Pledge over movable items and rights, Security by transfer of ownership

in Germany and Slovakia – comparative analysis

A thesis submitted to the Bucerius/WHU Master of Law and Business Program in partial fulfillment of the requirements for the award of the Master of Law and Business (“MLB”) Degree

Peter Glézl July 30, 2012

14.377 words (excluding footnotes) Supervisor 1: Dr.Sven Prüfer

Supervisor 2: Mgr.Lenka Dufalová, PhD.

Content

A. Introduction ........................................................................................................................ 1

B. Analysis .............................................................................................................................. 3

1. Pledge ......................................................................................................................... 3

1.1 Nature of pledge ........................................................................................................... 3

1.2 Secured claim and accessoriness ................................................................................ 3

1.3 Specificity principle ....................................................................................................... 4

1.4 Future claims and conditional claims ............................................................................ 5

1.5 Interest and other costs ................................................................................................ 6

2. Pledge on movable items ............................................................................................. 7

2.1 Formation of pledge on movable items ........................................................................ 7

2.2 Object of encumbrance ..............................................................................................10

2.3 Components and accessories .....................................................................................11

2.4 Fruit .............................................................................................................................14

2.5 Custodial and other rights and obligations ...................................................................15

2.6 Transfer of the pledged movable item .........................................................................17

2.7 Timely and orderly satisfaction of the secured claim ....................................................18

2.8 Priority .........................................................................................................................19

2.9 Satisfaction from the pledge ........................................................................................21

2.10 Satisfaction of several pledges ..................................................................................24

3 Pledge on rights .............................................................................................................25

3.1 Establishment of pledge on rights and claims ..............................................................26

3.2 Satisfaction from the pledge on rights ..........................................................................27

3.3 Satisfaction from the pledge on claims ........................................................................28

3.3.1 Performance by the debtor before the due date of the secured claim .......................29

3.3.2 Performance of the debtor after the due date of the secured claim ...........................31

3.4 Extinguishment of the pledge ......................................................................................33

4. Transfer by way of security .........................................................................................34

4.1 Creation .......................................................................................................................35

4.2 Accessoriness and condition subsequent ....................................................................37

4.3 Custody of the security ................................................................................................39

4.4 Transfer of ownership to third parties ..........................................................................39

4.5 Satisfaction ..................................................................................................................41

C. Conclusion ........................................................................................................................44

Bibliography ..............................................................................................................................47

List of abbreviations

GCC German Civil Code (i.G. “Bürgerliches Gesetzbuch“)

SCC Slovak Civil Code (i.S. “Občiansky zákonník“)

i.G. in German language

i.S. in Slovak language

TWS Transfer by way of security (i.G. “Sicherungsübereignung”)

SAR Security assignment of right (i.S. “Zabezpečovací prevod práva“)

GCP German Code on Civil Procedure (i.G. “Zivilprocessordnung”)

SCE Slovak Code on Enforcement (i.S.”Exekučný poriadok“)

1

A. Introduction

Proper collateralization of debt will always be of great importance in all kinds of

financing transactions, particularly in case of large-scale transactions. The differences in

the national legislation have remained grave with a potential of affecting the

effectiveness of agreed securities with the ultimate consequence of devaluation.

Purpose of this thesis is to provide practitioners with a short overview of the differences

in national legislation between Germany and Slovakia in regard to a small segment of

securities that stand at disposal of the creditors and debtors of both countries. The

complexity of issues is enormous and remains growing not only due to the output of the

legislators, but also due to court decisions that in some cases have developed and

accepted legal constructions that have not been foreseen by the legislator. Next to

complexity issues, the German and Slovak legislation that will be analyzed in this thesis

are in very differing stages of development. Germany adopted its civil code in the year

1900 and has pursued by way of large, yet comprehensive amendments such as

reforming of law of obligations, which entered into force in the year 2002. A systematic

approach like this has enabled the German legal rules to significantly develop in detail

particularly with regards to securities that are the main focus of this thesis.

In contrast to Germany, Slovakia completely rewrote its former civil code and since

reformation in 1991, the law has experienced so far only 21 years of rather questionable

progress. For what is worse, more than 40-years long rule within a centralized economy

and exclusion of private ownership has taken away all the know-how that Slovakia had

acquired during the first half of the 20th century. Not even this can excuse the Slovak

legislator for making frequent legislative changes and as a result Slovakia has so far not

been able to achieve any significant stabilization of case law. In light of these

circumstances and in order to avoid excessive theoretical discussion, this comparative

analysis will focus only on the most important aspects of each of the securities and

avoid analysis of German rules and case law that would lack a Slovak equivalent. To a

limited extent, an evaluation will be made on imaginable revisions of lege lata, where

2

the basis for development will be on individual legal acts. In pursuit of the goals of

reducing complexity, focusing on the most important components of individual

securities, and providing revision suggestions, the object of the analysis will be

concerned with the legal rules governing contractual pledge over movable items and

rights, security by transfer of ownership. The analysis will enable us to understand why

the pledge is the most favored security instrument in Slovakia with regard to movable

items, rights and claims and provide an overview of its basic characteristics. On the

other hand German legal practice prefers other instruments like the transfer by way of

security, which I will compare with the Slovak security assignment of right to analyze the

underlying reasons of why that is so. Specific conclusions of the writer will be provided

at the end of important chapters.

This writer believes that it is significant to note that while this thesis analyzes the most

frequently used security instruments in Germany and Slovakia that use movable items

and rights as security, the most preferred German security instrument in regard to

claims, security assignment of claims (i.G.”Sicherungsabtretung”) was excluded from

this analysis. This is because the German security assignment of claims does not have

a sufficiently developed and clearly regulated Slovak equivalent 1 , which makes a

comparative analysis impossible.

1 §554 SCC provides that a claim can be secured by assignment of the debtor’s or of a third party’s claim

in favor of the creditor. The SCC provides no further regulation of this instrument which is why this instrument requires an all-encompassing contractual regulation. The principles have not yet developed enough to be comparable with those of the German security assignment of claim.

3

B. Analysis

1. Pledge

1.1 Nature of pledge

Provisions regulating the German pledge (i.G.“Pfandrecht”) are contained in §§1204-

1256 of the German Civil Code (i.G. “Bürgerliches Gesetzbuch”) (“GCC”) whereas the

corresponding provisions relating to the Slovak pledge (i.S.“Záložné právo”) are to be

found in §§151a-151me of the Slovak Civil Code (i.S. “Občiansky zákonník“) (“SCC”).2

The meaning of a pledge in both Slovak and German law in general can be described

as a right of a creditor to sell an item charged by the pledge to settle a due unsatisfied

claim against the debtor. Regulation on who retains the possession of the item until the

obligation is discharged as well as other aspects of this legal instrument may differ. A

contractual pledge that is formed through a contract secures the creditor’s claim by

charging the security, in case of this analysis movable items and rights, with a pledge.

The pledge gives the creditor a right in rem to satisfy his claim from the security creating

a right of separate satisfaction for the creditor. This can be compared to other creditors

whose claims against the debtor have been secured only in personam and where

satisfaction shall be obtained from the rest of the debtor’s property.

1.2 Secured claim and accessoriness

The main characteristic of a pledge is its strong accessoriness (i.G.”Akzessorietät”,

i.S.”akcesorita”), by which we mean a strong dependency relationship between the

pledge and the claim secured by this pledge. Formation, assignment and

extinguishment of both the pledge and the claim are time wise identical and mutually

dependent. This principle does not allow the pledge to exist independently of a valid

claim. In practice “the pledge can only be formed if it is securing a valid claim - it can

only be assigned together with the claim and is being automatically assigned with the

2 Act No. 40/1964 Coll. Civil Code

4

assignment of claim onto a the new holder of the claim – and it terminates together with

the claim it secures.3” This nature is also behind further legal characteristics of the

pledge, which provide that

the pledge stays valid only to the extent of the remaining valid claim,

the pledge will also secure a new claim that has come to existence by

replacement of the old claim by means of a contractual novation,

the pledge is invalid due to invalidity of the claim caused by lack of legal capacity,

lack of form or due to a loan not being paid out.

As mentioned above, the security instrument of pledge has a strong accessory nature,

meaning that a transfer of the secured claim effects a transfer of the pledge to the new

creditor (§1250 (1) GCC, 151c (3) SCC).

1.3 Specificity principle

The specificity principle (i.G.”Spezialitätsprinzip, i.S.,”princíp špeciality”) answers the

questions (i) which claims may be secured by a pledge and (ii) which items may be

encumbered by a pledge. We will first assess the question of which claims may be

secured and the question of which items may serve as securities later on in separate

chapters on pledge on movable items and pledge on rights.

The most important matter regarding secured claims is the necessity of having these

claims sufficiently defined. Claims in general are required to be identified by the parties

to the contract, the contractual performance and its legal basis so as not to be mistaken

for a different claim. In general, claims can be split into monetary and non-monetary

claims. Where both countries assume monetary claims to be secured in the first place,

there is a slight difference between German and Slovak statutory regulation regarding

the possibility of securing non-monetary claims, such as the performance of a particular

service, for example the building of a house. German law provides the possibility to

3 Baur/Stürner – Sachenrecht (2009), §55, para.4, page 748

5

secure these non-monetary claims under the condition that they turn into monetary

claims in the moment of satisfaction, such as damage claims (§1228 (2) GCC).4 The

requirement set by Slovak law for a valid creation and duration of pledge securing a

non-monetary claim provides, that the value of the claim must be defined or at least stay

quantifiable during the whole term of the legal relationship (§ 151c (1) SCC).

Which claims can be secured by a pledge?

GCC SCC

Secured claims

Monetary claims

Non-monetary claims

(if they can be turned

into monetary claims at time of satisfaction)

(if the value is defined or stays quantifiable during

the whole legal relationship)

It is of this writer’s opinion that the German pledge on non-monetary claims is regulated

more reasonably than in Slovakia. While the necessity for having a quantifiable secured

claim is clear, it is the time when pledge becomes due, which requires specific amount

of the secured claim to be determined and not to the whole time of the pledge

relationship.

