. The default may comprise the deterioration of a pledged or hypothecated asset.
Process for enforcement
What are the most common procedures for enforcement? Are there any specific requirements with which lenders must comply?
Enforcement is commonly run through court proceedings. Before filing proceedings, the lenders must exhaust out-of-court mechanisms for having the debts repaid. Otherwise, no specific procedures apply.
Lenders filing court proceedings must supply originals or notarised documents evidencing the debt, together with their certified Azerbaijani translations. Absent a notarised agreement on an out-of-court enforcement, the enforcement over security would be through courts.
An out-of-court enforcement would involve a notary evidencing a default and a bailiff acting on the basis of the notary’s enforcement writ. A bailiff must proceed with the enforcement procedure within three days of the receipt of the notarised agreement endorsed by an enforcement writ and complete the enforcement within maximum three months, unless the enforcement is challenged by a debtor.
Irrespective of the type of collateral, the security holder must first notify the obligor and all other known security holders (creditors) of the launch of an out-of-court enforcement.
Enforcement of a hypothec must be made through the sale of the concerned real estate at a public auction or otherwise, as agreed by the parties.
In pledges, the security holder can sell only at auction. The pledged securities are sold through a stock exchange.
Ranking in insolvency
In what order do creditors rank in case of the insolvency of a borrower?
Claims of unsecured creditors and residual claims of secured creditors (ie, claims left unpaid from enforcement of security) come in the fifth tier of claims in the bankruptcy of most companies.
When the borrower is a bank or insurer, unsecured claims move down the list, as such borrowers face more specific groups of claims. For instance, in relation to insurers, unsecured claims come after:
- claims relating to losses associated with compulsory insurance;
- claims relating to losses associated with voluntary personal insurance;
- claims relating to losses associated with voluntary property insurance;
- claims for refunds of premiums under unexpired coverage;
- creditors’ secured claims;
- claims relating to injury and death caused by the insurer’s activities;
- claims by the bankrupt insurer’s employees for their allowances and wages;
- claims for copyright payments; and
- taxes and other statutory payments and sovereign loan repayments to the state budgets for the period (except in relation to the sovereign loan repayment) of one year before the bankruptcy.
In banks, unsecured claims come after:
- (subrogation) claims of institutions insuring deposits of individuals;
- costs incurred in connection with bankruptcy procedures by the temporary administrator and liquidator;
- claims by the bank’s employees for personal injuries or death during business hours;
- claims of the bank’s employees (current and former) for allowances, and salaries due for the six-month period before the court’s decision on the bankruptcy;
- the bank’s liabilities incurred during the temporary administrator’s management or during financial improvement; and
- taxes and mandatory state social insurance charges due from the bank one year before the court’s decision on the bankruptcy.
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