Are any security interests created by a borrower in favour of a lender made void if the borrower becomes insolvent? Are there any other effects?
One pivotal issue is the date such security is created as such security might be construed as a form to prevent specific assets to be included in the assets that will be used as payment to creditors.
Generally, a borrower’s insolvency will not affect a lender’s security (however a moratorium may be placed on the enforcement of securities in some circumstances where an administrator has been appointed).
There may be some transactions that can be set aside by a liquidator if they have been entered into while the company is insolvent or where the transaction is uncommercial or constitutes an unfair preference to a creditor.
Whether the transaction can be set aside by a liquidator will depend on the time that has elapsed since the security was created or the transaction was entered into. The ‘relation back period’, being the period during which a transaction may be set aside by a liquidator, may be six months, two years or four years prior to the date of liquidation of the company depending on the type of security given or transaction entered into and the circumstances of the company at that time.
If a security over non-real estate assets is not perfected by registration before the latter of six months before either a winding up or an administration began, 20 business days after the security became effective or the date of administration, the security interest may be void as against a liquidator, an administrator of the company, or an administrator of a deed of company arrangement.
In the event of the bankruptcy of the borrower, the secured creditors will be paid off according to the rank and chronological registration. Unsecured creditors rank behind secured creditors and rank equally between themselves.
There is however the risk of the 'suspect' period prior to the declaration of bankruptcy which may render securities which were granted within the 'suspect' period invalid.
Yes. In accordance with the Law on Bankruptcy, interests created over real estate which becomes part of the bankrupt estate are declared void if the interest was obtained in the 60 days in F BiH and Brcko District, respectively 90 days in RS, immediately before the filing of the petition to commence bankruptcy proceedings or if the interest was obtained on the basis of a court order.
Generally, the onset of a borrower’s insolvency does not affect the validity of a mortgage or hypothec granted to secure an obligation. However, the filing of any form of bankruptcy petition automatically stays foreclosure proceedings against the borrower. Nonetheless, courts may grant the lender relief from the automatic stay and the lender’s security may be enforced pursuant to the general enforcement rules.
Generally, the onset of a borrower's insolvency does not affect security interests although administration creates a moratorium which prevents creditors from enforcing their security without the consent of the administrator or an order of the court in the case of a company going into administration.
Security can be set aside in certain circumstances including where it constitutes a preference or a transaction at an undervalue. Generally, for this to happen, a court order is required and the security must have been created within a certain time period (which varies depending on the circumstances) before the commencement of the insolvency process.
Secured creditors of an insolvent debtor (razlučni vjerovnici), have the right to commence enforcement proceedings over the secured asset to recover the debt.
Certain actions in relation to a debtor's assets may, in a bankruptcy situation, be contested by a creditor or the trustee in bankruptcy, even if they have taken place prior to the commencement of bankruptcy proceedings. Such actions, referred to as 'contestable legal actions', can be contested if the action is seen as favourable to certain creditors.
The instigation of insolvency proceedings has the following effects: claims and other rights relating to the assets may not be enforced by virtue of an action, where they may be pursued by means of an application; the right to have debts paid through the enforcement of security over the assets included in the insolvency may be asserted; assets may be newly acquired only subject to the conditions set in the Insolvency Act, and the same applies to the establishment of a judicial lien over real estate or an executor's lien over real estate proposed after the instigation of insolvency proceedings.
Unless the insolvency court rules otherwise, as of the moment when the consequences of the instigation of the insolvency proceedings take effect, the debtor is obliged to refrain from disposing of assets included in the insolvency (ie assets allocated to satisfy the debtor's creditors) or assets that might be included in the insolvency where the disposal might substantially alter the composition, use or allocation of the assets to be included in the insolvency, or might diminish their value to a material extent. The debtor is obliged to make payments in respect of monetary obligations incurred prior to the instigation of the insolvency proceedings only to the extent and on terms stipulated by the Insolvency Act. These restrictions do not apply to acts necessary to satisfy obligations imposed by other legal regulations, acts which are required to operate the business in its ordinary course, to avert an impending loss, to fulfil statutory alimony or child support obligations or to satisfy procedural sanctions. These restrictions do not apply either to the satisfaction of debts payable and related to the assets and debts payable with the same priority; these debts must be settled by their due dates if the state of the assets allows it.