1.4 Future claims and conditional claims

Future claims as well as conditional claims can be secured in both Slovakia and

Germany. The simple condition required to be met in order to establish the validity of

claims that will (i) arise in the future or (ii) depend on future uncertain circumstance is

that they must be clearly defined (§151c (1),(2) SCC, §1113 (2) GCC). With regard to

future claims, the level to which these claims must be defined is essentially similar in

both jurisdictions. The German legal literature states that securing future claims is

possible only under the condition that the owner of the security is not able to prevent the

4 Baur/Stürner – Sachenrecht (2009), §55, para.14, page 755

6

formation of the claim.5 A similar approach was chosen by the Czech judicature that has

great influence on Slovak law. According to this approach, validity is granted only to

those future claims based on what has already been established by a future contract or

a different type of agreement. It is therefore necessary that such an agreement contains

an obligation, which will give rise to the claim.6

1.5 Interest and other costs

In practice, it should be always of great importance for a creditor to have the pledge

secure not only the original claim, but also other related costs that may be incurred by

enforcement of the pledge. According to German law, the liability attached to the pledge

extends to discharge of the claim in its particular amount along with any interest

(including default interest), contractual penalties and all other costs created by the

creditor (§1210 GCC).7 Pursuant to Slovak law, a pledge secures the claim, its interest,

default interest, contractual penalties and costs relating to recovery of the claim

(§§151a, 121 (3) SCC). Here we see that both jurisdictions offer the creditor recovery

allowances if debt conditions are not complied with.

Claims secured by a pledge

GCC SCC

(i) Nominal value of the claim

(ii) interest

(iii) default interest

(iv) contractual penalties

(v) all other related costs

(i) nominal value of the claim

(ii) interest

(iii) default interest

(iv) contractual penalties

(v) costs of recovery

5 Vieweg/Werner – Sachenrecht (2010), §15, para.28, page 484

6 Judgment of the Highest court of Czech Republic from 14.May 2004, Nr. 21 Cdo 2217/2003

7 Vieweg/Werner - Sachenrecht (2010), §10, para.22, page 296

7

2. Pledge on movable items

2.1 Formation of pledge on movable items

The following chapters will bring a short overview of the main aspects of pledge over

movable items. The life of every security instrument starts with creation, which may

require different conditions to be fulfilled. First we will take a look at the individual

national regulations.

According to GCC, a movable item can be encumbered for the purpose of securing a

claim in a way, so as to enable the creditor to seek the discharge of his claim from the

item. The formation of pledge on movable items requires the following:

1) an agreement of the pledgor (owner or another entitled individual or entity) and

the creditor on the creation of the pledge (§1205 I 1 GCC),

2) transfer of physical possession of the item from the pledgor to the creditor or a

different type of transfer of possession replacing the physical transfer (§§1205,

1206 GCC),

3) validity of the secured claim (§1204 I GCC).

The German pledge on movables is specific for the obligatory transfer of possession of

the encumbered item into the hands of the creditor. Therefore the pledger must lose his

sole direct possession of the item”8, which is an aspect of pledge that has caused it to

lose most of its value as a legal tool to the more practicable possession-free security by

transfer of ownership (i.G.”Sicherungübereignung“). Through this transfer of possession

related to the publicity principle, the German legislator aimed to prevent faulty

assessments of the debtor’s creditworthiness by other potential creditors. Interestingly,

the transfer of the claim secured by a pledge does not require the transfer of possession

to the new pledgee.9

8 Jan Wilhelm – Sachenrecht (2007), IV Pfandrecht, para.1855, page 711

9 Schapp/Schur – Sachenrecht (2010), §22 para.521, page 254

8

The simplest case of hand-over is the transfer of direct possession from the pledgor to

the pledgee.10 Next to that, the German legislature and judicature developed certain

hand-over surrogates that can affect a transfer of possession and a valid formation of

the pledge. Hence, next to the actual transfer of possession, the GCC prescribes that

the pledge can also be validly formed as follows:

If the creditor is already in possession of the movable item, the simple

agreement of the entitled parties on formation of the pledge gives rise to its

formation.11

The pledge can be formed through an agreement on assignment of the owner’s

claim for restitution against a third party. The legal condition that needs to be

fulfilled in order for this surrogate to be valid is a notice from the owner to the

direct possessor informing him on both the formation of the pledge and the

assignment of his claim for restitution. For practical purposes, the owner is

entitled to authorize the creditor to give the notice to the direct possessor in the

owner’s name.

The formation of a pledge can be effected through granting of qualified direct or

qualified indirect co-possession, which makes the exercise of the possession

subject to joint action of the owner and the creditor.

In contrast to German regulation of pledge, the Slovak pledge does not always

necessitate a transfer of possession. There are two alternatives of formation.

The first requires a written pledge agreement and registration of the pledge through

registration of the corresponding pledge agreement in the Central pledge register

(§151b (1) SCC). Any Slovak public notary can administer this registration.12 In contrast

to the Cadastral register, which is used for registration of rights to real estates, the

Central pledge register has only an informative nature in the sense that it does not

10

traditio vera 11

traditio brevi manu 12

Act No. 323/1992 Coll. on notaries public and notarial procedures

9

authenticate the existence of an ownership right or of a pledge over the item and rather

enables third parties to inform themselves on the non-existence of a pledge.13

The second alternative does not call for a written agreement and registration if the

parties agreed the item to be handed-over to the pledgee or into custody of a third party

(§151e (5) SCC). The hand-over of the item can be performed by virtue of the hand-

over surrogates such as traditio vera, tradition brevi manu or joint possession of the

pledgor and the pledgee.14 The contrast to Germany, the SCC requires the pledgee to

receive actual physical possession 15 which is not always required by GCC. Direct

physical possession is not a condition in cases of assignment of claim for restitution

against a third party to the pledgee. Another aspect that can be regarded as a

disadvantage of possessory pledge is that a later registration of another pledge over the

same item in the Central pledge register provides the registered pledges with higher

priority despite the later time of their establishment (§151k (2) SCC). The possessory

pledge can be turned into a register pledge at any later time under the condition of a

written contract or a written confirmation of the content of the contract being drafted and

executed by both the pledger and the pledgee.

Pledge formation GCC SCC

(i) agreement

(ii) transfer of possession to the

pledgee (see surrogates)

(iii) validity of the secured claim

(i) agreement

(ii) written contract and its

registration in the Central pledge

register; or

transfer of physical possession

to the pledgee or a third party

(iii) validity of the secured claim

What is being compared in this chapter is the position of the German possessory and

position of the Slovak registered pledge. It is of this writer’s opinion that the publicity

13

Svoboda - Občiansky zákonník (2005),komentár a súvisiace predpisy, §151e, page 273 14

Fekete – Občiansky zákonník - Veľký komentár (2011), §151e, page 936 15

Judgment of the Highest court of Czech Republic from 26.April 2006, Nr. 29 Odo 576/2004

10

principle achieved through registration in the Slovak central pledge register is adhered

to just as well as in case of the Germany’s possessory pledge. Additionally, thanks to

excerpts from the pledge register, the creditors are provided with better overview of the

debtor’s creditworthiness. The obvious advantage of the Slovak pledgor is that he can

use the pledged item, which is why German practice favors the transfer by way of

security more than the pledge. Position of the Slovak possessory pledge is weakened

by higher priority of the registered pledges regardless of the time of formation, which is

why it is not used in practice.

2.2 Object of encumbrance

The purpose of this chapter is to assess the nature of pledge on movable items. In the

most simple of cases, the pledge is created over a single movable item or over co-

ownership over such an item (§§1204,1258 GCC, §151d 1 SCC). A different option is a

pledge on several movable items with each of them securing the whole claim and with

the creditor’s right to choose which of the items will be used to discharge his claim. Due

to violation of the specificity principle, the pledge can neither be formed in respect of

aggregate items16, nor in respect to such groups described as “all of debtor’s property”.

The most wide ranging spectrum of items that can be subject to a pledge allowed by the

German law can only include items that can be defined by a summarizing description.17

Because the pledge must be created over each of the described items, each must be

pledgeable and must fulfill the condition required by the principle of publicity. In practice,

this can be the case of items stored in a storage facility the amount of which varies over

time. On the other hand, the Slovak law provides that a pledge can be established over

an item, a right and other assignable property right including a set of items, rights or

other property rights, an enterprise or a part thereof, or another aggregate item.

16

Aggregate item or aggregate of things is an item made up of a set of individual movable items that are internally connected through their purpose and form one economic unit 17

Baur/Stürner – Sachenrecht (2009), §55, para.5, page 749

11

Object of encumbrance GCC SCC

Movable item

Co-ownership on a movable item

Items defined by a summarizing description (implied)

Aggregate items ×

“All of debtor’s property” × ×

Taking into account the specificity principle, it is not clear how can the SCC allow

aggregate items to validly become objects of a pledge. The Slovak legal literature and

case-law have not addressed this issue so far, which is why the creditor’s rather prefer

a pledge over a business interest or a share than over an enterprise.

2.3 Components and accessories

In regard to movable items, one should assess the question: what are the components

and accessories of a movable item and in how far are they subject to liability under a

pledge according to the respective national regulations?

German regulation distinguishes essential and non-essential components (i.G.

“wesentliche und unwesentliche Bestandteile”) of an item. The essential components of

an item are those components that cannot be taken apart without one or the other being

destroyed or changed in its nature (§93 GCC). Essential components as defined above

cannot be subject of separate rights and will always be subject to the pledge. Non-

essential components that are considered relevant only in relation to movable items,

such as easily replaceable car components, can be subject of separate rights. The

reason for distinguishing these two types of components lies in regulation of the GCC

allowing non-essential components to be pledged separately from the main item. An

example can be a ring and a stone, the non-essential component must be individualized

and transfer of possession together with the main item in favor of the creditor must be

established (§1205 GCC).18

18

Damrau – Münchener Kommentar BGB (2009), §1204, para.3, page 2449

12

On the other hand, Slovak law does not distinguish between essential components and

non-essential components of an item and understands the single term component (i.S.

“súčasť“) to be everything according to its nature belongs to the item and cannot be

separated without consequent devaluation of the item (§120 (1) SCC). According to

SCC, a pledge encompasses all components of an item (§151d (2) SCC).

What are

components?

