Sale of pledged assets by the pledgee is newly possible

Czech Republic: As of 1 January 2014, parties may validly agree on the direct realization of a pledge by the pledgee.

Pledge titles are presently the most common security instrument used for credits and loans. The economic rationale behind this popularity is the fact that pledged assets can effectively be turned into cash and thus ensure that the creditor’s claims will be satisfied if the debtor fails to honor its debt. Until 1 January 2014 – the day on which the new Civil Code came into force, pledgees had essentially recourse to two options if they wanted to draw upon the pledge: either a foreclosure auction (’involuntary public auction’, in Czech legal terminology), or a court-ordered compulsory sale of the pledged asset. In this respect, the new Civil Code offers greater flexibility and thus makes the exercise of a pledge title more efficient.

The big change brought about by the new rules on liens, mortgages, and pledges is that the freedom of the parties is given much greater weight. This finds its expression in a provision which allows the pledgee to enter into a written understanding with the pledgor on the manner in which the pledge title is to be exercised. This substantially enhances the repayment function of the security interest. In the absence of such an understanding on the realization of the pledge, the pledgee may satisfy its claim from the proceeds of the sale of the pledged asset (in a foreclosure auction or court-ordered sale).

Where the parties have agreed on a different manner of realization (e.g. by way of a discretionary sale, voluntary auction, or sale in a public tender), the pledgee must proceed with due professional care. It is obliged to sell the pledged asset for a price no lower than that which could be customarily attained for a comparable item under comparable circumstances at the given place and time. However, failure to abide by this duty has no adverse effect on the rights of third parties who acquired the sold asset in good faith. In other words, the acquirer bears no consequences for buying below price. However, the pledgor may demand that the pledgee compensate them for the damage thus incurred.

Special restrictions apply in the case of consumers and SMEs. Under the new Civil Code, no supplementary agreement with these counter-parties is possible that would allow the pledgee to turn the security interest into cash at its discretion (even if the secured debt has already reached maturity).

Anna Suchá, lawyer


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