Bank finance and regulation. Multi-jurisdictional survey. Latvia. Enforcement of security interests in banking transactions

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1 Bank finance and regulation Multi-jurisdictional survey Latvia Enforcement of security interests in banking transactions Part I types of security Edgars Lodzins and Liene Krumina Borenius, Riga Edgars.Lodzins@borenius.lv/Liene.Krumina@borenius.lv 1. What are the most common types of security in banking transactions in your jurisdiction (eg, standard security package)? Please provide brief characteristic of each type of security. The most commonly used types of collateral by Latvian banks are: (i) mortgage a pledge of a real estate which is registered in official register without transferring it in possession of the creditor; (ii) commercial pledge a pledge of movable property which is registered in a public register; and (iii) financial pledge an arrangement or other transaction deed under which a collateral provider pledges financial resources to the collateral taker, retaining ownership rights to that resources. At the end of fourth quarter of per cent of all the loans provided by Latvian banks were secured by mortgages, but 8.1 per cent by commercial pledges. According to the information of Enterprise Register, as of end of January 2010 in Latvia were registered commercial pledges for a total value of 84.5 billion Latvian lats (approximately billion euro). 2. In relation to the following types of assets, please provide the types of security that can be created or granted in your jurisdiction and give details of any registrations required: (a) Real estate; Mortgage The security on real property is established as a mortgage on the respective real property. Accordingly the parties shall conclude a mortgage agreement. However in order to effect the mortgage it shall be registered with the Land Book Register, state maintained official real property register, which registers all information and any changes thereof with regard to the real property located in the territory of Latvia (the description of the real property, title to it, the collaterals etc). Such information is publicly available and binding. In order to register the mortgage with the Land Book Register the parties to the respective transaction shall submit to the Land Book Register the agreement on the basis of which the mortgage is registered (the loan agreement), the mortgage 1

2 agreement, as well as registration application that shall be made in the form of a notarial act and signed at public notary. Usually the registration application is signed by all involved parties; however in case the mortgage is registered on the basis of a legal transaction, it is sufficient that the registration application is signed only by the mortgagor. The parties may freely choose the form of loan agreement and mortgage agreement (with the condition that it describes the pledged property and indicates the maximum secured amount), while the registration application is in a standard form. The registration of a mortgage is confirmed by a decision of a Land Book Register s judge. It is possible to register several mortgages on the same real property, which accordingly will be ranked by priority. Thus in case a next mortgage is registered, the consent of the already existing mortgagors is required. The state fee for registration of mortgage is 0.1 per cent of the loan amount, but the state fee should not exceed 1000 Latvian lats (approximately 1422,8 euro). In addition the stamp fee in amount of 8 Latvian lats (approximately 11,3 euro) shall be paid. (b) Charging assets (inventory, stocks etc); In order to register a commercial pledge the parties shall conclude pledge agreement. However in order to effect the commercial pledge against third parties it shall be registered with the Commercial Pledge Register. In order to register the commercial pledge with the Commercial Pledge Register the parties to the respective transaction shall submit to the Commercial Pledge Register the agreement on the basis of which the commercial pledge is registered (the loan agreement), the pledge agreement, as well as registration application, signed by the pledgee and the pledgor, where the signatures shall be certified by the public notary (contrary to the registration of a mortgage, where the registration application itself is made in the form of a notarial act). The parties may freely choose the form of loan agreement and commercial pledge agreement (with the condition that it describes the pledged property and indicates the maximum secured amount), while the registration application is in a standard form. may be registered over specific movable tangible or intangible things or pool of the aforementioned things (existing as well as future parts of the pool), except real estate and vessel (covered by mortgage), financial instruments and financial assets (covered by financial pledge) or claim arising from a promissory note. may be registered also over enterprise as a pool of things (existing as well as future parts of the pool). It shall be noted that if the parties have concluded a commercial pledge agreement, however it has not been registered with the Commercial Pledge Register, the agreement itself is in force, while the pledge is not effective against third parties. In such case the pledgee can bring a claim against the pledgor, requesting the registration of the respective commercial pledge. The registration of a commercial pledge is confirmed by a decision of a Commercial Pledge Register and a Commercial Pledge Certificate. 2

