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Asset classes used as collateral for security

Real estate

Can security be granted over real estate? If so, what are the most common forms of security granted over real estate and what is the procedure?

Yes, real estate (freehold and certain leaseholds) may be mortgaged. A security over real estate is created by the parties entering into a security agreement and registering the mortgage with the registrar. The registrar will issue a real estate mortgage note to be delivered to the possession of the beneficiary of the mortgage (purely electronic mortgage registration is possible physical mortgage notes will be phased out). 

Machinery and equipment

Can security be granted over machinery and equipment? If so, what are the most common forms of security granted over this kind of property and what is the procedure?

Yes. Machinery and equipment, as well as inventories, are covered by a floating charge. A floating charge is created by the parties entering into a security agreement and the chargor company issuing floating charge notes which are registered with the registrar and delivered to the possession of the beneficiary of the floating charge. 

Machinery and equipment may also be pledged separately, but in order for such a pledge to be valid against third parties, the pledgor’s control over the assets would need to be effectively removed (so-called ‘possessory pledge’). This type of security is not usually practically and commercially viable and is therefore rare.

Receivables

Can security be granted over receivables? If so, what are the most common forms of security granted over this kind of property and what is the procedure?

Yes. Receivables may be pledged. A pledge over receivables is created by the parties entering into a security agreement. In order to perfect the pledge, the underlying debtor must be notified of the pledge and instructed to make payments to the pledgee from the outset. Given that such payment instructions are not usually practically and commercially viable (at least with regard to trade receivables), such payment instructions are commonly given only on the occurrence of an enforcement event or similar trigger event, it being acknowledged that such delayed notice may subject the pledge to clawback in case of insolvency proceedings and jeopardise its validity against third parties.

Financial instruments and cash

Can security be granted over financial instruments? If so, what are the most common forms of security granted over this kind of property and what is the procedure?

Yes. Financial instruments are typically in dematerialised form on a book-entry account, in which case security is created over the whole book-entry account by pledging it (if there are such financial instruments which should be excluded from the scope of the pledge, they must be transferred to a separate book-entry account). Security over a book-entry account is created by the parties entering into a security agreement and notifying the central securities depository of the pledge and requesting it to record the pledge over the book-entry account.

Security over shares of a private limited liability company – which are most commonly not in dematerialised form – is created by the parties entering into a share pledge agreement. If share certificates have been issued by the target, the pledge is perfected by the pledgor delivering the share certificates to the possession of the pledgee, endorsed in blank. If no share certificates have been issued, the pledge is perfected by notifying the target of the pledge and instructing it to register the pledge in its share register.

With regard to financial instruments not in dematerialised form, the position should be assessed on a case-by-case basis.

Can security be granted over cash deposits? If so, what are the most common forms of security granted over this kind of property and what is the procedure?

Yes. The bank account may be pledged. A pledge over a bank account is created by the parties entering into a security agreement. In order to perfect the pledge, the account bank must be notified of the pledge and instructed to block the pledgee’s access or control to the bank account from the outset. Given that such blocking of the bank account is not usually practically and commercially viable, instructions to block the account are commonly given only on the occurrence of an enforcement event or similar trigger event, it being acknowledged that such delayed notice may subject the pledge to clawback in case of insolvency proceedings and jeopardise its validity against third parties.

Intellectual property

Can security be granted over intellectual property? If so, what are the most common forms of security granted over this kind of property and what is the procedure?

Yes. Security may be granted over registered intellectual property (eg, patents, trademarks and utility models by pledging them; however, copyrights are not registered and cannot be pledged). A pledge over registered intellectual property is created by the parties entering into a security agreement and notifying the registrar of the pledge and requesting it be recorded.

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