GCC SCC

(i) essential components - components

that cannot be taken apart without one or

the other being destroyed or changed in

its nature

Component - everything what

according to its nature belongs

to the item and cannot be

separated without consequent

devaluation of the item (ii) non-essential components (relevant

only in relation to movable items) -

components that can be taken apart

without one or the other being destroyed

or changed in its nature, e.g. easily

replaceable car components

Leaving the matter of components behind, one must assess what are the accessories of

a movable item and in how far are they subject to pledge liability. Pursuant to §97 GCC,

accessories are movable items that do not qualify as components of the main item,

serve the economic purpose of the main item and have a close spatial relationship with

the main item. It must be necessary to consider this area through the viewpoint of a

layman sensitive to the fact that temporary use of an item for economic purposes of

another does not constitute the characteristics of an accessory. According to §121(1)

SCC, accessories are items that belong to the ownership of the owner of the main item

and are assigned by the owner to be used with the main item. What follows from these

13

two definitions of an accessory is a difference, which may result in differing scopes of

liability.

What is an

accessory?

GCC SCC

(i) does not qualify as components of

the main item

(ii) serves the purpose of the main

item

(iii) has a close spatial relationship

with the main item

(i) assigned by the owner to be used

with the main item

(ii) part of ownership of the owner of

the main item

One of the main conclusions of this particular comparison is that German law allows an

accessory to be subject of separate rights including pledge and it is therefore not

included in the liability of a pledge unless a contract provides otherwise.19 In other

words, German accessory requires to be separately assessed as to its ownership and

clearly defined in the contract.

As explained above, the Slovak regulators opted for a different approach that requires

the accessory to be owned by the owner of the item in order to fulfill the condition of the

terms of the accessory. As to the liability side, according to §151d (2) SCC, the regular

statutory case provides that the pledge encompasses the item, its components, fruits,

civil fruits and accessories unless otherwise agreed upon. In other words, the statutory

case includes accessories in the pledge liability, but it is necessary to assess the

question of its ownership and other statutory elements of an accessory.

19

Baur/Stürner – Sachenrecht (2009), §55, para.10, page 753

14

Statutory regulation of pledge liability of components and accessories

(be aware of differing statutory definitions)

GCC SCC

Essential components

(components cannot be

pledged separately)

Non-essential components

(can be pledged separately)

Accessories ×

2.4 Fruit

Fruits of a pledged item may have considerable value for a creditor. In the following, we

will shortly assess the statutory pledge liability of fruits. Bear in mind the contracting

parties can contractually regulate the liability differently. In the GCC, fruits of a thing

(i.G. “Sachfrüchte”) are defined as products of an item and other yield obtained from the

item in accordance with its intended use (§99 (1) GCC). Fruits of a thing are subject to

the pledge of the main item and a pledge established over the main item extends to the

products, or in other words fruits of a thing, even after their separation (§1212 GCC).

Civil fruits20 and insurance claims are not subject to pledge of the main item, but this

does not exclude a contract to provide otherwise.21

With regard to fruits, the legal regulation in Slovakia remains very unclear. First of all,

the SCC contains no definition of fruits whatsoever, which leads some legal theorists

back to definitions provided by §§330,405 of the General Civil Code of Austria which

was adopted in the year 1811 (i.G. “Allgemeines Bürgerliches Gesetzbuch”). Since

going in this direction would not bring any legal certainty to this issue, let’s try to work

with what we have. The SCC provides that fruits and benefits (i.S. “plody a úžitky“) are

subject to pledge only until the moment of their separation from the pledged item,

unless the securing contract provides otherwise (§151d (2) SCC). From this wording, it

can be interpreted that the legislator extended the pledge liability on both fruits of things

and fruits of rights under the term fruits as well as on civil fruits through use of the term

20

Proceeds supplied by a thing or a right by virtue of a legal relationship (§99 (3) GCC) 21

Prütting/Wegen/Weinreich, BGB Kommentar (2012), §1212 para.1, page 2050

15

benefits. Nevertheless, unless a contract provides otherwise, this liability lasts only until

the separation from the fruit and benefits producing item. Consider the example of

separating a fawn from its mother, which represents one example, it remains unclear

what is to be understood under such a separation with regard to benefits. For these

reasons, it is the opinion of the writer that the matter of fruits should be clearly regulated

by a contract.

Statutory regulation of pledge liability of fruits

(be aware of differing/lacking statutory definitions)

GCC SCC

Fruits of a thing (movable

item)

(remains after separation)

(lapses after separation)

Civil fruits ×

(lapses after separation)

Insurance × 22

2.5 Custodial and other rights and obligations

In this chapter, we will analyze the custodial rights and obligations of the pledgor and

pledgee with regard to the pledged item. Be aware that the GCC essentially prescribes

possession of the pledgee, whereas the SCC provides a choice between possession of

the pledgor and possession of the pledgee.

The pledge in Germany is characterized by pledgee‘s possession of the item, which is

connected to particular mutual rights and obligations. According to §1215 GCC, once

the pledgee gains possession of the pledged item, he becomes subject to obligations

that are substantially similar to obligations under custodianship23 that include obligations

to secure protection from damage, loss and destruction as well as any appropriate

22

If the pledgor gives notice or the pledgee provides proof of creation of the pledge to the insurer before pay-out of the insurance, the insurer is obliged to pay the insurance premium in favor of the pledgee or a third party appointed by the pledgee (§151mc (2),(3) SCC) 23

appropriate application of the provisions §§688 et seq. GCC

16

instructions, if a third party holds the item for the pledgee.24 Since the pledgor retains

his ownership of the item, he remains entitled to use the item and not the pledgee

unless the contract provides otherwise. More of the main custodial rights and

obligations are specified in the table below.

In Slovakia, the pledgee who is in possession of the movable item is allowed to use the

item only when having the security provider’s prior approval. Pledgee’s main duty is to

protect the item against damage, loss and destruction. Should the pledgee incur costs

while adhering to his obligations to protect the item, he has the right to have the

unavoidably and purposefully incurred costs reimbursed (§151i (2)(3) SCC). As we

mentioned many times before, in great majority of cases in Slovakia, the possession of

the pledged item is agreed in favor of the pledgor. In these cases and unless the pledge

agreement provides otherwise, the SCC requires the pledgor to use the item in a

regular way and to refrain from any conduct that would decrease the value of the item

below the level of ordinary wear and tear (§151i (1) SCC).

Statutory obligations of the pledgee arising out of possession of the pledged item

GCC SCC

protection against damage, loss and destruction

provide maintenance ×25 ×

provide insurance ×26 ×

Statutory obligations of the pledgor arising out of possession of the pledged item

(i) use the item in a proper way, (ii) refrain from use that would decrease the value of the item below the level of ordinary wear and tear

not applicable

Statutory rights of the pledgee

reimbursement of outlays 27 28

right to use the item × ×

24

Case of indirect possession of the pledgee 25

Prütting/Wegen/Weinreich – BGB Kommentar (2012), §1215 para.2, page 2051 26

Prütting/Wegen/Weinreich – BGB Kommentar (2012), §1215 para.2, page 2051 27

Prütting/Wegen/Weinreich – BGB Kommentar, §1216 para.2, page 2052 (Reimbursed are outlays that were incurred by the creditor in the security provider’s interest and in accordance with his real or assumed will) 28

§151i (3) SCC

17

2.6 Transfer of the pledged movable item

The issue we will look at in this chapter is transfer of ownership to the pledged item that

is performed after conclusion of the securing contract but before the security becomes

due.

As said above, in Germany the possession of the item is transferred from the pledgor to

the pledgee in order for the pledge to be established. Losing possession, the security

provider faces the risk of a pledge-free purchase of his item by a third party acting in

good faith. This pledge free purchase is valid under the condition that the third party is

not aware or is not as a result of gross negligence is not aware that the item does not

belong to the pledgee (§932 GCC).29 Upon such transfer of ownership, the pledge

extinguishes and the pledgor must rely on his claim for damages.

In Slovakia, the pledge is created either by registration in the Central pledge register

where the pledge will remain in the possession of the pledgor or it is established by an

agreement between the parties and coincidental hand-over of the item to the pledgee.

The SCC provides two cases that enable a pledge-free transfer of ownership to an item,

which is encumbered with a pledge.

a) Firstly, the pledge shall extinguish when the encumbered item is transferred from

the pledgor to a third party in course of a common trade transaction which falls

within the pledgor’s object of business (§151h (3) SCC). Herewith, the SCC is

trying to protect third parties and performance of ordinary trading from harsh

consequences of pledge’s accessory nature.

b) Secondly, the pledge shall extinguish if the acquirer at the time of the transfer

despite exercising due care can be seen as acting in good faith that he is

acquiring an item that is pledge-free (§151h (3)SCC). In logical contrast to the

German regulation, the SCC excludes good faith of the acquirer in cases when

29

Schapp/Schur – Sachenrecht (2010), §22 para.535, page 261

18

the pledge is registered in the Central pledge register, unless the acquirer proves

circumstances to the contrary. Here, the acquirer can prove that at time of

transfer of ownership to the item, the pledge had not been yet registered and he

had been therefore acting in good faith.30

In writer’s opinion the regulations of transfer of pledged items described above is well

adjusted to the nature of the respective types of pledges and the need for protection of

good faith in trading. Due to specific economic conditions and high numbers of frauds,

the need for protection of creditors in Slovakia is higher. This need is satisfied through

exclusion of good faith and encumbrance-free acquisition in cases when the pledge is

registered. Eventually, it may be of importance to note that encumbrance-free

acquisitions are also excluded with regard to pledges that are registered in other

specialized registers of the respective countries, e.g. registers of airplanes or ships.

2.7 Timely and orderly satisfaction of the secured claim

In general, the debtor has to the right to satisfy the secured claim of the creditor when

the claim is due and subsequently request the return of the pledged item. Is the

payment performed by a debtor who is also the owner of the pledged item, creditor’s

satisfaction shall result in extinguishment of both the pledge and the claim (§§362 (1),

1252 GCC). When the claim is satisfied, the owner gains the right to claim the return of

the item. At this point, we will take a look at the cases where the debtor and the

owner/pledgor are not identical and distinguish satisfaction performed by the debtor of

the secured claim and other performed by the owner of the pledged item.

(I) Firstly, satisfaction of the secured claim by a debtor who is different from the pledgor

has the same legal consequence as in the general case of debtor-owner, which resides

in extinguishment of both the claim and the pledge and the owner’s right to claim return

of the item.