Generally, the onset of an insolvency procedure does not affect a security interest, although only the administrator of the estate can implement the enforcement of the security. If the administrator has not applied for the sale of a charged property by foreclosure auction within six months, the lender can insist that the administrator applies for such public auction without further delay.
During the insolvency procedure the security may be made void if the security is provided for ‘old debt’. The Danish courts interpret this very strictly, and a security will therefore be void if it is not provided against a new debt. Under the Danish Bankruptcy Act the security can be set aside if it is created and perfected less than three months before the reference date. In addition, the act of perfection must be made without undue delay.
Transactions that unduly favour one creditor at the expense of other creditors can be set aside.
Under French law, any new security granted during the "suspect period" (ie the date determined by the court as being the date of "cessation des paiements" and which may be set at up to 18 months before the beginning of the proceedings) to secure pre-existing debts can be nullified. Pursuant to article L. 632-1 of the French Commercial Code, any mortgage or pledge granted by a debtor after the date of suspension of payments (date de cessation des paiements) shall be automatically deemed null and void.
In addition, pursuant to article L. 650-1 of the French Commercial Code, creditors may be held liable for damages suffered by debtors on the following grounds (and may only be held liable on those grounds):
In the event that a creditor is found liable on any of these grounds, the security or guarantee may be nullified or reduced by the judge.
The insolvency administrator may in certain circumstances challenge transactions, which would discriminate against other creditors and were effected prior to the filing for the opening of insolvency proceedings (or afterwards). There are various heads of challenge which the insolvency administrator can rely on, generally based on the following grounds:
The relevant periods which must have elapsed before transactions become unchallengeable vary between one month and ten years; if all parties are acting in good faith, the relevant period is normally three months. Transactions for which immediate and adequate consideration was received by the borrower are only voidable if the creditor knew that the transaction was undertaken wilfully to discriminate against other creditors' rights, ie if the security taken reflects a proper consideration for the credit risk in relation to the loan facilitated, there is no claw-back.
The opening of preliminary and/or final insolvency proceedings may in some circumstances prevent the secured creditor from enforcing its security interests. However, the lender’s security interests will be acknowledged by the (preliminary) insolvency administrator by compensating the lender for any use of the secured assets by the administrator. In addition, in the event that the security is realized, the secured creditor will receive the enforcement proceeds from the insolvency administrator.
In insolvency proceedings real estate collateral can be realized through a forced auction (Zwangsversteigerung) or a forced sequestration (Zwangsverwaltung); in practice, there is often an agreement between the creditor and the administrator to sell the property out of court, since enforcement proceedings might be costly and inefficient.
Generally, the onset of a borrower's insolvency does not affect security interests.
Security can be set aside in certain circumstances including where it constitutes an unfair preference or a transaction at an undervalue. Generally, for this to happen, a court order is required and the security must have been created within a certain time period (which can be up to two years depending on the circumstances) before the commencement of the insolvency process.
A floating charge granted by a company within 12 months of commencement of winding-up is invalid unless it is proved that the company was solvent immediately after the creation of the charge or except to the amount of any cash paid to the company in consideration for the charge.
If insolvent liquidation is ordered against a debtor, all enforcement/foreclosure proceedings against such debtor are terminated, all of its assets are placed under control of the liquidator appointed by the court.
Claims against the insolvent company and security interests created over its assets (including, for example, the mortgage over its property, or the pledge created over its receivables) can be enforced only within the framework of, and according to the rules applicable to, the insolvent liquidation proceedings controlled by the liquidator.
The lender must register with the liquidator within strict statutory deadlines in order to be able to assert its claims against the debtor and achieve due priority in the order of payments made by the liquidator to the creditors.
In addition, in insolvent liquidation of the security provider, the liquidator or other creditor may file for legal action before the court to challenge any transactions concluded by the debtor (including, for example, granting of a mortgage) if it qualifies as either a fraudulent transaction, an undervalued transaction or a preferential transaction within the meaning of the Bankruptcy Act, in each case subject to other conditions (eg suspect periods) set out in the Bankruptcy Act.