3 It is possible to register several commercial pledges on the same property, which accordingly will be ranked by priority. Thus when next commercial pledge is registered, the consent of the already existing pledgor is required. The state fee for registration of the commercial pledge is 25 Latvian lats (approximately 35.5 euros). (c) Movables; Please see comments on charging assets. (d) Shares; Please see comments on charging assets. may be established over the shares of public companies. Please see comment on bank accounts. (e) Rights under contracts (receivables); Please see comments on charging assets. (f) Bank accounts; One of the parties of financial collateral arrangement must be local FSA regulated institution, the Republic of Latvia and its institutions, the Bank of Latvia or central banks of other member states as well as other banks and institutions foreseen by Financial Collateral Law. Two possible collateral arrangements are available: (1) title transfer collateral arrangement (collateral provider transfers full ownership of financial collateral to a collateral taker); (2) security collateral arrangement (collateral provider provides financial collateral by way of security in favour of, or to, a collateral taker, and where the full ownership of the financial instruments remains with the collateral provider). The only documentation necessary to establish financial collateral is written agreement between the collateral provider and collateral taker regarding the establishment of financial collateral arrangement. In case the financial instruments being provided as financial security collateral are not in the custody of collateral taker, additional agreement on the custody of financial collateral shall be concluded between collateral taker, collateral provider and custodian of the collateral. It should be mentioned that Financial Collateral Law shall be applicable only to such financial collateral the provision of which may be confirmed by an entry (booking) of financial instruments or cash in an account that has been opened with the financial collateral taker or an authorised person thereof and the confirmation of the provision of which allows to identify such financial collateral (also to identify exactly the time of provision thereof), as well as it is possible to confirm the fact that the financial collateral arrangement, on the basis of which the financial collateral is provided, has been entered into. No other formalities are required to establish enforceable financial collateral arrangement. 3

4 (g) Financial instruments (eg, securities); Please see comment on Bank Accounts. (h) Intellectual property; Pledge established over trademarks in addition shall be registered with the State Register of Trademarks. The registration application and documents that confirm legal lien shall be submitted to the Patent Office. (i) Plant and machinery; (j) Other assets. 3. Can a trustee or security agent be used in your jurisdiction, or must security be granted in favour of all lenders? Is the parallel debt clause concept recognised in your jurisdiction? A trustee and a security agent are not regulated by Latvian law, as well as the parallel debt clause concept is not recognised in jurisdiction of Latvia. 4. Please explain the latest amendments to the law governing secured transactions in your jurisdiction. Are there any amendments which will be introduced in the near future (within one to two years) which might have an impact on the legal framework of secured transactions? Please also explain recent practical developments regarding secured transactions in your jurisdiction. Since 1 February 2010 in accordance with amendments to the Civil Procedure Law the process of selling of the mortgaged property is limited to two auctions instead of three auctions as it was before. In second auction the bidding proceed from 75 per cent from initial auction price. This order would shorten the time of selling of the property, as well as expenses thereof. In addition the amendments foresee provisions regarding additional protection of the first mortgagee during the time of crisis, namely, the selling of the property till 2012 in the auction will be possible only with consent of the first mortgagee. Part II enforcement of security 1. Please explain briefly general rules of enforcement of security indicated in answer to the Question 1 in Part I above (excluding rules in a bankruptcy or insolvency proceeding see Question 3 below). In your answer please explain whether specific security may be enforced only 4

