The pledge agreement:Let's see it in a simple and understandable way.

Δημοσίευση: March 1, 2024

The pledge agreement:Let’s see it in a simple and understandable way.

Generally,pledging collateral is a complex issue that requires a carefully crafted agreement to prevent the debtor from being caught “by surprise” without alternatives. Certainly, the provisions of the law and their complexity do not make the situation any easier, but we must be aware of them to be informed about our rights and obligations from whichever side we are, whether the lender or the debtor.

1.What is collateral;

With this term, we mean tangible security, i.e., a right of the lender over movable property owned by the debtor, which allows the lender to be satisfied preferentially when the property is liquidated. To establish collateral, because it has a monitoring character, a primary claim of the lender against the debtor is required.

So it is important to know that if a movable property is burdened with collateral, then the collateral will “follow” the fate of the property, wherever it is transferred, resulting in the new buyer of the property risking losing it if the lender seeks liquidation of the property through auction. For this reason, it is critical to research any movable property (e.g., a car) before making a purchase, under the risk of it being encumbered with collateral.

2.How do I establish collateral;

The law sets specific requirements for establishing collateral on movable property in its classic form (as we will see below). These requirements are:

It must be a third-party movable property = it does not belong to the lender, and obviously, it is not real estate.
It is not necessary for the property to belong exclusively to the debtor = a third party can also establish collateral on movable property in favor of the debtor.
If the one pledging the collateral is not the owner of the property, and the lender is unaware/ignores it due to gross negligence, the collateral is still valid.
There must be a monetary claim of the lender against the debtor = the collateral must have a reason for existence, i.e., it is given as security for the claim.
The monetary claim can also be future as long as it is specified in a way that can be distinguished when it arises.
There must be an agreement between the debtor and the lender that collateral is established on the debtor’s property.
The agreement must be made in a notarial document/private document with a certain date, specifying the movable property.
The debtor must deliver the movable property to the lender, although they can also deliver it to a custodian to hold it on behalf of the lender.

3.What are the rights of the collateralized lender;

As soon as the debtor delivers the property to the lender and the collateral agreement is drawn up between them, the parties begin to have rights and obligations arising from the collateral relationship that now binds them. Regarding the rights of the lender, they are entitled to:

Possess the property either themselves or through a third party and to use it = to treat it as if it belongs to them.
If the property generates political/natural benefits, the lender can receive them unless otherwise agreed. For example, if collateral is established on a bond, the lender can receive the dividends periodically, unless the debtor has reserved the right for themselves.
If the lender has incurred expenses on the collateral (e.g., repainting the car provided as collateral), they are entitled to claim them from the debtor when (and if) they return the property.
If the property serving as collateral is destroyed/alienated compulsorily while in the possession of the lender, the lender can demand as collateral the amount of compensation from the insurance company/due to alienation.
If the property begins to lose its value or is at risk of being destroyed, the lender can either ask the debtor to provide another property as collateral to supplement the security or sell the movable property by public auction if the debtor refuses to supplement the security and with the court’s permission.

4.Does the debtor have rights from the collateral;

The fact that the debtor pledges collateral on their property does not mean they cease to be the owner or are fully alienated from it. Therefore, the law grants them certain rights such as:

They can transfer the property to another person or encumber it with another real right.
As the debtor is still considered the possessor of the property, they have, against third parties who interfere with their possession, the right to the action of recovery as well as the action of disturbance of possession (these are exactly the same actions for this case).
If the lender violates the debtor’s right over the collateral, the debtor can request the property to be delivered to a surety = a person appointed by the court to hold the property.
If an opportunity arises for a sale at a high price, the debtor can request permission from the court to sell the property even before their debt is due, and by auctioning it, satisfy the lender.

If the property is at risk of immediate destruction/damage while in the hands of the lender, the debtor can request permission from the court to sell it or to provide another collateral to the lender after selling the property.

5.How is the collateral extinguished;

Primarily, there are 4 reasons why the law considers the collateral on movable property extinguished, meaning it ceases to exist, and the property is released. This happens when:

The claim the lender has against the debtor is satisfied (e.g., if the debtor pays them, if they reach a settlement/debt waiver, etc.).
If the lender returns the property to the debtor or to the third party who originally provided the collateral = this is considered a silent waiver of the collateral.
If the lender declares on their part that they waive the right of collateral and do not intend to exercise it.
If the qualities of the owner of the property and the collateralized lender coincide on the movable property = if the lender purchases the property from the debtor/if the lender is also the heir of the debtor and, in essence, has collateral on their own property – legally an inconceivable scenario.

Beyond these specific reasons for the extinguishment of collateral, there are general reasons that lead to its ‘abolition’, such as:

The destruction (by material or legal means) of the movable property on which the collateral right existed.
If a new debtor assumes the debt of the old debtor towards the lender, then if the lender disagrees regarding the retention of the collateral, the new debtor will acquire the property without the collateral.
If the debtor had pledged collateral to the lender with a reservation/term and in the meantime the reservation/term is paid, the results are overturned, and the collateral is considered as if it never existed.
However, if a third party acquires the property with good faith, they will acquire it free from any real right of another, without the collateral, that is.