Furthermore, for the purpose of exercising the call option, only those claims can be set off against the insolvent debtor which have been registered by the liquidator and which has not been assigned following the commencement of the liquidation.
In addition, in the bankruptcy proceedings (csődeljárás) initiated against the security provider, enforcement of security is not possible under a moratorium applicable to the debtor company.
Similarly, in public reorganisation proceedings initiated against the security provider (introduced as part of the COVID-19 emergency legislation), enforcement of security is not possible under a moratorium applicable to the debtor company. In the case of private reorganisation proceedings such moratorium applies only to creditors involved in the reorganization.
Generally, the onset of a borrower's insolvency does not, in itself, affect security interests although (as referred to in non-solvency procedures) as examinership imposes a moratorium which prevents secured creditors from enforcing their security without the consent of the court.
Security can be set aside in certain circumstances including where its granting constitutes a preference or a transaction at an undervalue. Generally, for this to happen a court order is required and the security must have been created within a certain time period (ie the 'hardening period' referred to in non-solvency procedures – this varies depending on the circumstances) before the commencement of the insolvency process.
In addition, a floating charge granted by a company within 12 months (24 in the case of connected persons) of commencement of a winding up is invalid unless it can be shown that the company was solvent immediately after the charge was created.
Generally, the onset of a borrower's insolvency does not affect security interests. As is the case in most jurisdictions, security which has been granted during an applicable hardening period may be clawed back to the bankruptcy estate in certain circumstances.
In determining the assets of the bankruptcy estate certain pre-petition acts of the bankrupt are considered void per se, including gratuitous acts and payment of certain debts (namely those becoming due after the bankruptcy date) executed by the bankrupt during the two years preceding the bankruptcy declaration.
The following transactions may be set aside by the receiver, unless the other party proves that it did not know that the debtor was insolvent:
The following transactions, if entered into in the 6 month period prior to bankruptcy, may also be set aside, if the receiver proves that the other party knew or ought to have known of the debtor’s insolvency:
Creditors are generally prevented from levying individual attachments upon a formal declaration of bankruptcy.
Payments made by the debtor after such date are considered per se ineffective against the insolvency estate.
Distribution and allocation of payments may be made solely within the proceedings in accordance with periodic plans prepared by the receiver and authorized by the bankruptcy court. The receiver can decide to cancel or perform current agreements on the basis of the proceeding requirements. The stay on creditors rights is therefore general. Retentions of title and other security rights may be recognized only to the extent that all formalities and requirements have been observed.
The realization of a creditor’s rights (subject to the relevant ranking and required formalities) requires the prior admission of such creditor into the insolvency proceedings. Creditors are granted a specified term from the date of the bankruptcy declaration to tender their claims, although late applications may be admitted until the proceeds and assets of the bankrupt estate have been distributed completely.
Generally, the onset of a borrower's insolvency does not affect security interests, although under corporate reorganization creditors are, in general, prevented from enforcing their security.
Security can be at risk of being set aside if they are:
Security may also be challenged on other grounds relating to insolvency.
Generally, a borrower's insolvency does not affect the security rights of secured creditors. Mortgagees and pledgees are referred to as ‘separatists’ under Dutch law, which means that if insolvency proceedings are commenced in respect of a debtor, the secured creditors may still enforce their security rights without regard to these insolvency proceedings.
However, a trustee in bankruptcy (faillissementscurator) can try to annul the security rights on the basis of the so-called actio pauliana or fraudulent conveyance if:
For the purposes of annulment of the relevant legal act, it suffices for the trustee in bankruptcy to declare the annulment. In practice, however, the trustee in bankruptcy will petition the court to order the beneficiary of the annulled legal act to undo the performance or benefit it received as a consequence of the legal act.
Additionally, please refer above, which sets out several conflicts under general Dutch law that might affect the validity of security rights and which can be evoked by the trustee in bankruptcy.
