Lien is a very frequently used institute of law, by which a creditor can achieve a substantial securing of his receivable. The new regulation according to Act No.89/2012 Sb. [Coll.] of the Civil Code (hereinafter only referred to as „NCC“) will be fundamentally different.
The method of settlement from the pledge according to the current law
Provisions of Section 165a (1) Act No. 40/1964 Sb. [Coll.] of the Civil Code (hereinafter only referred to as „CC“) lays down that a pledge may be realized at the proposal of the pledgee in a public auction or by the sale of the pledge by court. Therefore, according to the current law a creditor has only three options for realizing the pledge.
– The first option is the most common procedure, which is based on an action against the debtor for performance of his obligation and on the subsequent execution of the decision on the basis of a judgment in this disputable discovering proceedings.
– The second option is to realize the pledge in a public auction according to Act No. 26/2000 Sb. [Coll.], on Public Auctions.
– The third option is a sale of the pledge by court according to Act No. 99/1963 Sb. [Coll.] of the Civil Procedure Code (hereinafter only referred to as „CPC“).
This practice is now being changed by the NCC. According to Section 1359 (1) NCC it applies that as soon as a debt is due, the pledgee may be satisfied by means, which are agreed with the pledger, or a distrainee, in writing or otherwise by the proceeds of sale a pledge in a public auction or by the sale of the pledge in accordance with other law.
Method of satisfying from a pledge according to the NCC
The above mentioned concept of the sale of pledge will further be supplemented according to Section 1359 (1) NCC by the option of the parties to agree in writing on the method of getting satisfaction from the pledge. Newly, such method of realizing will be the so called free hand sale out of auction, which was so far inadmissible. Where the parties agree on such sale the creditor must proceed during the sale with expert care not only in his own interest but also in the interest of the distrainee. Within the framework of these obligations the creditor is mainly obliged to make every effort to sell the pledge at least for the common price (see Section 1365 NCC).
However, should the creditor breach this obligation it has no effect on the rights of third parties, who would acquire the object of the pledge in good faith. This means that the acquirer of the thing does not bear the consequences of the fact that he purchased the thing for a lower price. However, the distrainer may claim compensation for damage which he incurred as a result.
Forfeit pledge?
An interesting question arises with the effectiveness of the NCC, whether it is possible to arrange a so called forfeit pledge. It is a form of securing where the pledge upon the default of the debtor is transferred to the property of the pledgee. In other words it is „forfeited“ to the creditor.
Next to the option to arrange a different method of encashing a pledge the NCC also introduces another revolutionary innovation. It is a possibility of an arrangement according to which the creditor may keep the pledge for any or a determined price (see Section 1315 (2)(b) NCC). As well as the arrangement on a different method of encashing a pledge this arrangement must also be always made in a written form (Section 1359 NCC).
Such arrangement is not possible for (i) distrainees – consumers, or debtors who are small or medium-size entrepreneurs, and/or unless (ii) the secured debt is mature (hereinafter only referred to as „Conditions“).
The same Conditions exclude an arrangement for a pledgee to be able to realize a pledge by any means. However, this does not stop them from arranging a specific method in accordance with the above mentioned in compliance with Section 1359 NCC.
It is necessary to emphasise that the arrangement where the pledgee keeps the pledge is possible in the NCC. Regarding this, the Section 1 (2) NCC lays down that the parties may arrange anything, which is explicitly not forbidden by law. Paradoxically, it may be concluded that even though the arrangement for a pledgee keeping a pledge for a specific price where the Conditions are not met is forbidden, an arrangement for a pledgee keeping the pledge with no consideration is not forbidden and it is therefore admissible.
The conclusion that the NCC allows the option of an arrangement of a forfeit pledge can not be argued against even by using Section 2(2) NCC, which lays down that no one can rely on the wording of the law against its meaning. Even though the intent of the enactor to protect the pledger and the distrainee by a ban according to Section 1315 is evident, it is not so that by arranging a forfeit pledge the pledgee is relying on the wording of the law against its meaning because the law is silent about the admissibility of a forfeit pledge. And in the case of absence of an explicit ban the law actually determines the admissibility of such arrangement.
Arranging a forfeit pledge is surely very attractive for many creditors as it is a fast and effective solution. It will be interesting to see how the above mentioned drawback of the NCC and the admissibility of the forfeit pledge will be dealt with by judicature.
Conclusion
On the basis of the above mentioned it can be summarised that the parties of pledge contracts will be able to agree the methods of satisfying from a pledge, which were not possible until now. However, these new options will only by applied upon legal relationships between all legal entities and/or large entrepreneurs (see Section 1315 (3) NCC).
Further, paradoxically, according to the current wording of the NCC it is possible to understand that it will be possible to arrange forfeit pledge for all legal relationships, therefore even for financing of housing construction by mortgages.