6.Are there special categories of collateral;

Collateral, depending on the purpose it serves and how it is regulated legislatively, has several types, which aim to serve the needs of transactions. For this reason, we distinguish between:

Common collateral, which is what we have presented so far, i.e., what is regulated by the provisions of the Civil Code, and in order to be validly established, requires the delivery of the movable property from the debtor to the lender. The latter element (delivery of the property) is also its main disadvantage, given that usually the debtor does not want to part with the property, which will be useful to them, for example, for their business activities.
Legal collateral, i.e., what is directly provided by law, and therefore the lender does not need to draw up an agreement with the debtor to acquire collateral on the property. An example of such collateral is the landlord’s collateral on movable property brought into the apartment by the tenant (e.g., TVs/furniture) for overdue rents, as well as the contractor’s collateral on the movable property of the employer inside the construction site (e.g., tools of the employer) for claims against the employer from the construction contract.
Commercial collateral, i.e., what mainly serves the needs of transactions between merchants where it can be agreed in bank-merchant relationships that the property will be liquidated through a special forced execution procedure and not through the procedure provided by the articles of the Civil Code, while significant other facilities are provided to the merchant who will prefer to establish it from the traditional type of collateral.

7.Can collateral be established only on property;Can it also be established on rights;

To facilitate the parties involved, the institution of collateral is extended to rights as well = it can be validly established on a debtor’s right in favor of the lender. For collateral on rights to be valid, the following conditions set by the law must be met:

It must be a right that can be transferred = not purely personal rights such as the right to the debtor’s personality.
The collateral must be established by a notarial document or a private document with a certain date, just like in the basic form of collateral.
In case collateral is acquired on a claim, the (new) collateralized lender must inform the debtor that they have acquired collateral on their claim.
It is not necessary for the claim to already exist when it becomes the object of collateral; it can be a claim that will arise in the future.
Other forms of collateral are also possible, such as collateral established on securities (bills of exchange/promissory notes) as well as on deposit books, especially to secure claims of the bank against its customer.
In collateral rights, the provisions for traditional collateral of the Civil Code are applied as long as they are not in conflict with its operation.

8.I want to establish collateral without delivering the property. Is it possible;

Seeing the main disadvantage of traditional collateral = the fact that the debtor, by delivering the property to the lender, is deprived of its use, which may be necessary for them even to settle the claim from the collateral, the legislator created a special category of collateral called ‘fictional collateral.’ This has the characteristics of collateral in its classic form, with the peculiarity that the delivery of the property from the debtor to the lender is not required for it to be valid. It is important, according to Law 2844/2000, that certain conditions are met for fictional collateral to be valid:

It must involve freelancers and/or businesses that will draw up the contract = fictional collateral cannot be acquired by tenants, etc.
The purpose for which the collateral is provided must concern the economic development/support of the debtor’s business or profession = it should not be given for unrelated purposes such as the debtor’s personal needs.
The collateral must primarily concern movable property of commercial significance = household items of the debtor that are exempt from seizure, as well as items that could be mortgaged instead of being collateralized (except real estate), are excluded.

9.What procedure should I follow to establish fictional collateral;

In general, the procedure for establishing valid fictional collateral on movable property does not differ significantly from what was described above. However, there are some differences in the operation of this specific institution. That is, the law requires:

Again, the party granting the collateral must have ownership of the property (unless the lender does not legitimately know/ignores that the grantor is not the owner of the property).
There must be an agreement between the debtor and the lender specifying the claim secured by the collateral, the property given as collateral, and the amount up to which the lender can be preferentially satisfied from the liquidation of the property. These two amounts may differ.
It is understood that the aforementioned agreement between lender and debtor must be made in writing, as in all forms of collateral seen so far.
This agreement must be registered in the so-called ‘collateral registry,’ which is the equivalent of the mortgage registry/land registry but for the registration of collateral on movable property. From this registration, the effects of the collateral agreement commence and become public.

10.Are there any other differences between fictional and ‘traditional’ collateral;

The most significant differences between fictional and conventional collateral, which anyone considering granting this form of collateral should know, are as follows:

The registration of fictional collateral in the special book of the collateral registry is valid for a maximum of ten years. It must be renewed after this period, although the lender may extend its validity in the meantime with a relevant declaration to the collateral registry.
Because the property remains in the possession of the debtor (which is the purpose of fictional collateral), the debtor may grant a collateral right on the property to another lender.
If the debtor grants another collateral right on the property, the priority of satisfaction of the lenders from the auction will be determined by which of them registered the collateral first = lenders who registered collateral on the property earlier will have a higher priority.
Since the property remains in the possession of the debtor, the lender does not know if the debtor is handling it with care, etc. Therefore, the lender has the right to send a judicial caretaker to the debtor’s premises every six months to check if the property is in good condition or has suffered damage, etc.

The above information does not constitute legal advice, and no liability is assumed for it. For more information, please contact us.