30

Fekete – Občiansky zákonník - Veľký komentár (2011), §151h, page 942

19

(II) On the other hand, should the owner of the pledged item, who is different from the

debtor, decide to pay on the pledge, then he is not only entitled to claim the return of the

pledged item, but he also acquires the claim against the debtor (§1225 GCC). Because

the pledge is transferred to the owner/pledgor, it will regularly extinguish. In the GCC,

there are two exceptions that prevent the extinguishment of the pledge turning it into a

so-called owner’s pledge (i.G. “Eigentümerpfandrecht“). These two exceptions include

the case when the claim is encumbered with a right of a third party or the case when the

owner has a legal interest in continuation of the pledge.31 According to Slovak law of

obligations, pledgor who is different from the debtor can pay on the secured claim and

claim reimbursement or have the secured claim assigned to him. The German so-called

owner’s pledge enabled by the abstraction principle cannot form under any

circumstances and the pledge always extinguishes.

2.8 Priority

Content of a pledge relates to the satisfaction of the pledgees and satisfaction of an

individual pledgee is highly dependent on the priority of his pledge among other pledges

established over the same item.

According to the GCC, the priority of the pledge is determined by the time of its creation

(§1209 GCC) and pledges that are created simultaneously have the same priority. It is

important to note that priority of a pledge is determined by the moment of its

creation/establishment irrespective of creation of the future or conditional claim that the

pledge is securing. In Germany, due to the in rem effect of the §1209 GCC, the

pledgees of movable items or rights can change the priority only through an agreement

with an in personam effect. 32 This agreement must be concluded between those

creditors, whose priorities follow eachother, otherwise the agreement requires approval

of the creditor who is stuck between them. Additionally, breach of such a priority

agreement would give rise only to a claim for damages on the side of the harmed party

excluding a possibility to invalidate the performed satisfaction.

31

Schapp/Schur – Sachenrecht (2010), §22 para.524, page 256 32

Prütting/Wegen/Weinreich - BGB Kommentar (2012), §1209; Westermann/Gursky/Eickmann – Sachenrecht (2011), §130, para.3, page 993

20

The German priority principle explained above is essentially valid in both countries with

certain deviations that relate to Slovak Central pledge register in the sense that decisive

for priority of a pledge in Slovakia is the time of its registration (§151k (1) SCC). In

regard to the two concepts of pledge establishment and the issue of priority in Slovakia,

it is particularly important to be aware of the rule, which prescribes higher priority to

pledges registered in the Central pledge register than those pledges which are

established by a transfer of physical possession to the pledgee (§151k (2) SCC). This

rule simply gives higher priority to pledges that are registered, which is one of the main

reasons why are registered pledges more common in practice. Another advantage that

the SCC exhibits due to existence of the pledge register is that the SCC gives the

pledgees an enforceable statutory basis for alteration of the priority. In order to achieve

an in rem effect, the pledgees can conclude an agreement which will enter into effect as

of its registration in the Central pledge register (§151k (3) SCC). Pledgee, who is not

party to the agreement and whose satisfaction is impaired as a result of the agreement

are protected in the way that the agreement is towards him without legal effect.

GCC SCC

Priority of a pledge time of creation time of registration

(registered pledge has higher

priority than a possessory pledge)

Change in the

priority

(i) possible through agreement of

all pledgees that stand behind

eachother

(ii) the agreement has an “in

personam” effect that can give

rise to claim for damages

(i) possible through agreement of

pledgees,

(ii) registration of the agreement has

an “in rem” effect, which can lead to

invalidation of an unlawfully

performed satisfaction ( it is without

legal effect towards the pledgee

whose satisfaction is impaired due

to the agreement )

21

2.9 Satisfaction from the pledge

Regulation of satisfaction from the pledge belongs to creditor’s most important area of

interest. This chapter contains an overview of the respective national regulations of the

methods of satisfaction accompanied by a short description. The pledgee is entitled to

satisfy his claim from the pledged item if his secured claim is not satisfied timely and

orderly (§1228 1 GCC, 151j SCC). On the due date, the pledgee gains the right to

satisfaction from the pledge. With regard to German non-monetary claims secured by a

pledge, these must be convertible into monetary claims, such as claim for damages, to

become subject of the right of satisfaction from the pledge (§1228 (2) GCC). For

protection of pledgers, statutory regulations of both countries prescribe minimum criteria

for satisfaction from the pledge and invalidate forfeiture agreements the nature of which

resides in satisfaction of the pledgee through acquiring ownership over the pledged

item. To be specific, forfeiture agreements are invalid if they are agreed on before the

claim’s due date (§1229 GCC, (§151j 3 SCC), but after the pledge’s due date, it is

allowed that the parties agree on satisfaction by way of transfer of ownership to the

pledged item.

2.9.1 Satisfaction from the pledge in Germany

Private sale through public auction (i.G. „Privatverkauf durch öffentliche Versteigerung“)

The regular GCC case of satisfaction from the pledge allows the pledgee to satisfy his

claim without further need of an enforcement title.33 Nevertheless, the pledgee is not

entitled to find a buyer himself, because that could be detrimental for the pledger as well

as the owner. Therefore the pledged item is regularly sold in a public auction (i.G.

“Öffentliche Versteigerung”) (§§1235 (1), 1243 GCC). The GCC allows the owner and

the pledgee to agree on easier or stricter terms of the sale all the while being restricted

by the rule that the application of the provisions on public auctions and public notice of

the auction may not be waived prior before the pledgee’s right of sale comes into

33

Vieweg/Werner – Sachenrecht (2010), §10, para.40, page 322

22

existence (§1245 GCC). In case of an item with a market or exchange market value,

the pledgee can opt for a sale through sale-licensed brokers, auction-licensed entities or

notaries (§1235 (2) GCC).34

Satisfaction according to law of enforcement (i.G. “Zwangvollstreckungsrecht”)

Next to the abovementioned private sale, another two methods of satisfaction are

provided by the provisions of the German Code on civil procedure (i.G.

“Zivilprocessordnung”) (“GCP”) on enforcement. Satisfaction governed by these

provisions necessitates an enforceable title, such as a notarial deed or a court order.

The reason why the pledgee may want to pursue this method of satisfaction from the

pledge is to exclude claim for damages from the side of the pledgor in cases when the

validity of the pledge is uncertain.35 Another reason for choosing the court procedure is

to avoid having to adhere to the public auction procedure. The main difference between

the two ways of satisfaction according to GCP is that in case of sale according to GCP

(i.G. “Verkauf nach Zivilprocessordnung”), the court enforcement officer acting as a

private representative of the pledgee adheres to the provisions of GCP on enforcement

through sale (§§1234 et seq. GCP), whereas in the case of compulsory enforcement

(“Zwangsvollstreckung”), one opts for a complete subjection to the GCP’s law of

enforcement the outcome of which is an administrative act (§§806 et seq. GCP).

2.9.2 Satisfaction from the pledge in Slovakia

Private sale governed by the contract

The Slovak regulation allows the parties to come up with their own contract regulation

concerning creditor satisfaction, which is subject only to certain criteria. The sale of the

item in accordance with the pledge agreement is only allowed to take place after the

lapse of 30 days following the notice from the pledgee to the pledgor as well as all those

pledgees ranking higher than the one exercising the sale and the debtor. The

34

Palandt – Bürgerliches Gesetzbuch (2011) - §1221 para.2, page 1640 35

Schapp/Schur – Sachenrecht (2010),§ 22 para.525, page 257

23

notification will then take effect, when all parties to the agreement have been notified

and the begin of satisfaction has been registered in the Central pledge register (§§151l

(1), 151m (1) SCC). The pledgee has on obligation to proceed with due care so that the

proceeds reach an amount regularly acquired for a similar or comparable item under

comparable conditions in the time when and at the place where the sale is taking place

(§151l (8) SCC). In regard to a contractually agreed method of satisfaction, the pledgor

should be aware, that according to the Slovak regulation, the contractually agreed

method of satisfaction can also be changed at any point of time during the exercise of

the pledge right into the two methods mentioned below. This change is however still

subject to the same notice procedure as above.

Satisfaction pursuant to Act on voluntary auctions or the Slovak Code on Enforcement

The Slovak law entitles the pledgee to satisfy his claim via a sale of the item in an

auction36 or, according to provisions of the Slovak Code on Enforcement (i.S. Exekučný

poriadok)(“SCE”) 37 through a forced sale by a court executor on the basis of an

execution order issued by a court.

Satisfaction

method

GCC SCC

(i) pledge agreement under adherence to

provisions on public auction

(ii) sale through sale-licensed brokers,

auction-licensed entities or notaries in

case of items with market or exchange

market value

(iii) sale according to GCP

(iv) compulsory enforcement

(v) transfer of ownership after due date

and when becoming a monetary claim

(i) pledge agreement

(ii) voluntary auction

(iii) forced sale by a court executor

(iv) transfer of ownership after due

date

36

Act Nr. 527/2002 Coll. on voluntary auctions (i.S. “Zákon o dobrovoľných dražbách“) 37

Act Nr. 233/1995 Coll. on enforcement officers and performance of law enforcement (i.S. “Exekučný poriadok“)(“SCE“)

24

2.10 Satisfaction of several pledges

The rule of pledgee’s possession in Germany and the regular possession of the pledgor

in Slovakia has a differentiating impact on mode of satisfaction when several pledges

are established over the same item.

The prerequisite of satisfaction from a pledge in Germany is the pledgee’s possession

of the pledged item.38 If there is a sale of the item performed by a pledgee with the

highest priority and the proceeds are sufficient just for this pledgee’s satisfaction, then

the pledge will extinguish, proceeds will then come under the ownership of him and the

pledgees with lower priority are left with nothing. An interesting situation arises when the

proceeds from the sale amount to a higher sum than the claim with the highest priority.

In this case, the pledgor acquires ownership 39 over the exceeding proceeds

encumbered with pledges of the lower priority pledgees to the extent necessary for

satisfaction of their claims.40 In other words, the first pledgee is entitled to take away the

proceeds up to the amount of his claim and what is left turns into the pledgor’s

ownership encumbered with pledges of the remaining pledgees. A pledgee whose

pledge has lower priority can also perform the sale of the pledged item.41 Similar to the

previous situation, the proceeds become part of the pledgor’s ownership now

encumbered with the higher-priority pledge. Depending on the amount acquired from

the sale, the pledgee performing the sale might be satisfied or might be left with nothing

at all. It is important to realize, that the pledge over the item extinguishes upon the sale

at all times and new pledges may form only on the proceeds.

As mentioned above, Slovak regulation allows the creation of a possessory pledge of

one pledgee, who can perform satisfaction of his claim directly. Once a second pledge

is created and registered over the same item, it gains priority over the possessory

pledge. If an item is encumbered with several pledges of higher and lower priority, the

pledgee whose secured claim is due can claim possession of the item and satisfy his

38

Westermann/Gursky/Eickmann – Sachenrecht (2011), §130, para.3, page 994 39

Co-ownership with the pledgee with highest priority. 40

Büllow – Nomos Kommentar BGB, Sachenrecht (2008), §1247, para.3, page 1453 41

Possession of the pledged item is required at all times.

25

claim (§151ma SCC). This is different from the German approach, according to which

the first pledgee is entitled to possession of and satisfaction from the item. In

exceptional cases when the lower priority pledgee has possession and his claim is due,

this pledgee is entitled to perform the sale.42 Pursuant to §151ma (1)(2) SCC, the

pledgee performing the sale must inform those pledgees with higher priority about the

intended method of satisfaction 30 days ahead and in writing. According to SCC the

item is transferred encumbered with higher priority pledges unless the pledgee

performing the sale had the highest priority (§151ma (6) SCC). This is in contrast to

Germany where the item is always sold pledge-free. Since the item is sold encumbered

with a higher-priority pledge, right of satisfaction has only the sale-performing pledgee

and those pledgees that are below him.43 The exceeding proceeds must be put in favor

of the lower-priority pledgees into notarial custody (§151ma (3) SCC) and the purchaser

must be registered in the Central pledge register as the new pledgor (§151ma (7) SCC).

3 Pledge on rights

In this part, we will look at the respective national regulation of pledge on rights

including pledge on claims. The analysis will focus on the crucial aspects of pledge

creation, satisfaction from the pledge on rights and collection of or satisfaction from the

security before and after the pledge’s due date.

A right can be encumbered by a pledge (§151d (1) SCC, §1273 (1) GCC). A pledge on

rights is a security right of the creditor that entitles him to satisfy his due claim from the

right. One of the necessary conclusions in regard to the pledge formation is that the

right must be transferable in order for the creditor to sell the right and satisfy his claim.

Therefore, it is a legal condition of a valid formation of pledge for the right to be

transferable or otherwise it cannot be formed (§1274 II GCC, 151d (1) SCC). It is

important to be aware of transferability being an obligatory characteristic of the right,

because this requirement may exclude many rights from being used as security. The

42

Westermann/Gursky/Eickmann – Sachenrecht (2011), §130, para.3, page 994 43

Pledgee who performed the sale can only deduct the sale’s costs

26

legislators in Slovakia and Germany have chosen a different method of regulation of the

pledge on rights. Where the SCC names rights as one of the possible objects of a

pledge without providing any particular regulation of pledge on rights, the GCC,

however prescribes that provisions on pledge on movable items are applicable to

pledge on rights unless specific provisions provide otherwise (§1273 (2) GCC). The

rights frequently used as pledge securities include monetary claims, business interests

in limited liability companies or stock of joint stock companies; some of these pledges

are equipped with specialized provisions such as in the case of pledge on claims

(§1279-1290 GCC, §151mb SCC).

3.1 Establishment of pledge on rights and claims

A valid establishment of a pledge on rights assumes an agreement of the pledgor and

the pledgee. The right in question must always be transferable. The GCC provides that

a pledge of a right is created in accordance with the provisions governing the transfer of

the particular right in question (§1274 (1) GCC). Hence, provisions on transfer of these

rights govern the conditions under which these rights can be pledged including their

form. The SCC has a straightforward regulation requiring a written form of the pledge

agreement and its registration of the pledge in the Central pledge register or a different

specialized register.

Pledge on claims has a particular position within the regulation of pledges on rights and

this includes the rules on its establishment. In Germany, a pledge on claims becomes

effective as of delivery of a notice thereof by the creditor/pledgor to the debtor (§1280

GCC). Since the pledgee has interest in having control over the delivery of the notice in

order to assure establishment of the pledge, he will regularly have this task assigned to

him in a pledge agreement.

Slovak regulation requires the pledge agreement with regard to all kinds of claims to be

concluded in writing and registered in the Central pledge register. The debtor must be

notified of the pledge in either by the pledgor in writing or by the pledgee through

27

delivery of a certificate of registration of the particular pledge by the Central pledge

register. In contrast to the German regulation, Slovak law does not require the

notice/certificate as a condition of the pledge’s formation, but only to be effective against

the debtor. Furthermore, the notice is to be delivered only to debtors of monetary claims

in order for the pledge to be effective against the debtor (§151mb (2) SCC).

Effectiveness against the debtor achieved through the notice is not to be replaced with

the moment of the pledge’s establishment, which in case of both monetary and non-

monetary claims is the time of their registration.

GCC SCC

Establishment of the

pledge on rights

governed by the rules on

transfer of the specific right

written form

+ registration in the Central

pledge register

Establishment of the

pledge specifically on

claims

agreement of establishment of

the pledge + notice from the

creditor/pledgor to the debtor

written form

+ registration in the Central

pledge register

(notice from the creditor/pledgor or

certificate of registration delivered

by pledgee to the debtor in case of

monetary claims is not one of the

conditions of establishment)

3.2 Satisfaction from the pledge on rights

Satisfaction from the pledge on rights in German and Slovak law differs only

moderately. Where the general provisions of SCC allow satisfaction from the pledge to

be almost entirely regulated by the pledge agreement, the GCC generally requires an

enforceable title. Both SCC and GCC distinguish between (i) the general satisfaction

from rights and (ii) specific regulation of satisfaction from claims, which are two differing

processes of satisfaction.

28

General satisfaction from rights in Germany requires the pledgee to acquire an

enforceable title such as a judgment and then seek satisfaction from the right according

to the law of enforcement of judgments (i.G.“Zwangsvollstreckungsrecht”)(§1277

GCC).44 In this regard, a notarial deed that would contain the pledgor’s declaration of

subjection to immediate enforcement also represents an enforceable title, which

precludes the necessity of court proceedings (§794 I (5) GCP). The parties to the

pledge agreement can agree on a method of satisfaction other than the statutory case

of §1277 such as a private sale without an enforceable title.45

Slovak regulation treats the pledge on rights the same way as pledge on movable items.

This means the pledgee and the pledgor can agree on (i) an exclusively contractual

regulation of the satisfaction from the right; (ii) perform an auction or (iii) sell the item

according to the SCE.

General satisfaction from

the pledge on rights

GCC

(§1277)

SCC

(§151j SCC)

(i) Sale according to GCP

(ii) Contractually agreed

satisfaction (e.g. private sale)

(i) Private sale according to

the contractual agreement

(ii) Voluntary auction

(iii) Sale according to SCE

3.3 Satisfaction from the pledge on claims

National regulations of both states provide specific provisions on satisfaction from the

pledge on claims (§§1281-1282,1287-1288 GCC, §151mb SCC). In the case of claims,

the German legislator allowed the satisfaction to be performed without the pledgee

having to acquire an enforceable title through a court judgment. Nevertheless, there are

differences to be found in the German regulation that make the satisfaction less flexible

while protecting the interest of the pledgor better than what the provisions of the SCC

44

Schapp/Schur - Sachenrecht (2010), §23 para.547, page 267 45

Prütting/Wegen/Weinreich – BGB Kommentar (2012), §1277, para.4, page 2077

29

prescribe. Collection of claims is regulated in different ways depending on whether the

claim is being performed before or after the due date of the secured claim.

3.3.1 Performance by the debtor before the due date of the secured claim

This paragraph describes performance of pledged non-monetary and monetary claims

before the claim secured by the pledge becomes due. The GCC prescribes that the

debtor46 must perform in favor of the pledgee and the creditor/pledgor jointly or, have

the owed claim deposited for both or if appropriate delivered to a custodian appointed

by a court (§1281 GCC). The debtor must be aware that delivering performance to only

one of the parties to the pledge agreement doesn’t constitute a valid discharge of his

obligation. What follows after the performance of the debtor is an acquisition of the

performed object by the pledgor and establishment of a pledge over the object in favor

of the pledgee. For example if the claim consists of transfer of ownership on a movable

item and the item is given into joint possession of the pledgor and the pledgee, by virtue

of the statutory subrogation the pledgee acquires a pledge on the item itself.

Should the performance consist in repayment of a monetary debt, the claim must be

collected jointly by both the pledgor and the pledgee and subsequently, a pledge will be

established over this money. Additionally, both parties must cooperate and invest the

money at an appropriate interest. Upon payment of the secured monetary claim to the

bank account of the pledgor, the pledgee acquires a pledge on the creditor’s claim for

credit against the bank.47

In contrast to the GCC, the SCC provides a significantly less detailed regulation of

collection of claims before the secured claim’s maturity. One may find it surprising that

there is an absence of regulation on what happens to non-monetary claims when being

satisfied before maturity of the secured claim. The SCC does not offer the solution used

by the GCC which expressly prescribes that on performance of the claim, the object of

46

Debtor whose obligation against the pledgor has been pledged in favor of pledgee 47

Prütting/Wegen/Weinreich – BGB Kommentar (2012), §1281, para.4, page 2078

30

the performance becomes subject to a pledge established in favor of the pledgee. In

legal language, this is a case of statutory subrogation. This being said, it is not certain

whether the Slovak courts will incline to the less probable subrogation of the non-

monetary claim by the object provided on its due date for which there would be no

statutory basis or rather interpret this situation as performance-related extinction of the

claim resulting in extinction of the pledge. These differing outcomes and a higher

likelihood of a judgment declaring extinction of the pledge, future pledgees have a good

reason to avoid the pledge on non-monetary claims, particularly those which become

due before the due date of the secured claim. Instead, pledgees have the option of

replacing the pledge on such early due non-monetary claims by a pledge on items,

rights and other property rights that will be acquired by the pledgor through the

performance in the future. Pledge on these ‘to be acquired’ items and rights would have

the same practical effect as the subrogation according to GCC and would exclude the

legal uncertainty due to SCC’s lack of clear regulation on this issue.

Provisions governing satisfaction from monetary claims have a simpler and more

flexible nature. As of the moment the notice of pledge or the certificate issued by

Central pledge register are delivered to the debtor, the debtor must satisfy his monetary

obligation he has against the pledgor only through performance to the hands of the

pledgee or a third person designated by the pledgee (§151mb (3) SCC). Pledgee is

entitled to keep the received monetary performance. This way the pledge de facto

transforms into a possessory pledge.48

Performance by the debtor before the due date of the secured claim

GCC SCC

Non-monetary

claims

performance to the hands of both

pledgor/creditor and pledgee →

pledge subrogation

?

(performance would most likely lead to

extinction of the pledge)

48

Fekete – Občiansky zákonník - Veľký komentár (2011), §151mb, page 967

31

Monetary

claims

pledgee acquires a pledge on the

creditor/pledgor’s claim for credit

against the bank

debtor must pay directly to the pledgee

who is entitled to keep the whole

performance until the due date of the

secured item

The abovementioned pledge establishment and satisfaction from the pledge have

certain disadvantages. First of all, the notice that is to be delivered to the debtor may

cause a downgrade in creditworthiness of the pledgor in the eyes of the debtor.49 We

have to remember that a debtor may not be just a debtor, but also an important

business partner who may be in position to reconsider the mutual business relationship

and cause increase in costs. Furthermore, when facing the task of having to pledge big

volumes of claims, delivering of notices to all the debtors may present a significant

obstacle. One more disadvantage of the German pledge in regard to collection of claims

is the requirement of joint collection that assumes cooperation on the side of the

pledgor. These obstacles may have been those that lead most of some practitioners to

opt for different securities, such as transfer by way of security in relation to movables

and security assignment of claims that confer higher security through temporary transfer

of ownership or claim to the creditor.

3.3.2 Performance of the debtor after the due date of the secured claim

Following the secured claim’s maturity, the pledgee is entitled to collect the claim from

the debtor, who is obliged to perform only in his favor (§1282 (1) GCC). The

requirement of joint acceptance of the performance by pledgor and pledgee this time

falls away. Despite pledgee’s exclusive title to collect the claim, the pledgor remains its

legal acquirer. During the collection, the pledgee is to be seen as a representative of the

pledgor with a statutory power of representation.50 For illustration, when having a pledge

on a claim for transfer of ownership over a movable item and the pledge is due, the

hand-over of the item constituting the transfer of ownership is carried out exclusively in

49

According to SCC, only monetary claims require a notice to be delivered to the debtor 50

Schapp/Schnur - Sachenrecht (2010) §23 para.551, page 269

32

favor of the pledgee. It is important to understand that the pledgee, next to the

possession of the item, will by virtue of the aforementioned subrogation receive a

pledge over the item. Hence the pledgor acquires the item whereas the pledgee

receives possession and a pledge.

This is different with monetary claims. Collection of monetary claims is provided with a

particular regulation according to which the pledgee is entitled to collection of such a

claim to the extent necessary for satisfaction of his secured claim (§1282 (1) GCC). This

case is the only one where the collection of a claim by the pledgee leads to direct

satisfaction of his secured claim.

The regulation on what happens to a pledge on non-monetary claims performed after

maturity of the pledge faces similar uncertainty as the claim performed before the

pledge becomes due. The aforementioned question is whether the pledge extinguishes

with performance of the claim or lives on transformed into a pledge on the performed

object. As an interpretation toward extinction is more likely, pledgee should prefer to

acquire pledge over non-monetary claims whose maturity is further in the future or

establish a pledge on the object of the performance.

Satisfaction from monetary claims according to SCC is very pledgee friendly. As said

before, delivery of notice or delivery of a certificate issue by the pledge register obliges

the debtor to pay full amount of the claim to the pledgee irrespective of whether before

or after the secure claim’s due date. Pledgee can use the received amount directly for

satisfaction of his claim and must return the exceeding proceeds to the pledgor without

undue delay (§151mb (5) SCC).

GCC SCC

Non-monetary claims exclusive possession of the

pledgee and a pledge by

subrogation

?

(performance would most likely

lead to extinction of the pledge)

33

Monetary claims collection of the claim by the

pledgee to the extent necessary

for satisfaction

Collection of the claim to the

extent necessary

Performance by the debtor after the due date of the secured claim

3.4 Extinguishment of the pledge

This chapter will provide an overview of the reasons for pledge extinguishment. The

assessment contained in this chapter does not exclude the reasons described in the

previous chapters. GCC regulates reasons of extinguishment in provisions that describe

the respective circumstances, whereas the SCC does the same and additionally to this

approach names the reasons of extinguishment in a separate provision (§151md SCC).

The most basic reason for the extinguishment of a pledge is the satisfaction of the

secured claim51 by virtue of payment of debt, off-set of mutual claims, merging of debtor

and creditor into one entity etc.52 The pledgee’s statutory right is to waive his pledge

(§1255 (1) GCC, §151md (c) SCC) and parties to the securing contract can allow the

pledge to extinguish, e.g. upon lapse of a certain time period or upon sale of the item to

a third party. Upon extinguishment of the pledge, the item must regularly be returned to

the pledgor and according to SCC, the pledge must be deregistered from the Central

pledge register without undue delay.

Extinguishment of pledge GCC SCC

Satisfaction of the secured claim §1252 §151md (1)a)

Coincidence of pledge and ownership §1256 I 1 implied

Waiver of the pledge by the pledgee §1255 §151md (1)c)

Return of the item to the pledgor §1253 I §151md (1)e)

Good faith encumbrance-free acquisition §§936,945,949, 950

(2), 955 et seq., 973 (1)

§151md (1)f),

§151h (3)

Encumbrance-free acquisition of the item §1244 §151md (1)f),

§151h (3)

51

See chapter 2.1 52

Merging of pledgee and pledgor may not always cause pledge extinguishment, see chapter 3.7

34

Complete destruction of the pledged item Destruction or long-

term loss of any

value53

§151md (1)b)

Upon satisfaction from the pledge §1252 §151md (1)i)

Condition subsequent (e.g. upon lapse of a

specified period) or by virtue of a specific Act

§§158 (2),163 §151md (1)d),h)

4. Transfer by way of security

Transfer by way of security or security transfer of ownership is a security by which a

debtor or a third party security provider temporarily transfers his ownership of a certain

property to the creditor in order to secure a claim that the creditor has against the

debtor. The creditor acquires an in rem security in the form of temporary ownership

granting him preferential position in respect of all other creditors that don’t have an in

rem security.

In Germany, the Transfer by way of security (i.G. “Sicherungsübereignung”)(“TWS”) is

a legal construction that does not have its own specific GCC regulation, but has rather

been accepted by the case law. It is the instrument, which has gradually replaced

pledge in Germany’s financing practice with regards to movable items. On the other

hand, the SCC contains specific provisions 54 on Security transfer of rights (i.S.

“Zabezpečovací prevod práva“)(“SAR”). The basic characteristics of the SAR and the

TWS are shared. One of the rights within the SAR that can be assigned in this way is

the ownership right, which corresponds to the German TWS. Considering what is said

above, we will take the legal construct of TWS and compare it with the rather more

general regulation of the Slovak SAR in regard to assignment of ownership to movable

items to see whether we can extract any valuable knowledge as to their nature and

practicability.

53

Prütting/Wegen/Weinreich – BGB Kommentar (2012), §1204 et seq., para.2, page 2037 54

§553 et seqq. SCC

35

4.1 Creation

Establishing the German TWS requires a transfer of ownership to the collateral (in rem)

and a securing agreement (in personam). Preconditions of a transfer of ownership are

an agreement in rem and a hand-over of the item to the creditor. However, transfer of

possession to the creditor is impractical and in contrast to the pledge, it can be

prevented by agreeing to a concrete kind of constructive possession (i.G.

“Besitzkonstitut”), by virtue of which the party granting the collateral can stay in

possession of the item. In order to set up constructive possession, it is sufficient for the

securing agreement to contain specific rights and obligations of the parties in relation to

the collateral.55 It is accepted in practice that the securing contract itself meets the

condition of constructive possession, since one can regularly understand clearly that the

provider is entitled to possess the collateral until the creditor’s claim for return or right to

satisfaction arise. 56 To fulfill the precondition of agreeing on a concrete kind of

agreement to constructive possession, one can opt for the following contractual

provision: “The hand-over of the security collateral to the Bank shall be replaced by a

charge-free custody provided by the collateral provider. Should any third parties acquire

direct possession of the collateral, the collateral provider herewith assigns his existing

and future claim for restitution to the Bank.” 57 The securing contract itself has an

important role of connecting the security purpose with the transfer of ownership to the

collateral and must stipulate the creditor’s duty to transfer the ownership back to the

security provider upon due discharge of his obligation. As to the form of the contract, a

written form is not a statutory requirement, however, for evidence reasons the Banks

will always demand a written form.

The SAR offered by the SCC presents a similar security as the TWS in the sense that it

enables a temporary transfer of the ownership right from the security provider to the

creditor without the necessity for a transfer of possession. The securing contract must

stipulate the temporary nature and security purpose of the ownership transfer.

55

Baur/Stürner – Sachenrecht (2009), §57 B II, para.9, page 789 56

Quack - Münchener Kommentar BGB (2009), §930, para.14, page 831 57

Baur/Stürner – Sachenrecht (2009), §57 B II, para.9, page 789

36

According to §553 (3) SCC, the ownership is transferred back to the security provider

upon satisfaction of the secured claim. In this regard, it is important to note that a

contract which would tie duration of the security to other conditions than satisfaction of

the secured claim would be invalid.58 Provision of §553a SCC prescribes a written form

for the securing contract and obliges the parties to stipulate details on the secured

claim, the right that serves as security, rights and obligation of the parties in respect of

the security, valuation of the security, method of satisfaction as well as other

information. Next to identification of both claim and collateral and regulation of the

fiduciary relationship thereto, the securing contract must also contain certain information

that is specific to SCC. Firstly, it requires an estimation of the security’s value.

Secondly, should the parties decide the mode of satisfaction to be a voluntary auction,

the contract must stipulate the lowest bid. Purpose of these statutory requirements is

protection of the debtor, whose position is considerably weak.

One aspect of TWS’s formation that must be taken into account is over-collateralization

that causes invalidity of both the secured contract and of the in rem transfer of

ownership. Over-collateralization can only be determined through assessment of

individual cases. In general, the main condition that defines over-collateralization is

disproportionate relation of the value of the secured item to the excessively high value

of the security and the related disregard of the security provider’s interest. The threat of

invalidation concerns cases when (i) a limit amounting to 150% of the secured claim’s

value is crossed59; (ii) when through acceptance of the security the creditor restraints

the security provider's freedom of business decision-making or (iii) when one creditor

and security provider mislead other creditors on the security provider’s

creditworthiness.60 In contrast to these considerably specific categories, SCC and other

Slovak legislature as well as case law does not provide any basis for such conclusions.

58

Fekete – Občiansky zákonník - Veľký komentár (2011), §553a, page 1587 59

The over-collateralization is relevant at the time of conclusion as well as at the following time. 60

Wolf/Wellenhofer – Sachenrecht (2011), §15., para.28,30,31,32, 33, page 207-209

37

Creation requirements

Transfer by way of security – TWS (GCC) Security assignment of right (SCC)

1) agreement in rem on transfer of ownership to

the creditor

2) hand-over to the creditor or constructive

possession of the security provider stipulated in

the securing agreement

3) securing contract which must contain:

(i) definition of the secured claim,

(ii) definition of the collateral,

(iii) obligation to transfer the ownership and

retransfer of ownership on lapse of the security

purpose

and may optionally contain:

(i) limits to creditors legal authority (effective only

in personam and not against third parties),

(ii) adequate custodial obligations,

(iii) method of satisfaction from the security

(no form required)

1) Securing contract which must contain (§553a

SCC):

(i) definition of the secured claim,

(ii) definition of the security,

(iii) rights and obligations of the parties to the

contract in regard to the security, mainly the

obligation to transfer the ownership and retransfer of

ownership on lapse of the security purpose ),

(iv) estimation of the security’s value,

(v) lowest bid in case of a voluntary auction.

2) hand-over to the creditor or an additional

contractual provision prescribing possession of the

security to the security provider or to a third party.

and may optionally contain:

privately regulated method of satisfaction from the

security

(written form required)

possible invalidity due to over-collateralization Invalidity due to over-collateralization not possible

4.2 Accessoriness and condition subsequent

Keeping in mind the German principle of abstraction, a contrast of the national

regulations that must be taken into account lies in the dependency relationship between

the destinies of the secured claim and the collateral/security itself, in other words one

must consider the accessory nature of the claim to the collateral. Principle of abstraction

separates the consequences of legal conduct in rem from consequences of legal

conduct in personam. In regard to TWS, the rules of this principle lead to a complete

transfer of ownership in rem, which is put in picture of a security transaction through the

38

securing contract as a relationship in personam. Upon satisfaction of the secured claim,

the ownership of the collateral does not fall back to the security provider. Instead, the

provider acquires a right to have the ownership transferred back to him according to the

securing contract by a separate transfer in rem, in which case he may end up getting

stuck in a tiring enforcement procedure.61 A practical alternative for the security provider

is to make a corresponding agreement to subject the transfer of ownership in rem to a

condition subsequent that would affect an automatic retransfer of ownership and even

protect the provider from unlawful transfers of the collateral by the creditor to third

parties (§161 (2),(3) ICW §936 (3) GCC).62 In doubt about which one of these two

alternatives was chosen by the parties, some sources even assume a choice in favor of

the security being subjected to a condition subsequent.63 Considering what was said

above, we can conclude that the TWS does not have an accessory nature although it

can at best achieve this effect through agreement on a condition subsequent.

After short analysis of the two German alternative approaches, we can move on to the

Slovak regulation of SAR, which deviates from the German statutory case. According to

§553 (3) SCC, satisfaction of the secured claim automatically affects return of the

ownership to the security provider. Following the fulfillment of the creditor’s secured

claim, the creditor loses the ownership and by virtue of law becomes a possessor of the

security. In fact an unlawful possessor, who is obliged to return the security and pay any

damages caused by the unlawful possession.64 As we can see, Slovakia has chosen to

subject the SAR to a statutory condition subsequent. In addition to that, this nature of

the SAR invalidates any transfers to third parties and as one can see, it is therefore

comparable to a TWS subjected to condition subsequent. In conclusion, it can be said

that the SAR has by virtue of law a strong accessory nature.

61

Vieweg/Werner – Sachenrecht (2010), §12, para.11, page 365 62

Vieweg/Werner – Sachenrecht (2010), §12, para.11, page 365 63

Baur/Stürner – Sachenrecht (2009), §57 B II, para.10, page 789 64

Fekete – Občiansky zákonník - Veľký komentár (2011), §553, page 1584

39

4.3 Custody of the security

In this chapter, we will shortly analyze how the custody of the collateral is regulated.

General sales law conditions the transfer of ownership to a movable item by its hand-

over to the buyer. Without any specific agreements to the contrary, the item must also

be handed-over to the creditor when it comes to our security instruments, the TWS and

SAR. This is avoided through stipulations on constructive possession, so that the

pledgor can stay in possession and use the collateral.

In light of the functions of the TWS, the German creditor is not the one entitled to use

the collateral, but rather the security provider. 65 Additional custodial rights and

obligations such as how to treat the collateral or duty to provide insurance are to be

governed by the securing contract.

The SCC requires an agreement on the custodial rights and obligations to be part of the

securing agreement, which would otherwise be invalid. Considering the express SCC

regulations and analogical applicability of specific provisions on pledge, one can

conclude that the creditor and security provider, depending on who has possession over

the item, both have the obligation to protect the item from damage, loss or destruction

(§553b (2) SCC). According to the legal literature, the creditor who is in possession of

the collateral is not liable for the damage that arises by chance and he shall be entitled

to reimbursement of those costs incurred protecting the collateral. 66 All rights and

obligations including the dispositive statutory norms mentioned above can be regulated

differently in a contract.

4.4 Transfer of ownership to third parties

The object of this chapter is the assessment of legal consequences of transfer of

ownership of the collateral from the creditor to third parties that is not performed in

65

Vieweg/Werner – Sachenrecht (2010), §12, para.3, page 361 66

Fekete – Občiansky zákonník - Veľký komentár (2011), §553b, page 1589

40

course of satisfaction. Surprisingly, such an early transfer of ownership gives rise to

differing legal consequences.

Upon creation of the TWS, the German principle of abstraction secures the creditor with

a complete and unrestricted ownership right in rem against third parties. His position is

only restricted by the securing agreement with the security provider. This contractual

relationship is only a relationship in personam, which essentially does not exclude a

valid ownership transfer to third parties. Therefore, in case the creditor transfers the

ownership, the transfer stays valid in spite of constituting a breach of contractual duty

that might give rise to a claim for damages. Nevertheless, the parties have an option to

subject the TWS to a condition subsequent, which protects the security providers from

transfers to third parties through invalidation of such transfers.

The issue of unlawful transfers is regulated by the SCC strictly. According to §553b (1)

SCC, until the extinguishment of the security, the creditor is not entitled to transfer or

encumber the right transferred to him. In a very strict manner, the legislature holds

transfers or charging of the collateral with additional encumbrances as violation of this

provision for invalid. Furthermore, in case of a transfer of ownership over a movable

item, the third party would not acquire the ownership even if it was acting in good faith

that it is acquiring an encumbrance-free item.67 This interpretation is affirmed by the

fact, that the legislator did not include the provision on protection of a good-faith

acquirer (§151h SCC) as being applicable to the SAR (§553e SCC). Due to absence of

ownership, any transfers on the part of the security provider are invalid.

GCC SCC

Nature of transfer of

ownership to the creditor

Alt.1) complete transfer of

ownership in rem subjected to

obligations according to the

securing contract

“temporary transfer of

ownership” subjected to a

statutory condition

67

Fekete – Občiansky zákonník - Veľký komentár (2011), §553b, page 1588

41

Alt.2) complete transfer of

ownership in rem subjected to

an in rem condition subsequent

subsequent

Consequences of transfer

from the creditor to a third

party

Alt.1) valid transfer of ownership

to third party + claim for

damages of the security provider

transfer to a third party is

invalid even in case of a

“good faith acquirer”

(§553 (3) SCC).

Alt.2) transfer of ownership is

invalid even in case of a “good

faith acquirer” (§161 (3) GCC)

Consequences of transfer

from the security provider

to a third party

invalid

invalid

Transfer of ownership to third parties

4.5 Satisfaction

Assessing the differences in regulation of satisfaction, we will start with the German

TWS. The method of satisfaction is regularly determined by the securing contract

according to which the parties primarily opt for a direct sale to public (i.G. “freihändiger

Verkauf“), because it is less rigid and cheaper than an auction. Upon the sale, the

creditor acquires ownership over the proceeds, which he consequently sets off against

his claim. Should the contract leave out any provisions on satisfaction, the legal

literature prescribes an interpretation of the hypothetical will of the parties that needs to

consider the interest of the security provider. This interpretation will regularly lead one

back to satisfaction through direct sale to public, because of the auction rarely being in

the security provider’s best interest.68 According to the German Federal Supreme court

(i.G. “Bundesgerichtshof”), other ways of satisfaction from the TWS are allowed only by

virtue of specific contractual agreements.69 A differing opinion applies the provisions on

pledge, which prescribe performance of satisfaction by way of a public auction and

68

Vieweg/Werner – Sachenrecht (2010), §12, para.32, page 375 69

Vieweg/Werner - Sachenrecht (2010), §12, para.32, page 375

42

penalize a breach of this duty by giving rise to a claim for damages.70 Considering the

uncertainty, the parties should take advantage of being able to regulate the satisfaction

from the security entirely by the security contract. Like the method of satisfaction, also

its procedural side is primarily agreed on contractually. In absence of contractual

regulation, one must look at the logical sequence of events. Once the secured claim is

not satisfied in a timely and orderly fashion, the creditor possessing the security can

start with his satisfaction from the security. If the creditor does not have the item and the

secured claim is not paid, the possession right extinguishes and the creditor can claim

return of the item. Incidents where the security provider refuses to return the item

require the creditor to acquire a title through an action for restitution, which may make

the process lengthier. In regard to creditor satisfaction, it is interesting to assess the

issue of forfeiture clauses that are agreed on before maturity of the secured claim and

the purpose of which is the satisfaction of the pledgee through acquisition of ownership

over the collateral. In contrast to provisions on the pledge that invalidate these clauses,

the majority opinion stands against the invalidity of forfeiture clauses in cases of TWS,

particularly those that equip the security provider with a reimbursement claim

(i.G.”Ausgleichsanspruch”).71 This claim prevents those types of forfeitures where value

of the security exceeds the secured claim from being invalidated for violation of good

morals principle (i.G. “Sittenwidrigkeit”).

Moving on to the regulation of satisfaction from SAR according to SCC, one can

conclude that it provides certain minimal criteria that mostly aim to protect the security

provider. There are two alternatives as to the method of satisfaction, one entirely

regulated by the securing contract and one being a voluntary auction governed by a

statute (§553c (1) SCC). In regard to these methods, the legislator grants protection to

provider of the security by (i) requiring an estimation of the security’s value performed

by an expert appraiser and/or by (ii) requiring the parties to agree on the lowest bid for

cases of an auction. As we mentioned before, provisions on these two issues constitute

obligatory terms of the contract the absence of which invalidates the contract. The

70

Baur/Stürner – Sachenrecht, §57 B VI, para.42, page 807 71

Vieweg/Werner - Sachenrecht (2010), §12, para.23, page 371

43

purpose of the valuation is protection of the security provider through determination of

market value that needs to be acquired from the proceeds in course of the creditor’s

satisfaction. This protection is doubled by another specific provision of the SCC that

requires the creditor to proceed with due diligence so as to achieve a purchase price for

which similar or comparable rights are sold under comparable conditions, otherwise he

is liable for any damages incurred (§553c (4) SCC). In other words, in case the

satisfaction is regulated by a contract, the statutory rules require the creditor to evaluate

the price of the collateral and respect its conclusions regarding the market price or

otherwise face liability for damages. When the parties agree on an auction, similar kind

of protection is secured by the obligatory contractual provisions on the lowest bid.

Another aspect that differs is also the procedural aspect of the satisfaction. In contrast

to GCC, the SCC prescribes a 30-day period the lapse of which entitles the creditor to

perform satisfaction from the security (§553c (3) SCC). The period starts running as of

delivery of a notice on performance of satisfaction.

GCC SCC

Statutory case of

satisfaction

- no express provision,

- 1st opinion : according to

interpretation of the will of the

parties, which is regularly

direct sale to public

- 2nd opinion: public auction

otherwise possible claim for

damages

- SCC provides alternative to

go by the contract or perform a

voluntary auction (expert

valuation of the security or

lowest bid -otherwise the

contract is invalid)

Contractual regulation of

satisfaction

allowed and preferred allowed and preferred

Commencement of

satisfaction

- according to contract

- depending on who is in

possession as of secured

claim’s default/as of security

provider’s default with the

obligation to return the security

after lapse of a statutory 30-

day period after delivery of

notice

44

Forfeiture clauses

(agreed on before

security’s due date)

allowed when contract

includes a claim for

reimbursement

invalid

Satisfaction

In German practice the TWS is widely used in collateralization of bank loans. Since the

real estates have a practicable security instrument in the form of a land charge (i.G.

“Grundschuld”), the object of TWS is mainly movable property such as cars or other

valuable equipment. As mentioned before, the TWS has won the overhand over the

pledge through the practicable aspect of the security provider being able to keep

possession of the property and retain the right of use. In Slovakia, the pledge is still

keeping its position of a dominant security in regard to movable items as well as real

estates. As far as the movables are concerned, the preference for pledge can be

explained not only by the fact that the pledgor keeps possession of the pledged item,

but also by the highly valued of publicity enabled by the Central pledge register. In

contrast to security assignment of right, the Slovak pledge of a movable item can be

registered in the Central pledge register thereby reducing uncertainty as to transfers to

third parties. Even though the statutory regulation of SAR invalidates transfers to third

parties, the publicity enabled by the Central pledge register makes the pledge a more

preferable security instrument. Another reason why the pledge is preferred more than

the SAR’s is the SAR’s requirement to perform a valuation of the right, which can

substantially raise the costs.72

C. Conclusion

Due to the global financial crisis, increasing number of companies are defaulting on

their obligations. Increasing instability in the traditional economy forces banks and other

creditors to address the issue of securities more thoroughly, which may be a difficult

72

Condition of security agreements validity if one opts for contractiually regulated satisfaction. Second option is to choose voluntary auction, which requires the contract to contain an agreement on the lowest bid.

45

and costly task for those of them, coming from outside jurisdictions with no prior

experience within domestic regulation. Since Germany and Slovakia have very close

economic ties, it is this writer’s opinion that this thesis may serve as a practical short

overview of the most favored securities for encumbering movables and rights, namely

pledge and security transfer of ownership. For now, it seems that a significant step

toward a common course such as the new Czech civil code73 would be required to

achieve some level of homogeneity.

We will look at a simple Slovak example to examine the differences within the Slovak

statutory regulation of a pledge and how pledge is regulated differently in Germany.

Take a Slovak of a debtor/pledgor, who owns a valuable machine. Each of the following

statements are in accordance with the SCC, but deviate or are opposite of the

regulations in Germany. Since the SAR requires a costly valuation, creditor and debtor

will most likely agree on formation of a pledge, which requires a written contract and its

registration in the Central pledge register. Should the creditor be interested, he can

even acquire a pledge over aggregate items such as a whole enterprise. The pledgor

can use the machine, but he is restricted to use the machine in a proper way and refrain

from use that would decrease its value below the level of ordinary wear and tear. The

pledge will always encompass all components of the movable item including

accessories, which are items that belong to the pledgor and that are assigned to be

used with the main item. Unless a contract provides otherwise, the products (fruits) will

not be subject to pledge. Due to the registration of the pledge, good faith transfers of

ownership to third parties are invalidated. Priority is determined by the time of entry in

the pledge register and the creditors have an option to change the priority with an in rem

effect. If the creditor will not be able to satisfy the secured claim, the satisfaction will

most likely be regulated by the contract and the only two duties of the creditor relate to

lapse of a 30-day period following a notice to the pledgor and his obligation to achieve

certain amount of proceeds. All these aspects of a pledge are in line with the Slovak

regulation, but at the same deviate from or even violate the German statutory approach.

73

Act No.89/2012 Coll. “Civil Code” will enter into force on 01.01.2014

46

In Germany, pledge formation requires an abstract agreement and transfer of

possession to the creditor74, which excludes the debtor from being able to use the item.

For this and other reasons, the parties will most likely agree on formation of a TWS. Let

us take a look at some true statements on statutory regulation of the German TWS that

are not applicable to the comparable Slovak instrument of SAR. Formation of the TWS

requires two types of conditions, (i) one is an in rem transfer of ownership and (ii) the

other a securing contract in personam that is not required to be in writing. The contract

does not need to contain a valuation of the security or definition of the lowest bid in case

on an auction. The creditor must be aware of rules on over-collateralization. Due to the

abstraction principle, the destiny of the secured claim and the security are essentially

independent, which means that for example satisfaction of the claim does not

automatically affect return of ownership to the pledgor. This principle is also a reason

why a transfer of the security’s ownership performed by the creditor in favor of a third

party before maturity of the secured claim is to be seen as valid. Under the condition of

agreeing to the pledgor’s reimbursement claim, the parties can even agree on a

forfeiture clause.

As can be seen, the deviations are numerous and it can only be hoped that European

legislators will provide more homogeneity and thereby decrease transaction costs that

have remained significant within the borders of the European Union. Since the

regulations are mostly of dispositive nature, it is advisable that parties who want to

achieve some level of relationship certainty without engaging lawyers should try to

define their legal relationship by clearly stipulating their mutual rights and obligations.

Nevertheless, considering the level of deviation, even this strategy may not bring them

far.

74

GCC does not require transfer of physical possession as the second alternative of a Slovak pledge does

47

Bibliography Baur F., Stürner R., 2009, Sachenrecht, 18.Auflage, Verlag C.H.Beck München, München

Bassenge, P., 2011, Palandt Bürgerliches Gesetzbuch, 70.Auflage, Verlag C.H.Beck

München, München

Grziwotz H., Keukenschrijver A., Ring G., 2008, BGB Sachenrecht Band 3: §§854-1296,

2.Auflage, Nomos, Baden-Baden

Horváth, E., 2010, Judikatúra vo veciach zabezpečenia záväzkov, Iura Edition,

Bratislava

Imrich Fekete, 2011, Občiansky zákonník – veľký komentár §§1-459, Eurokodex,

Bratislava

Lazar, J. a kolektiv, 2004, Základy občianskeho práva hmotného I, IURA EDITION,

Bratislava

Prütting H., Wegen. G., Weinreich G., 2012, BGB Kommentar, 7. Auflage, Luchterhand,

Köln

Säcker F.J., Rixecker R., 2009, Münchener Kommentar zum Bürgerlichen Gesetzbuch

Sachenrecht §§854-1296, 5.Auflage, Verlag C.H.Beck München, München

Schapp J., Schur W., 2010, Sachenrecht, 4. Auflage, Verlag Franz Vahlen München,

München

Schellhammer K., 2005, Schuldrecht nach Anspruchsgrundlagen, 6. Auflage, C.F. Müller Verlag

48

Svoboda, J., 2004, Občiansky zákonník – komentár a súvisiace predpisy, Eurounion,

Bratislava

Vieweg K., Werner A., 2010, Sachenrecht, 4.Auflage, Carl Heymanns Verlag, Köln

Vojčík P., 2010, Občiansky zákonník – stručný komentár, 3.vydanie, IURA EDITION,

Bratislava

Westermann H., Gursky K.H., Eickmann D., 2011, Sachenrecht, 8.Auflage, C.F.Müller,

Ulm

Wilhelm, J., 2007, Sachenrecht, 3. Auflage, De Gruyter Recht, Berlin

Wolf M., Wellenhofer M., 2011, Sachenrecht, 26.Auflage, Verlag C.H.Beck München, München

Zimmermann, S., 2008, Bankrecht in der Praxis, Verlag Recht und Wirtschaft GmbH,

Franfurt am Main