5 Mortgage through judicial proceedings or whether extra-judicial methods are also available. Furthermore, please provide estimate of costs (if they create significant obstacle in enforcement, including applicable taxes and any other duties/ costs) and timing for enforcing such security. Please also explain degree of difficulty (eg, burdensome formalities, whether enforcement requires actions of a state body) in enforcing security. Also please explain whether taking security by an entity from other jurisdiction influences possibility of establishing security and its enforcement. The enforcement of mortgages is governed by Civil Law and Civil Procedure Law. The mortgage can be enforced only when it is due, in case the term is divided in several payments, the creditor may enforce the mortgage if any of the due payments is not made. The enforcement mechanism generally used for realisation of mortgages is voluntary sale of immovable property at auction through the court, which is regulated by Civil Procedure Law. However in order to apply this mechanism it shall be specifically stipulated in the mortgage agreement. In such case applications for the voluntary sale real property at auction through the court shall be submitted to the district (city) court according to the location of the real property. The respective application to the court may be submitted by the owner or the mortgagee, having right to sell the mortgaged real property on the open market. The application shall be appended with the conditions of sale, indicating the composition of the real property, the opening price of the auction, the form of the procedure for payment; rights with reserved by the owner with regard to real property and other conditions that are considered as necessary. The State fee for application for the voluntary sale of real property at auction through the court is in amount of two per cent of real estate s value but not more than 200 Latvian lats (approximately euro). Besides when the auction is initiated by the mortgagee, it shall also submit the corresponding mortgage agreement and evidence regarding warning of the debtor, unless it does not follow from the document itself or the law that such warning is required. The application regarding voluntary sale of the real property at auction shall be adjudicated by a judge within a period of seven days from the day of submission of the application. The sale at auction shall be performed by a bailiff. After the purchaser of the real property has fulfilled all the conditions of sale, the court shall take a decision regarding confirmation of the statement of auction and the registration of the sold real property in the name of the purchaser. The mortgage will be regarded as cancelled after its deletion from the Land Book Register, which can be done only with the consent of the creditor or on the basis of a court s decisions. Deletion of the mortgage from the Land Book is free of charge. The other option is compulsory recovery, which is applicable in case the agreement does not contain a right of the mortgagee to sale the real property in a voluntary auction, as described above. Civil Procedure Law determined the procedure for undisputed compulsory execution, which is applicable also in the case of realisation of a mortgage. Accordingly the creditor shall submit an application to the court. The judge will adopt a decision thereof within seven days from the day of submission of the application. The judge's decision shall come into effect without delay, and it shall 5

6 have the effect of an execution document. The decision shall be executed in accordance with provisions regarding the enforcement of judgments. If a debtor considers that the claim of the creditor is, on the merits, unfounded it may dispute the execution decision within six months after the adoption of such decision. There are no difficulties for an entity from other jurisdiction to establish the mortgage, but some difficulties may arise in its enforcement if the mortgage is registered over land in rural area or forest land. Civil Procedure Law foresees rights for the secured creditor to participate in an auction, besides the secured creditor is entitled to include its secured claim in purchase price of the real estate. Difficulties may arise with registration of the real estate in the name of the purchaser. The Law on Land Privatization in Rural Areas foresees prohibition for entities from other jurisdictions to register ownership over land in rural area or forest land. This prohibition is foreseen till 1 May This restriction is not related to other types of the real property. The regular practice with regard to enforcement of commercial pledges is the right for the pledgee to sale the commercial pledge without an auction. If the parties intend to apply this mechanism, it shall be specifically stipulated in the agreement. In such case the pledgee can sell the commercial pledge at free price at its own discretion, without conduction an auction and/ or receiving court s order. The other enforcement mechanism of the commercial pledge is sale of the pledged property through an auction, which is applicable, if the parties have not agreed on the above mentioned procedure of sales without an auction. However, in opposite to the realisation of the mortgage, the auction for realisation of a commercial pledge does not have to be approved by the court, ie, the pledgee organises the auction, in accordance with the general provision applicable to the auctions. At least one month before the auction the pledgee shall publish an announcement in the official newspaper, indicating the main information with regard to the auction, such as information on the pledgee and the pledgor, the description of the sold property, the initial price, as well as other required details. The parties may also agree on realisation of a commercial pledge through court s approved auction, as described in case of realisation of mortgage; however it is not commonly used mechanism for commercial pledges, as the basic advantage of commercial pledges is their easy enforcement. Thus if the commercial pledge is being realised without court intervention by any of the above described procedures, before the exercise of the commercial pledge rights, the pledgee shall submit a notice to the Commercial Pledge Register, as well as the pledgor. If there are several pledgees registered on the respective pledged property, the Commercial Pledge Register informs them thereof. The pledgor is entitled to appeal such notice. Accordingly the pledged property may be sold without court intervention after the expiry of 30 days from the submission of the notice to the Commercial Pledge Register. The pledgee shall sell the pledged property at the highest price possible during the sale and shall not delay its sale. If the pledged item is sold without an auction and the pledgor disputes the determined price the pledgee shall justify the set price. The dispute concerning the price shall not suspend the sale of the pledged 6

