REALWorld Law

Real estate finance

Imperfect security

If a security interest has not been validly perfected, what is the position of the holder of that security if the borrower becomes insolvent?

Angola

Angola

Mandatory formal requirements under Angolan law, including registry with the relevant Land Registry Office, must be satisfied in relation to a security document for it to be valid and enforceable. A creditor holding a non-registered security, such as a mortgage, against an insolvent debtor will be treated as an ordinary unsecured creditor.

Australia

Australia

Where a security interest is created over a company’s assets (other than land), the security interest must be registered on the PPS register if the security interest is to be enforceable against third parties and in the event of an insolvency. Timing requirements of registration vary depending on the type of security interest which has been granted.

If the security interest is not registered on the PPS register 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.

Registration of a mortgage over land can be perfected after a borrower becomes insolvent, but if no consideration is given for the grant of the mortgage, payments made to the mortgagee may be clawed back by a liquidator of the mortgagor as being preference payments. 

Belgium

Belgium

A distinction must be made between the validity of a security between parties and the perfection of the security against third parties. Between parties a security will generally be considered valid following execution of the security document. The formalities to be complied with in order for a security document to be opposed by third parties, depend upon the type of security.

A mortgage and the conversion of a mortgage mandate must be executed as a notarial deed and registered with the registration office and recorded at the mortgage register to be valid against third parties.

A pledge over the business and the conversion of a mandate to pledge the business must be registered with the National Pledge Register.

A pledge over receivables and bank accounts is valid against the debtor of the receivables or the institution where a bank account is held, on notification to or acknowledgement by such debtor or institution.

A pledge over shares is valid against third parties (including the company whose shares are pledged) upon registration of the pledge in the relevant share register.

If the security is not perfected as set out above, the security will not be enforceable against third parties, including the mass of creditors in an insolvency.

Further security interests perfected after the date of cessation of payments that is intended to secure a debt that existed prior to the date of perfection of the security interest may be declared ineffective and unenforceable against the mass of creditors. This is the "suspect" period that may be fixed by the competent court in an insolvency and which cannot exceed six months prior to the bankruptcy order.

Bosnia-Herzegovina

Bosnia-Herzegovina

Security interests which have not been validly perfected cannot be enforced as such.

Canada

Canada

Registration of a mortgage or hypothec is generally a prerequisite to a validly perfected mortgage charge in real estate. However, failure to perfect the charge does not in fact make such charge invalid. The charge could be perfected at a later date subject to arguments that upon a bankruptcy filing of the mortgagor, the granting of such mortgage constituted a fraudulent conveyance or is otherwise ineffective against the trustee in bankruptcy or other secured creditors.

China

China

Unperfected security interests will not be enforceable against bona fide third party purchasers or against the insolvency administrator.

Croatia

Croatia

If security has not been validly perfected, the holder of such security will have no rights with regard to enforcement of the security in relation to the asset in question and will be treated the same as any other unsecured creditor in relation to insolvency proceedings.

Czech Republic

Czech Republic

After the instigation of insolvency proceedings claims and other rights relating to the assets may be pursued only 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. Secured creditors assert their claims by lodging a claim application in which they must refer to their security, detail the circumstances supporting their claim and attach relevant deeds. This applies equally to creditors who would be able to satisfy their claims against the debtor solely from assets provided as security.

Should the registered claim entitle the creditor to a right to satisfaction by the realization of security for that registered claim to an extent lower than 50% of the value of security contended for in the application, or should the creditor's ranking be lower than that stated in the application, the creditor's right will not be taken into account. However, this rule will not apply where the court's decision regarding the amount of the registered claim depends on the expert opinion or the court's discretion.

Secured creditors will be satisfied to the extent of their security from the liquidation of the asset, right, receivable or other property value securing their claim. The order of satisfaction is based on the time the pledge or collateral was created.

Secured creditors will be satisfied to the extent of their security from the liquidation of the asset, right, receivable or other property value securing their claim. The order of satisfaction is based on the time the pledge or collateral was created, unless agreed otherwise in writing by the secured creditors.

Denmark

Denmark

If the security has not been validly perfected, the security will be extinguished when the borrower enters into insolvency proceedings.

France

France

A security interest created by a company over property must be registered at the Land Registry within the time period imposed by law or prior to the start of proceedings. If left unregistered, it will not be enforceable against a liquidator or administrator in the framework of insolvency proceedings.

Germany

Germany

If the security has not been validly perfected before the opening of insolvency proceedings it can not be perfected at a later stage. With the opening of the proceedings, the right to manage and dispose of the debtor’s assets passes from the management of the debtor to the appointed insolvency administrator.

In preliminary insolvency proceedings (the time between the petition for the opening of the insolvency proceedings and the actual opening) the court can prohibit or stay execution measures being taken against the debtor and can order that certain movable assets (including receivables) which are subject to creditors’' security rights may not be removed from the insolvent estate if those assets are required for the continuation of the debtor’s business. In addition, the court may (and almost always does) appoint a preliminary insolvency administrator.

