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Criteria for enforcement

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

The enforcement triggers should be clearly specified in the relevant finance and security documents. A common enforcement trigger is the occurrence of an event of default under the documents which govern the secured obligations (usually the loan agreement) and subsequent delivery of a notice of enforcement by the secured creditor (or security agent, as applicable), usually in a format included as an exhibit to the relevant security document. 

Process for enforcement

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

Different types of security are subject to different regimes.

Mortgages on real estate must be enforced judicially through a public auction carried out pursuant to court proceedings. However, mortgages on concessions granted by the state on infrastructure or public services may be foreclosed through an out-of-court procedure. 

On agreement between the obligor and the beneficiary, pledges over moveable assets may provide for foreclosure through an out-of-court procedure. To this end, the parties must designate a ‘common representative’, through which the foreclosure procedure will be performed. Out-of-court enforcement is usually much faster than judicial enforcement, given that enforcement can take place either:

  • through sale of the relevant assets; or
  • through direct allocation of the relevant assets in favour of the beneficiary.

In the case of guaranty trusts, the security may also be enforced out of court by the trustee, which will act in accordance with the terms and conditions of the relevant trust agreement.

Ranking in insolvency

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

If the borrower is declared insolvent, a creditors’ meeting will be established. The creditors’ meeting has the power to:

  • decide whether the debtor should enter into reorganisation or liquidation proceedings; and
  • approve the management of the debtor or appoint a liquidator, as the case may be.

If the creditors’ meeting decides on reorganisation, a reorganisation plan must be approved and the creditors will be paid in the order approved in the plan. If the creditors’ meeting decides on liquidation, claims will be paid in the following order:

  • labour claims (including pension claims);
  • alimony claims (applicable only where the insolvent is an individual);
  • secured claims, including attachments and seizures;
  • tax claims; and
  • unsecured claims.

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