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Criteria for enforcement
What are the common enforcement triggers for loans, guarantees and security documents?
The enforcement triggers by which a lender can enforce its loan, guarantee or security interest are contractual, and therefore depend on what is agreed by the parties in the relevant agreement. However, all enforcement proceedings in relation to security are subject to a formal court judgment unless, the relevant security is regulated in terms of the Financial Collateral Arrangements Regulations (Subsidiary Legislation 459.01).
Common enforcement triggers include the following:
- Non-payment – where the borrower does not pay on the due date any amount payable pursuant to a security document at the place and in the currency in which it is expressed to be payable.
- Misrepresentation – any representation or statement made or deemed to be made by a borrower in a security document is or proves to have been incorrect or misleading in any material respect when made or deemed to be made.
- Insolvency – a borrower is unable to pay its debts, suspends or threatens in writing to suspend making payments on any of its debts or, by reason of actual or anticipated financial difficulties, commences negotiations with one or more groups of its creditors with a view to rescheduling any of its indebtedness.
- Creditors’ process – any expropriation, attachment, sequestration, distress or execution or any analogous process in any jurisdiction affects any asset or assets of the borrower.
- Unlawfulness and invalidity – where it becomes unlawful for a borrower to perform any of its material obligations under the security document, any obligations of a borrower pursuant to a security document are not or cease to be legal, valid, binding or enforceable or any security document ceases to be in full force and effect.
- Cessation of business – the borrower suspends or ceases to carry on all or a material part of its business.
- Litigation – any litigation, arbitration, administrative, governmental, regulatory or other proceedings or investigations or disputes are commenced which are reasonably likely to be adversely determined and, if so, have or would reasonably be expected to have a material adverse effect.
Process for enforcement
What are the most common procedures for enforcement? Are there any specific requirements with which lenders must comply?
The enforcement of any loan, security or guarantees granted to the lender in relation to such loan first requires the creditor to obtain an executive title. Article 253 of the Code of Organisation and Civil Procedure (Chapter 12 of the Laws of Malta) provides a list of the principal executive titles under Maltese law:
- judgments and decrees of the courts of justice of Malta – it is not only judgments and arbitration awards awarded in Malta that constitute an enforceable executive title for the purposes of Maltese law; judgments and awards constituting res judicata in other jurisdictions are also enforceable in Malta, although the procedure varies depending on whether the Brussels Regulation (1215/2012) applies. In cases where the Brussels Regulation applies, enforcement is significantly more efficient;
- public deeds relating to debts certain, liquidated and due, and not consisting of the performance of an act;
- taxed bills of judicial fees and disbursements, issued in favour of any advocate, legal procurator, notary public, architect, judicial referee or witness, unless such taxed bills are impugned according to law;
- awards of arbitrators registered with the Malta Arbitration Centre; and
- bills of exchange and promissory notes issued in terms of the Commercial Code.
The list of executive titles found in the Code of Organisation and Civil Procedure is not exhaustive, since apart from the code itself providing for further executive titles, various other special laws provide for additional executive titles, including:
- the Merchant Shipping Act (Chapter 234 of the laws of Malta);
- the Value Added Tax Act (Chapter 406 of the laws of Malta);
- the Income Tax Management Act (Chapter 372 of the laws of Malta); and
- the Malta Communications Authority Act (Chapter 418 of the laws of Malta).
On the basis of such executive title, the lender may request the Maltese courts to issue executive warrants as necessary for the monetary claim to be enforced against the assets in question.
Set out below are the enforcement mechanisms for each type of security.
Hypothecs and privileges
Hypothecs and privileges may be enforced only through judicial enforcement proceedings. However, if such hypothecs and privileges constitute an executive title, a prior judgment may not be necessary for enforcement. Once an executive title is obtained, the lenders may apply for the sale by judicial auction of the assets securing the debt and subject to the registered hypothec. This process is regulated by intricate procedural rules and the creditor can bid for the assets out of the recovery value being sought through the same judicial sale.
The general provisions relating to pledges under the Civil Code provide that the creditor cannot dispose of the thing pledged in case of non-payment, but it may cause that thing to be sold by auction under the authority of the court. A demand for the sale of the thing pledged may be made by the creditor by means of the filing of an application in court.