The preliminary insolvency administrator’s power to control the debtor's assets will depend upon the level of restrictions imposed on the debtor by the court. The court may appoint either a ‘strong’ preliminary insolvency administrator with authority to take over the management of the debtor completely or a ‘weak’ preliminary insolvency administrator with authority only to supervise continued management by the directors. In practice the appointment of a ‘weak’ administrator is the most common route adopted, since in general the management will not act without the administrator's approval. This means that, so long as preliminary insolvency proceedings last security interests cannot be perfected, that is to say not without the consent of the preliminary insolvency administrator. Even if the ‘weak’ preliminary insolvency administrator consents to a perfection of the security, the transaction would be subject to claw-back by the insolvency administrator in any subsequent full insolvency proceedings.

Hong Kong, SAR

Hong Kong, SAR

Generally, a security interest created by a company has to be registered at Companies Registry within one month after the date of creation of the security interest. If it is not so registered, it is void against a liquidator and any creditor of the company.

Mortgages of real property, if registered in the Land Registry within one month of the date of its creation, have priority from the date of creation. If a mortgage is registered outside this one-month period, it shall have priority from the date of registration with the Land Registry.

Hungary

Hungary

In order to be effective vis-à-vis third parties mortgages must be registered at the Land Registry, pledges must be registered at the relevant registry (Credit Collateral Registry (HBNY), Court of Registration or other relevant registry) and security deposits need to be duly perfected (eg by way of handover). In the absence of compliance with the above requirements, the lender will not be regarded as a secured creditor with respect to the relevant security asset in an enforcement, bankruptcy or insolvent liquidation procedure of the security provider or in a public reorganisation procedure of the security provider (introduced as part of the COVID-19 emergency legislation). However, according to the court practice, subject to the final registration of its mortgage with the Land Registry, the mortgagee can be regarded as a secured creditor if at least the pending registration of the mortgage is shown as side note on the land registry extract of the property at the time of the opening of the insolvent liquidation.

Ireland

Ireland

The particulars of a security interest created by an Irish incorporated company have to be registered at Companies Registration Office within 21 days of creation in order to preserve enforceability. If the security is not registered within the 21-day time limit, it is void against a liquidator or creditor. It is possible to make an application to the High Court for permission to register the security outside of this time limit. Granting an order to permitting this is, however, at the discretion of the court. Section 412 (3) of the Companies Act 2014 also introduced a priority regime which provides that the priority will be determined by the date and time of receipt by the Registrar of a fully filed charge submission. The date of creation of the deed of charge no longer determines its priority.

Security over real estate assets should also be registered in the Registry of Deeds/Land Registry (as applicable). In addition, where a security assignment is taken notice should be served on counterparties. If, however, security is not registered at the Registry of Deeds/Land Registry (as applicable) or notice is not served on third parties (in the case of a security assignment), this will not affect the validity of the security. These perfection steps can still be carried out at a later date, even where the borrower has become insolvent, but there may be a loss of priority if subsequent perfected security has, in the meantime, come into being.

Italy

Italy

The holder of the security is treated as an unsecured creditor.

Japan

Japan

Without valid perfection, a security right may not be asserted against a third party which is considered to include, without limitation, the security grantor's trustee in bankruptcy. 

Netherlands

Netherlands

One requirement for the creation of a mortgage right is that a copy of the instrument establishing the mortgage is registered with the Land Registry.

If the security has not been perfected, because of lack of registration at the Land Registry, this cannot be rectified after the borrower has been declared bankrupt. In such cases the creditor is treated as an ordinary, ie unsecured, creditor. The same applies if a right of pledge has not been perfected prior to the borrower's bankruptcy being declared.

Additionally, in case a right of pledge has been established a year before bankruptcy the receiver in bankruptcy proceedings (faillissementscurator) is (under certain conditions) allowed to nullify the right of pledge if there is prejudicial to the interests of the other creditors of the pledgor.

Nigeria

Nigeria

Under Nigerian law, the enforceability of a security interest so granted is determined by the status of the perfection of such security interests. Specifically, the perfection requirement for a security interest in real property requires:

  • The consent of the governor
  • Stamping of documents, and
  • Registration with the Land registry and the Corporate Affairs Commission (CAC)

In the absence of the consent of the governor, a purported security interest so created is void and unenforceable; where the relevant conveyance documents are not duly stamped, same cannot be admitted in evidence in a court of law as evidence of a security interest in the property. Failure to register the security interest at the CAC within the stipulated period makes any such security interest created void against a liquidator or any other creditor of the company.

Norway

Norway

A security interest which has not been validly perfected is void against any third parties which have a validly perfected security interest in the same asset, as well as against any estate in bankruptcy.

Poland

Poland

The answer depends on the form that the defect in establishing the security is going to take. If the defect in establishing the security is that no entry in the land and mortgage register was made, then according to the Polish law the mortgage will not be effective, because in order to establish a mortgage there must be an entry in the land and mortgage register.