7 item. The sale of the pledged item shall be conducted at the expense of the commercial pledgor. Accordingly the proceeds obtained from the sale of the pledged property shall be deposited in a bank separate account, and a list of all pledgees entitled to the proceeds from the respective pledged property shall be prepared. The proceeds from the sale shall be distributed within a period of 30 days after the sale. Hence the claims of all pledgees are covered in accordance with their priority right. After the secured claims, as well as any sales expenses are covered, the remaining amount, if any, is used to settle the unsecured claims associated with the respective commercial pledge, ie, the claims exceeding the agreed amount of the secured claim. The residue shall be paid to the pledgor. If, upon the sale of the pledged property, the proceeds do not cover claims of all pledgees, they shall have the right to claim the outstanding debt amount from the debtor, by submitting regular recovery claims. The pledgee, selling the pledged item without court intervention, shall bear responsibility for the sale of the pledged item as a proxy and shall reimburse to the pledgor all losses incurred through its negligence. The pledgee shall be entitled to realise their commercial pledge before the term under the following circumstances: 1) the assets of the pledgor are being divided; 2) the business of the pledgor is suspended or terminated, or a decision on initiation of pledgor s bankruptcy is enforced; 3) the pledged property is being alienated without a consent of the pledgee; 4) a major part of the pledged property is destroyed or its value has substantially decreased, due to the fault of the pledgor; 5) the pledged property is abandoned. The parties may also agree on other conditions under which the anticipatory realisation of the commercial pledge is permitted. There are no restrictions provided by law for entities of other jurisdictions to establish or enforce commercial pledges. 2. Please explain briefly specific features (if any) of enforcement of security established over following types of assets: (a) Real estate; Mortgage please see answer to the Question 1 Part II above. (b) Charging assets (inventory, stocks etc); please see answer to the Question 1 Part II above. (c) Fixed charge over movables; please see answer to the Question 1 Part II above. (d) Shares; please see answer to the Question 1 Part II above. (e) Rights under contracts (receivables); please see answer to the Question 1 Part II above. 7

8 (f) Bank accounts; In case the financial collateral is established it is binding to any third parties, administrators and liquidators. In case the secured claims are not settled, collateral taker settles the claims outstanding from the proceeds gained from selling the financial collateral. Collateral arrangement can also be provided in the way that upon the default of debtor it permits the collateral taker to settle the secured claims by simply retaining the financial collateral in the ownership of creditor. In case the event of default has occurred no special formal procedure formal procedure is required for collateral taker in order to dispose with the collateral. (g) Financial instruments (eg, securities); Please see comments on Bank accounts. (h) Intellectual property; Please see answer to the Question 1 Part II above. (i) Plant and machinery; Please see answer to the Question 1 Part II above. (j) Other assets. Please see answer to the Question 1 Part II above. 3. How does a commencement of bankruptcy or insolvency proceeding influence the rights of the security holder to enforce its rights? In bankruptcy or insolvency proceedings, what are the suspect periods, is claw-back possible, and what other types of rights (tax debts, employees, etc) have preference over security granted? Please explain briefly specific features (if any) of enforcement of security established over following types of assets in a bankruptcy or insolvency proceeding: A commencement of insolvency proceeding does not influence the rights of the security holder to enforce its rights. The secured creditor shall be entitled to require the selling of a debtor s property in respect of enforcement of security after the decision regarding the solution of the type of insolvency proceedings is made. Moreover the secured creditor has rights to require having the insolvency administrator s concluded deal declared null and void if this deal refers to the secured property and the interests of the secured creditor are affected. In insolvency proceedings the suspect period is five years. The administrator has an obligation to examine all agreements concluded by the debtor within a period of five years before insolvency proceedings. The administrator shall have an obligation to bring an action in the court concerning declaring the respective deal null and void if this deal is concluded after the day of setting in 8