Finally, the rights of a pledgee or mortgagee to claim or seek recourse against an asset (goed) which belongs to an insolvent estate and in respect of which such pledgee or mortgagee has a security right may be suspended by any competent court in insolvency proceedings for a period of not more than four months. During this period, the pledgee or mortgagee of such asset may not without the court's consent exercise such rights.
If a pledgee or mortgagee of an asset belonging to the bankrupt estate fails to sell an asset after having been given a reasonable period by the trustee in bankruptcy to exercise its rights, such trustee may, after expiration of such period, claim such asset and sell it, without prejudice to the pledgee's or mortgagee's entitlement to the proceeds after deduction of bankruptcy costs and taking into account its rank.
Provided that the security interest created by the Lender was duly perfected prior to the insolvency of the borrower, the lender can validly enforce its security against the borrower. Under Nigerian law, any court attachment, sequestration, execution put in force against the estate or effects of the borrower or any disposition of property of the company when in the course of a winding up proceeding shall be void.
Security rights that are legally protected before the commencement of bankruptcy or composition proceedings, will be recognized in insolvency, assuming that the agreement establishing the security right is valid. Legal protection is in most cases achieved either through registration or notification, depending on the type of security.
However, the debtor’s granting of security may be reversed if the security unfairly favour one creditor at the cost of the others at a time when the financial situation of the debtor was weak or became materially weaker after the security was granted. Such transactions/granting of security can be reversed within a time limit of 10 years.
The security may also be deemed void if:
In some cases, the security must be created within a certain time period before the commencement of the insolvency process in order to be valid.
Pursuant to the Insolvency Law, any legal acts performed by the bankrupt within one year before the day of the submission of the petition for declaration of bankruptcy, with which he had administered his assets, will be considered ineffective to the bankruptcy estate if they were at an undervalue.
Secondly, security and payment of debt made by the bankrupt within six months before the day of the submission of the petition for declaration of bankruptcy will also be ineffective. However, a person who has received a payment or a security in that time may demand through court action or an objection for those acts to be deemed effective, providing that during their performance they had not been aware of the existence of the grounds for the declaration of bankruptcy.
Furthermore, at the request of the bankruptcy trustee, court supervisor, receiver or the judge commissioner there shall be an acknowledgement that security is ineffective to the bankruptcy estate when a bankrupt had not been a personal debtor, and this security has been established one year before the date of the submission of the petition for declaration of bankruptcy, and due to the establishment of this security, the bankrupt did not obtain any consideration. The same would apply if the burden of the security was established in exchange for consideration which was incommensurably low to the value of the provided security.
Where the bankrupt’s acts are ineffective by law or have been considered as ineffective, the portion of the bankrupt’s assets diminished or not entered into the bankruptcy estate as a result of such acts mentioned above, will be transferred to the bankruptcy estate and if the transfer is not possible, the equivalent in money will be paid into the bankruptcy estate.
The registration of real security such as mortgages granted in benefit of the State, municipalities or social security entities may be cancelled if the registration occurred less than two months prior to the insolvency proceedings. Other mortgages can also be cancelled if the registration is not accomplished on the date of the relevant insolvency ruling.
It should be noted that the registration of mortgages with the relevant Land Registry Office is essential for the recognition of the guarantee’s existence and effectiveness.
As a rule, at the commencement of insolvency proceedings against a debtor, all court and out-of-court actions in respect of claims against the relevant debtor and its assets are suspended by operation of law. Nonetheless, a secured creditor has the right to request the insolvency judge, summoning the creditors' committee, the special administrator and the judicial administrator, the overturn of the suspension of claims with regard to its debts if the following conditions are met:
a. if the value of the secured asset, determined by an evaluator according to international valuation standards, covers the value of the secured obligation or parts of the secured obligations, provided that:
b. if there is no adequate protection of the secured claim against the corresponding secured asset due to:
Should the insolvency judge accept the application for overturning the suspension, the creditor’s security may be enforced pursuant to the general enforcement rules.
