Austria: Improving The Position Of Secured Creditors Under Registered Pledges In Bulgaria

Last Updated: 7 February 2017
Article by Katerina Kraeva and Rebeka Kleytman

Almost two decades after being adopted following the model of the World Bank and UNCITRAL for non-possessory registered pledges, the Special Pledges Act (the "Act") was substantially amended at the end of 2016. Most of the amendments take immediate effect while those concerning the digitalization of the Central Register of Special Pledges (the "Register") will come into force on 1 September 2018.

Overcollateralization

The effectiveness of the non-possessory pledges was questioned due to certain ambiguities in the Act and their diverse interpretation by the courts. The creditors thus preferred using this security instrument mainly in combination with the traditional mortgage where cohesive and unified case law exists. This practice undermined the otherwise flexible and inexpensive security which should suit well both vanilla financings and more complex structures. It further led to overcollateralization and tied up assets that can be better used in the operations of the debtor.

Filling The Gaps

As we highlight below, the amendments to the Act fill in some of the existing gaps, although few of the problematic points remain unresolved:

1. Strengthening the subordination relations

The creation of any lower ranking pledge can from now on only be made with the explicit consent of the senior ranking pledgee(s). As the previous regime did not expressly address the second ranking security, and as the Register was exercised inconsistently, the refinancing and leverage finance structures were extensively and protractedly negotiated.

However, where a transfer of ownership over the collateral takes place in breach of the consent requirements, any further third party which has acquired the collateral in good faith may question the opposability of the pledge. Thus, the changes in the Act will not ensure the broad protection they are expected to give, but leave room for abusive behavior.

2. Improving the enforcement proceedings

2.1 Limitation of enforcement rights of junior creditors

Until now, any secured creditor, regardless of its ranking, was allowed to initiate and carry-out enforcement proceedings. Although the rights of the first ranking, non-selling creditor should not be affected pursuant to the law (as it should have been satisfied with priority out of the selling proceeds), in practice its privilege was undermined. The selling, junior ranking creditor was able to define the sale price and decrease the total amount for distribution between the creditors. Pursuant to the amendments, junior ranking pledgees are restricted from initiating enforcement before obtaining the consent of all senior ranking pledgees.

2.2 Conflicting proceedings

Where a third party has started any enforcement procedures over a collateral, the pledgee shall be considered by virtue of law a "joining creditor" ("присъеднинен взискател") to each and every enforcement procedure, while previously there was uncertainty and the creditors should have closely monitor other creditors' moves. Priority is given to the enforcement proceedings which were started first. After joining, the pledgee should seek satisfaction within the procedure opened by another creditor and it is not able to enforce separately, what was the case before.

2.3 Competing with insolvency creditors

This might be problematic for a pledgee when competing with insolvency creditors as it is loosing its leading position in the assets liquidation which would be controlled by the insolvency claimants. However, in an insolvency threaten scenario a pledgee would now have a window to initiate enforcement under the Act in the interim period after a petition for the opening of insolvency proceedings has been filed and prior to the decision of the insolvency court for the opening of the insolvency proceedings.

3. Special manager's role

The debtors often hindered in the past the special manager appointed by a pledgee as the Act was not précised as to whether he depowers the existing managers. The loopholes are now fasten giving priority to the special manager and broader entitlement to the pledgee for access to the pledged assets. The special manager is further able to sell non-core assets of the debtor (i.e. such which are not material for the company to pursue its business) with the consent of the pledgee. The remaining security interests over the collateral will remain in force. It is arguable whether this option protects sufficiently the creditors as it may lead to transfers of high value assets to third parties at a low price.

4. Higher Publicity

The entering into force of the pledge is now linked to its recording within the relevant register, administrating the respective assets. Complied with the digitalization of the Register, which is scheduled for 1 September 2018, the creation and subsequent  amendments to the pledges will be publicly accessible via web based platform . Similar migration was successfully completed for the companies' files and the real estate batches, administrated by the Registry Agency. Therefore the Register will be moved within the competence of the same agency.

The Register will include additional information such as the pledge agreement, all relevant consents and also the sale notice in case of enforcement which has been regulated in detail and should include extensive information concerning the minimum price, the sale details and the collateral. Moreover, the sale notice shall be published in a special bulletin of the Ministry of Economics at least 14 days prior to the sale date.

5. Higher security vs. administrative hurdles and higher costs

The Act has resolved a number of open questions by introducing new requirements involving the creditors' consent, which shall be granted with notarised signatures. While offering higher security for the creditors, the above requirements would involve additional notarisations and approvals of the officers of the (relevant) register, which would increase the transaction costs and would involve additional administrative steps. This would constitute a considerable change in case of syndicated loans and other more complex transaction involving a number of lenders.

The Act also introduces a clearer regulation of the liability of the enforcement depositary and the special manager (i.e. appointed in case of enforcement of a going concern pledge). Such parties are also required to obtain and maintain liability insurance.

6. Perfection formalities

Each element of the going concern of the pledgor will be considered to be pledged, if the pledge has been registered with the register responsible for the individual assets. There is currently no explicit requirement for including a detailed list of assets to ensure enforceability and opposability of the pledge, what was the case before. However, the practical application of such solution may raise some additional enforcement issues.

In addition, the pledge over real estates (as part of the going-concern of the pledgor), unless otherwise agreed between the parties, will also include the attachments and improvements without needing to derive this conclusion by way of interpretation of the rights in rem regime.

Implementation

New procedural rules in relation to the registration process will be adopted by 3oth of March. All pledges registered before the current amendments, will remain in force. The registration procedures initiated before 1 September 2018 will be completed under the existing rules.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions