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?
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.
