News ways of enforcing a lien

Czech Republic: Pledgee and pledger can now agree in writing on how to enforce a lien

A lien is currently the most common means of securing loans. Its economic purpose lies in the option of converting a pledge into cash, thereby achieving the agreed performance if the borrower fails to meet its debt.

Any item that can be traded can now be pledged, though the most common items pledged are real estate, receivables, businesses or shares in corporations.

Up until January 2014 when the New Civil Code came into force the pledgee had only two ways of gaining satisfaction from a pledge, either by involuntary public auction or by judicial sale of the pledge. This was a great restriction as both methods are highly formalised, so they take longer to implement and, in addition, the yield often does not meet expectations.

The New Civil Code allows pledgee and pledger to agree in writing on how to enforce a lien. However, it sets fairly strict rules as to negotiating an agreement and completion of the actual sale. The pledgee will therefore have to proceed with professional care during the sale and will have to sell the subject of the pledge at least at a price for which a comparable item can usually be sold under comparable circumstances at that particular time and place. Breach of this obligation by the pledgee will not affect the rights of third parties that have acquired the subject of the pledge in good faith. This means that an assignee does not bear the consequences of the fact that it bought the object at a lower price. Nevertheless, the pledger can demand compensation from the pledgee.

In practice this will most frequently be a private sale, a sale by voluntary auction or a sale in a public competition for the best offer.

Each further legal successor of the pledger will also be bound by the agreement on how the lien is to be enforced.

In the absence of agreement on how a lien is to be enforced the pledgee can obtain satisfaction for an overdue debt from the proceeds of liquidation of a pledge at public auction or through judicial sale of the subject of the pledge.

Anna Suchá, Lawyer


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