It should be noted that if the imperfection consisted of taking the security from the bankrupt within six months before the day of submission of the petition for declaration of bankruptcy, the security shall be ineffective. However, a person who received a security may demand by the court action or objection that this act be deemed effective if during its performance he has not been aware of the existence of the grounds for declaration of the bankruptcy.

Portugal

Portugal

Mandatory formal requirements under Portuguese law, including registry with the relevant Land Registry Office, must be satisfied in relation to a security document for it to be valid and enforceable. A creditor holding a non-registered security, such as a mortgage, against an insolvent debtor will be treated as an ordinary unsecured creditor.

Romania

Romania

Under Romanian Legislation, in order to make its security enforceable against third parties, the holder must register its security in the relevant registers (eg the Land Book, the Romanian National Registry for Movable Security Publicity). Any unregistered security is not enforceable against third parties; the holder of the security is in the position of a regular unsecured creditor. In the case of movable mortgages, a perfected mortgage (meaning a mortgage which is effective and binding on third parties) always has priority over one which has not been perfected.

Slovak Republic

Slovak Republic

Where a pledge has not been registered correctly in the respective register or another form of security has not been validly perfected, we are of the opinion that the bankruptcy trustee would not recognize the existence of the security and therefore the creditor of that invalid security interest could only be satisfied within bankruptcy proceedings as an unsecured creditor and not as a secured creditor.

Spain

Spain

If a security interest has not validly been perfected, the relevant creditor will rank pari passu with the rest of the ordinary creditors (or the subordinated creditors, if applicable).

Sweden

Sweden

The Bankruptcy Act (Konkurslagen) provides that any security granted (or any other measure taken with a view to securing the rights of a creditor) during the period commencing three months (or two years in the case of transactions between affiliates) prior to the day on which the petition to declare the debtor bankrupt was received by the competent court, may be clawed back if:

  • The security was not agreed when the relevant debt(s) arose, or
  • The security was not perfected without delay after the relevant debt(s) arose

Claw-back will not apply where the granting or perfection of the security is nevertheless deemed to have been made in the ordinary course of business.

Where a security requires registration (eg where a creditor must be registered as holder of a mortgage certificate), a delay in transfer will be deemed to have occurred if the application for registration has been made later than the first day that the register was open for registration falling two weeks or more after the day the debt arose.

Thailand

Thailand

The holder of the unperfected security will not have a preference right over the secured property and they will be deemed normal creditors in relation to unsecured assets of the debtor.

United Arab Emirates - Abu Dhabi

United Arab Emirates - Abu Dhabi

The security holder would be treated as an unsecured creditor and would rank equally with the other unsecured and unsubordinated creditors.

United Arab Emirates - Dubai

United Arab Emirates - Dubai

The security holder would be treated as an unsecured creditor and would rank equally with the other unsecured and unsubordinated creditors.

UK - England and Wales UK - England and Wales

UK - England and Wales

Generally, a security interest created by an English or Welsh corporate entity must be registered at Companies House within 21 days. If it is not so registered, it is void against a liquidator or administrator of that entity and against any other third party creditors of it.

Other than a failure to comply with the registration requirement at Companies House, which cannot be remedied later if registration has not been made within the necessary 21 day period, if the security was not perfected because it was not registered at the Land Registry or notice was not served on third parties, this can still be perfected even though the borrower has become insolvent.

UK - Scotland

UK - Scotland

Generally, a security interest created by a company has to be registered at Companies Registration Office within 21 days. If it is not so registered, it is void against a liquidator or administrator.

If it emerges that a standard security was not validly created because it was not registered at the Land Register of Scotland it can be registered at any time after it was signed (there is no time limit in that regard) but it will not rank ahead of any floating charges which crystallize before the standard security is registered at the Land Register. For a lender to have a right enforceable against third parties (distinct from the borrower) over the real estate, the standard security must be registered in the Land Register of Scotland. Prior to 1 April 2016 it was also possible to register standard securities in the historic Sasine Register and a large number of existing (and enforceable) securities are still registered there. However, since 1 April 2016 it has not been possible to register a new standard security in the Sasine Register, meaning that any property over which a standard security is to be created must first be registered in the Land Register.

Ukraine

Ukraine

Ukrainian law provides for the mandatory registration of the mortgage and trust ownership with the State Register of Proprietary Rights Over Immovable Property. These security instruments become effective only upon registration with the state (if the mortgage or trust ownership is not registered, it does not exist).

United States

United States

Recordation of a mortgage is generally a prerequisite to a validly perfected mortgage lien in real estate. However, failure to perfect the lien does not in fact make such lien invalid. The lien could be perfected at a later date subject to arguments that upon a bankruptcy filing of the mortgagor, the granting of such mortgage constituted a fraudulent conveyance.

Zimbabwe

Zimbabwe

If the security has not been validly perfected, the lender is not considered a secured creditor should the borrower become insolvent or fails to meet its obligations, their security will only be serviced once all secured and unsecured debts have been settled on a first-in first-out basis.