If the thing pledged has a stock exchange or market price, the court may order the sale to be carried out by means of a public broker, bank or other banking institution to be appointed by the court instead of judicial sale by auction.
The pledging of shares is further regulated by the Companies Act. If a debtor defaults under a pledge of shares agreement, the pledgee can enforce the pledge by either:
- applying to the court for the judicial sale of the shares; or
- giving notice by judicial act to the pledgor and the company that it wishes to dispose of the shares pledged or appropriate and acquire the shares for itself in settlement of the debt due.
If the pledgee opts to dispose of or appropriate the shares, once the pledgee gives notice by judicial act to the pledgor the value of the shares can be agreed between the pledgor and the pledgee. The value can only be agreed at this point; any prior agreement determining the value of the shares is prohibited.
If the pledgor and the pledgee do not agree on the fair value of the shares, the fair value for the sale or appropriation of the shares will be determined by a certified public accountant appointed by the court on application by the pledgee.
In selling the shares the pledgee must seek the best price, which must be no less than the fair value as determined above. In the event that a buyer cannot be found for the securities at their fair value, the pledgee will apply to the court for the securities to be sold at less than fair value subject to any conditions imposed by the court.
In the case of pledged shares in a private company, before disposing of the shares or appropriating and acquiring the shares itself in settlement of the debt due the pledgee must offer the shares to the other shareholders in accordance with their pre-emption rights in the transfer of shares as set out in the memorandum and articles of association. If the memorandum and articles of association do not provide for pre-emption rights, the shares must be offered to the other shareholders in proportion to their holdings. The shareholders have the right to purchase the shares at the established fair value within 10 working days.
The pledging of shares may also be regulated under the Financial Collateral Arrangements Regulations provided that such pledge falls within the regulations’ remit. The regulations, in line with EU legislation, provide a more creditor-friendly approach to the enforcement of share pledges and pledges on receivables by limiting perfecting requirements and enforcement formalities in respect of financial collateral.
The regulations apply solely and exclusively to:
- financial collateral consisting of cash, instruments or credit claims;
- financial collateral which has been provided and can be evidenced in writing; and
- financial collateral arrangements which can be evidenced in writing or a legally equivalent manner.
In order for the regulations to apply, both the collateral taker and the collateral provider must both be an entity listed in Regulation 4 of the regulations.
The regulations provide that the financial collateral arrangement – in this case, the pledge agreement – is valid and enforceable within its terms and within the regulations. Enforcement may be by sale or appropriation of the shares and by offsetting their value against the debt due or applying their value in discharge of the secured obligations.
Realisation of the pledge does not require:
- prior notice of the intention to realise to be given;
- the terms of the realisation to be approved by any court, public officer or other person;
- the realisation be conducted by sale by auction or in any other prescribed manner; or
- any additional time periods to elapse.
The collateral taker must ensure that any action taken under the regulations – including any realisation or valuation of the financial collateral – is conducted in accordance with the terms of the arrangement, and in any event in a commercially reasonable manner and in good faith to ensure fair treatment to the collateral provider. The regulations also exclude the applicability of Articles 122(6) to 122(9) of the Companies Act, which provide for the offering of shares on a pre-emptive basis before appropriation or disposal of the shares.
Security by title transfer
Security by title transfer is enforced in terms of the agreement between the debtor, the transferor and the creditor (if different to the transferor). Subject to the terms of the agreement, in the event of default the creditor, on giving notice in writing to the debtor and the transferor of property, is entitled to realise the property transferred:
- by sale; or
- by offsetting or netting their value and applying the value in discharge of the secured obligations.
Set-off or netting is possible only if it has been expressly agreed in the agreement between the parties.
The regulations may also apply to security by title transfer arrangements.
Ranking in insolvency
In what order do creditors rank in case of the insolvency of a borrower?
Malta has no specific insolvency legislation which comprehensively lists preferential debts in priority. While general civil law principles require that the property of a debtor is the common guarantee of its creditors, all of whom have an equal right over the property unless there is a lawful cause of preference, the reality is far more complex due to the various privileged and preferential debts scattered across various pieces of legislation. This system creates a complex web of preferences which must be carefully considered in each case by the liquidator.
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