There are nonetheless several agreements which, if executed by the debtor within a certain (legally determined) period of time prior to the opening of insolvency proceedings – known as the 'grey period' – are treated as being to the detriment of the debtor’s creditors and thus may be challenged by an insolvency official (ie the judicial administrator or liquidator). By way of example, these agreements include:
The insolvency official may apply for these transactions to be annulled, and this in turn may trigger the annulment of related security agreements as well. Such an application may be filed within one year from the expiry of the period laid down for drafting the report detailing the causes of the insolvency, but no later than 16 months from the opening of the insolvency proceedings.
The Bankruptcy Act distinguishes between the following security rights
A security right over debtor's property which forms part of insolvency proceedings will not become void following the commencement of bankruptcy proceedings. However, security rights cannot be executed during insolvency proceedings. This does not apply to the execution of security rights to
In these cases, the security right can be executed until the bankruptcy declaration. In cases when the execution of a security right has commenced prior to the bankruptcy proceedings, the execution proceedings shall be suspended. The pledgee will then have to file an application within the insolvency proceedings in accordance with the Bankruptcy Act.
Some assets, in particular assets secured by means of a pledge, a transfer of right serving as security (securing transfer of right), or the securing of an assignment of claims, have priority status in relation to other claims in bankruptcy proceedings. The bankruptcy trustee will discharge those claims prior to the other claims by distributing the proceeds from the secured assets. If the proceeds from the secured assets are not sufficient for the full discharge of all secured claims, then the remainder of those claims will be classified as unsecured claims and will then be discharged alongside other unsecured claims.
The validity of security interests is not, as such, affected by the onset of a borrower's insolvency. However, insolvency rules establish that the secured creditor will not be recognized as privileged for the whole secured amount, but rather for a maximum of 90% of the market value of the encumbered asset minus the value of any prior charges registered over the asset. Any amounts that are not recognized as privileged will rank as ordinary debts in the list of creditors, which has implications for quorum and voting majorities regarding arrangements with creditors. This notwithstanding, if the security is eventually enforced, the creditor will be repaid with the proceeds of the auction up to the initially secured amount.
As regards enforceability, in the event of a declaration by the judge of the debtor's insolvency, if the asset affected by the security is necessary for the continuation of the debtor’s professional or business activity, the secured party cannot initiate proceedings to enforce the security until one of the following events occurs:
Any actions of the debtor during the two-year period preceding the declaration of insolvency which are deemed harmful may be annulled. Transfers made in favour of related parties and the creation of in rem guarantees to secure pre-existing obligations or new obligations acquired replacing those pre-existing liabilities (unless made following an agreement between the creditors holding at least three fifths of the liabilities) are deemed to be “harmful” unless proved otherwise. Gratuitous transactions and payments made before the due date are deemed “harmful” notwithstanding any evidence to the contrary.
As is the case in most jurisdictions, security which has been granted during an applicable hardening period may be clawed back into the bankrupt estate in certain circumstances. Security will not otherwise become void as a result of bankruptcy. Under the Bankruptcy Act (Konkurslagen), though, a bankrupt debtor may propose a composition to its creditors. If the proposal is accepted by a certain percentage of the creditors, the claims of those creditors may not be fully compensated. A lender which benefits from security with preferential rights in bankruptcy such as a mortgage will only be bound by the composition to the extent that the realisation proceeds in respect of the relevant security do not cover its claim(s). It is also possible to implement a composition with the creditors under the Company Reorganization Act (Lag om företagsrekonstruktion).
The Bankruptcy Law sets out the circumstances where a transaction (including transactions relating to security interests) entered into by an entity may be ruled by a court to be void if that entity later becomes insolvent. The court can reverse transactions that occurred up to two years prior to the commencement of bankruptcy procedures that are harmful or prejudicial to creditors, including the following:
The Bankruptcy Law does, however, provide a defence to reversal if it can be demonstrated that the insolvent entity provided the security in good faith with the purpose of carrying out its business and that there were reasons to believe that the security would benefit the business.
Again, please note that as the Bankruptcy Law is relatively new, a number of its aspects remain largely untested, and so any consideration of these provisions would need to be done on a case by case basis.
The Bankruptcy Law sets out the circumstances where a transaction (including transactions relating to security interests) entered into by an entity may be ruled by a court to be void if that entity later becomes insolvent.