9 of insolvency proceedings and thus losses are caused to a debtor irrespective of that, if a person, with whom or for the benefit of whom the deal is concluded, has or has not known about causing losses to creditors. Also the action in the court shall be brought if the deal is concluded within five years before the day of setting in of insolvency proceedings, thus losses are caused to a debtor and the person with whom or for the benefit of whom the deal is concluded knew or should known about causing such losses. Besides if the deal by which losses are caused to a debtor is concluded with persons concerned in relation to a debtor or for the benefit of these persons, it is to be considered, that these persons have known about causing losses, if they do not prove the opposite. (a) Real estate; Mortgage In case of insolvency of the debtor, the secured creditors can start to realise the pledged property after the creditor meeting of the debtor has adopted a decision on solution of the respective insolvency (settlement, rehabilitation or bankruptcy). However in case the rehabilitation is chosen as a solution for insolvency, the realisation of the secured pledges may be subject to the rehabilitation plan. In case the mortgage is realised at a voluntary auction, the secured creditor shall coordinate the provisions regarding voluntary auction and the initial price with the administrator. The administrator shall represent the interests of the debtor in the auction. After the sale of immovable property, the administrator shall submit to the court an application regarding the extinguishing of the insolvency notation in the Land Register. If the amount of money received for the pledged property of the debtor exceeds the secured claims and the auction expenditures, the surplus shall be paid into the current account of the debtor. It shall be noted that if the above provisions are not complied with, the alienation contract on the pledged property of the debtor is invalid. (b) Charging assets (inventory, stocks etc); Similarly as in the case of realisation of a mortgage in case of insolvency of the debtor, the secured creditors having registered commercial pledges are entitled to realise the pledged property after the creditor meeting of the debtor has adopted a decision on solution of the respective insolvency (settlement, rehabilitation or bankruptcy). However in case the rehabilitation is chosen as a solution for insolvency, the realisation of the secured pledges may be subject to the rehabilitation plan. In case the commercial pledge is realised at an auction, the secured creditor shall co-ordinate the provisions of the auction and the initial price with the administrator, while if the commercial pledge is sold at free price, the agreement on sale of the pledged property shall be concluded in writing and coordinated with the administrator. If the amount of money received for the pledged property of the debtor exceeds the secured claims and the auction expenditures, the surplus shall be paid into the current account of the debtor. It shall be noted that if the above provisions are not complied with, the alienation contract on the pledged property of the debtor is invalid. 9

10 (c) Fixed charge over movables; (d) Shares; (e) Rights under contracts (receivables); (f) Bank accounts; The insolvency proceedings do not have an effect on the enforcement of financial pledge. (g) Financial instruments (eg, securities); Please see the answer above. (h) Intellectual property; (i) Plant and machinery; (j) Other assets. 5. Are there any specific features or problems of enforcement proceedings if the security is granted to a trustee or security agent or the parallel debt structure is used? Please see answer to the Question 3 Part I above. 6. Please explain the latest amendments to the law governing secured transaction in your jurisdiction in relation to a bankruptcy or insolvency proceeding. Are there any amendments which will be introduced in the near future (within one to two years) which might have impact on the legal framework of the enforcement of secured transactions in the light of insolvency law? Please also explain recent practical developments regarding secured transactions in your jurisdiction in relation to insolvency law. 10

11 Recently a new draft Insolvency law was submitted to the Parliament. Currently the draft law is an object of discussions, therefore it is hard to predict how it will impact the secured transactions after its final approval. 11