Czech Republic: New Regulation Of Securities Focusing On Pledge

From 1 January 2014 private law in the Czech Republic will be revolutionised.

New regulation of securities focusing on pledge

From 1 January 2014, private law will be revolutionised and regulated by the new Act No. 89/2012, Coll., the Civil Code (the NCC). Unlike the current legal regulation, the NCC distinguishes between the security of debt (pledge, retention right, security transfer of right, guarantee, financial guarantee and deduction of wage) and its affirmation (contractual penalty and acknowledgement of debt). This article focuses on the most important changes with respect to the pledge as the most frequently used security instrument.

Secured debt and subject of pledge

The NCC extends the circle of debts which may be newly pledged, eg a debt whose amount may be determined any time during the pledge relationship or a debt that does not exist at the time of pledge creation. This may be widely used, eg, by securing of debts from an overdraft or revolving facility or other multipurpose credit lines.

Under the NCC, the subject of a pledge can be each thing which may be traded, whereas according to the NCC a thing is everything other than a person which serves the needs of people. This extension means that electric or other energy as well as things to which ownership arose in the future (ie, the thing does not exist at the time of creation of pledge or the thing is owned by a third person provided that the third person agrees) may be pledged. This may have wide use in the financing sector, ie, the thing, such as real estate, which shall be acquired only in the process of the loan financing may be pledged in favour of the financing bank already when negotiating the loan documentation. This regulation may also impact the priority of pledge. Moreover, the future pledge may be registered in the pledge register or public register if registration is required for the perfection of the pledge. After the acquisition of ownership, the pledge will be established without need for further action.

Newly, pledges also will relate to individual things from the pledge by means of a pledge over collective things, such as an enterprise. It therefore will not be possible during the duration of the pledge to create a new pledge over these individual assets. It always should be reviewed prior to the creation of pledge over individual assets relating to a collective thing whether the collective thing is not pledged.

The security may newly be provided not only to the creditor, but also to a third party (so-called agent for security) in favour of the creditor. This may have extensive application in syndicated financing.

Form of the pledge agreement

The pledge agreement does not generally need to be in writing, although this is recommended due to legal certainty. Written form shall be required if the pledged thing is real estate or the pledged thing (eg, receivable) is not handed over to the pledgee or to a third party. The form of a notarial deed will be required in specific cases stipulated in the NCC, such as pledge of enterprise or other collective thing, if the real estate is not registered in the Cadastral Register or if the pledge is created by registration in the pledge register.

Negative pledge

Upon fulfilment of certain conditions in the NCC, the parties may newly agree that the pledgor cannot create a pledge over a specific thing. Should this restriction be registered in the pledge register or in the public register, it also has effects towards third parties. Otherwise, the effects will be only between the parties, unless the third party knew about it.

Priority of pledge by movables

The pledge agreement may stipulate that the pledge over any movable, including receivables, will be registered in the pledge register, even if the legal regulations do not require registration. In such a case a pledge agreement in notarial form must be concluded. This process is favourable for creditors due to priority of pledges. If there are multiple pledges over one movable, the creditor whose pledge is registered in the pledge or public register will be favourably satisfied. If multiple pledges are registered in the pledge or public register, the moment when the application for registration was submitted shall be decisive. If no pledge over one thing is registered, the rank shall follow the creation of pledge. Therefore, the timing criterion takes a back seat or will be decisive only within the priority group.

Monetisation of pledge

One of the most important changes regarding the pledge is the possibility of the creditor to satisfy himself from the pledge via the manner agreed in writing under the conditions stipulated in the NCC, eg, sale or retention of the thing by the creditor. As a general rule, prior to the maturity of debt, the arrangements stipulating that the creditor may monetise the pledge in an arbitrary manner or may keep the pledge for an arbitrary or predetermined price are prohibited. As a consequence, the strict rules for monetisation, ie, only public auction or judicial pledge sale, are overcome as well as the prohibition of forfeited collateral. This agreement is not possible if the pledgor is a consumer or small or medium-size business.

The NCC also introduces other new institutes, such as substitution of pledge, assignment of priority or release of pledge, which will be discussed in the next article.

Quote: Unlike the current legal regulation, the New Civil Code distinguishes between the security of debt and its affirmation.

This article was originally published in the schoenherr roadmap`14 - if you would like to receive a complimentary copy of this publication, please visit:

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.

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