The court can reverse transactions that occurred up to two years prior to the commencement of bankruptcy procedures that are harmful or prejudicial to creditors, including the following:
The Bankruptcy Law does, however, provide a defence to reversal if it can be demonstrated that the insolvent entity provided the security in good faith with the purpose of carrying out its business and that there were reasons to believe that the security would benefit the business.
Again, please note that as the Bankruptcy Law is relatively new, a number of its aspects remain largely untested, and so any consideration of these provisions would need to be done on a case-by-case basis.
Generally, the onset of a borrower's insolvency does not affect security interests although administration creates a moratorium which prevents creditors from enforcing their security without the consent of the administrator or an order of the court in the case of a company going into administration. Other moratoria have recently been introduced by the UK Corporate Governance and Insolvency Act 2020 as part of the UK's response to the Covid-19 pandemic.
Security can be set aside in certain circumstances, including where it constitutes a preference or a transaction at an undervalue. Generally, for this to happen, a court order is required and the security must have been created within a certain time period (which can be up to two years (or five years for individuals) depending on the circumstances) before the commencement of the insolvency process.
A floating charge granted by a company within 12 months of commencement of insolvency is invalid save where new money is advanced although, in most circumstances, this provision does not apply unless the company is insolvent when it granted the security or became insolvent as a result.
Generally, the onset of a borrower's insolvency does not affect security interests although administration creates a moratorium which prevents creditors from enforcing their security without the consent of the administrator or an order of the court.
Security can be set aside in certain circumstances including where it constitutes a gratuitous alienation or an unfair preference. Generally, for this to happen, a court order is required and the security must have been created within a certain time period (which varies depending on the circumstances) before the commencement of the insolvency process.
A floating charge granted by a company within 12 months of commencement of insolvency is invalid save where new money is advanced although in most circumstances, this provision does not apply unless the company was insolvent when it granted the security or became insolvent as a result.
Ukrainian law stipulates that acceptance by a Ukrainian court of a decision to commence the insolvency procedure against the borrower shall be automatically considered as an event of default under the security agreement.
In this case, the lender gains the right to enforce its security against the defaulting borrower, regardless the maturity of the principal obligation, unless agreed otherwise between the lender and the mortgagor.
The property granted as a collateral under the mortgage agreement shall not be included to the pool of liquidation assets and shall be used solely for the enforcement of the relevant security. The proceeds of enforcement shall be directed to fulfil obligations before the mortgagee under the relevant mortgage agreement.
In respect of trust ownership, the Bankruptcy Code of Ukraine explicitly states that the trust property shall not be included in the liquidation estate neither of a trustee, nor a trustor. There is also a carve-out for the trust property ringfencing it from moratorium on enforcement of the secured property under the insolvency law.
Moreover, any transactions or dealings with property by the debtor during the three years preceding the commencement of a bankruptcy case or after its commencement may be declared invalid or rescinded (provided that they caused damage to the debtor or lenders) by a commercial court as part of the proceedings on the application of the arbitration manager or bankruptcy creditor on the following grounds:
In addition, any transactions or dealings with property by the debtor during the three years preceding the commencement of a bankruptcy case may be declared invalid or rescinded by a commercial court on the application of the arbitration manager or bankruptcy creditor also on the following grounds:
If transactions are declared invalid or if the debtor's property dealings are rescinded on any of the grounds indicated above the creditor must return the property it received from the debtor to the pool of liquidation assets or (if the property cannot be returned in kind) pay the cost at market value assessed as of the time of the transaction or property dealing.
Generally, the onset of a borrower’s insolvency does not affect the validity of a mortgage granted to secure an obligation. However, the filing of any form of bankruptcy petition automatically stays foreclosure proceedings against the borrower. Nonetheless, courts may grant the lender relief from the automatic stay and the lender’s security may be enforced pursuant to the general enforcement rules.
This ultimately depends on the wording of the agreement between the borrower and the lender. This is to say, should the agreement list insolvency as default, then the lender is permitted by law to foreclose on its security interest, with the residue going to the insolvent estate.
If the agreement does not list insolvency as default, but the security has been perfected then the lender has a preferential right over other creditors in the event of insolvency of the borrower.