Security over receivables from issued bank guarantees

Security over receivables from issued bank guarantees

On August 26, 2014 the Supreme Court issued a decision which alters fundamentally the doctrine related to the security of receivables from bank guarantees.

Besides the specific case of loan financing under Section 41 of the Act no. 182/2006 Coll. “Insolvency Act“ (hereinafter as “IA”), after the initiation of insolvency proceedings it is not possible to obtain a right for satisfaction from a security (collateral) which is a part of the insolvency estate. The courts were in the past inclined to apply the provisions of the IA prohibiting the rise of new security extensively in the cases where the right for satisfaction from a security arose after the initiation of the insolvency proceedings, but with a retrospective effect dating before the initiation of the proceedings (see the Supreme Court’s decision file no. 29 NSČR 16/2011, from November 30, 2011).

However, in the aforementioned decision from last year the Supreme Court took one step further when it issued a ruling related to the extinction of the right for separate satisfaction acquired after the filing of a bankruptcy petition (note: this decision refers to the extinguished Act no. 328/1991 Coll. on Bankruptcy and Settlement, however it is applicable on the relations under the IA as well). In this ruling the Supreme Court opines that even though it is possible to conclude a valid pledge agreement to secure a future receivable, the right of pledge as such shall arise only in the same moment as the receivable being secured by such pledge (with the rank as of the day when the formal conditions for the creation of the pledge were met). If the secured receivable (and thus also the right of pledge) arose only after the declaration of bankruptcy, according to the Supreme Court the creditor cannot be awarded (with regard to such pledge) with a right for separate satisfaction (i.e. satisfaction from the security).

In light of this decision, banks will be unable to obtain a right for satisfaction from a security (collateral) related to recourse claims incurred as a result of payments made under issued bank guarantees if such payments are made after the initiation of the insolvency proceedings. It should be noted that when banks issue bank guarantees they are unable to anticipate with a sufficient degree of certainty whether the economic situation of the debtor during the validity period of the guarantee will worsen to such extent that insolvency proceedings could be initiated.

We deem that the legal opinion of the Supreme Court is unfortunate however we are of the opinion that there are certain legal instruments which banks may implement to strengthen their position towards debtors in bank guarantee transactions and to obtain the status of a secure creditor in potential insolvency proceedings.