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Criteria for enforcement

What are the common enforcement triggers for loans, guarantees and security documents?

The enforcement triggers for loans vary depending on the contract; however, the most common triggers are non-payment and breach of obligations or representations under the loan agreement (and the lapse of any security period, if agreed).

With respect to credit facilities granted by banks, the Banking Law provides that where the borrower fails to comply with the conditions for granting the credit or loses its creditworthiness, the bank may reduce the amount of granted credit or give notice of termination of the credit contract, unless the Restructuring Law provides otherwise. The notice period for contract termination is 30 days (unless the parties specify a longer period in the contract) or seven days if the borrower is threatened with bankruptcy. The notice of termination of the credit contract due to the borrower having lost its creditworthiness or being threatened by bankruptcy may not be submitted if the bank has agreed to the implementation of a rehabilitation programme by the borrower.

Guarantees are usually triggered if the borrower fails to pay its debt under the underlying agreement, the performance of which is secured by the guarantee.

The same applies to the security documents.

Process for enforcement

What are the most common procedures for enforcement? Are there any specific requirements with which lenders must comply?

Enforcement is usually preceded by at least one notice being given by the lender to the debtor, stating the lender’s intention to commence enforcement proceedings.

In financing transactions, lenders usually require that debtors provide a declaration of voluntary submission to enforcement. This is not a security instrument itself, but its role is to expedite the court enforcement proceedings, as it replaces the court order adjudicating the lender's receivables. As a consequence, the enforcement proceedings may be started without the lengthy part of the court proceedings where the lender must provide evidence of its receivables towards the borrower.

Procedures for the enforcement of security depend on the type of security.

Mortgages and civil pledges may be enforced only through court enforcement proceedings.

Registered and financial pledges may be enforced through either court enforcement proceedings or, if the pledge agreement so provides, one of the out-of-court enforcement methods listed in the Act on Registered Pledges and the Pledge Register or the Act on Financial Collateral, as applicable.

Providing for such out-of-court enforcement methods in pledge agreements is crucial for the lender, because it allows lengthy court proceedings to be avoided. Such methods include:

  • the lender taking over the pledged asset for an agreed value to be applied to satisfy the secured claim; and
  • the right of the lender to sell the pledged asset and to satisfy its claim from the sale proceeds.

In the case of the security assignment of rights or the security transfer of ownership, the lender is (or becomes so on the occurrence of an event of default) the owner of the assigned rights or transferred assets.

Ranking in insolvency

In what order do creditors rank in case of the insolvency of a borrower?

The creditors holding security in rem are privileged in the event of the insolvency of the borrower, as the assets that have been pledged or mortgaged, or transferred under the security assignment or security transfer of ownership agreements, are extracted from the bankruptcy estate and are used solely to satisfy such creditors in accordance with their priority.

If such assets are not sufficient to satisfy all of the claims in full, the claims of a creditor holding security in rem with a lower ranking are satisfied only once all the claims of a creditor holding security in rem with a higher ranking have been satisfied in full.

Unsecured creditors are satisfied in the manner and order specified in the Bankruptcy Law. The first to be satisfied from the bankruptcy estate are the costs of insolvency proceedings. Once these costs are satisfied in full, the outstanding amount is divided into four categories:

  • employee pay, alimony claims, compensation for the impairment of health or death, social security contributions, as arose before initiation of the insolvency proceedings, and some receivables under legal actions performed during the restructuring proceedings (and meeting statutory criteria);
  • other claims that are not covered by the remaining categories, in particular taxes and other public duties;
  • interest arising from the claims covered by the abovementioned categories, as well as court and administrative fines and claims under donations and bequests; and
  • receivables of the shareholders of the insolvent company (the shareholders being limited liability companies or joint-stock companies) towards the company under a loan granted by the shareholders to the company or similar legal action (together with interest), concluded in the five years before the company is declared insolvent.

The receivables of unsecured creditors fall within the second category.

If the bankruptcy estate is insufficient to satisfy all of the claims in full, claims falling under a lower category are satisfied only once all the claims falling under the higher category have been satisfied in full. If the bankruptcy estate is insufficient to satisfy all of the claims from the same category in full, the claims will be satisfied proportionally to the share of each amount claimed in the total amount of claims from the category.

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