Pledge enforcement now requires an insurance, which makes it more costly

February 17, 2017

One of the amendments brought at the end of 2016 to the regime of ”special pledges” (i.e. commercial pledges where the pledged assets remains in the possession of the pledger) is the new requirement for insurance.

In particular, a creditor secured by a special pledge enforcing the pledge must, among other things, appoint a “depository”. The depository must be a lawyer or an auditor (prior to the amendments the depository had to be an accountant).

In short, the role of the depository is to prepare a list of the creditors secured by a pledge over the same property and their ranking, receive the cash proceeds from the enforcement of the pledge and distribute such cash proceeds among the secured creditors based on the list. The depository does not carry out the enforcement sale. The later is carried out by the secured creditor.

A new requirement that did not exist prior to the end of 2016 is that the depository must have insurance covering any damages he can cause with his activity at an amount not less than the enforced amount.

This new requirement for insurance raises few concerns:

First, the amendment law did not provide for any transitional period before this new requirement enters into force. Hence, it entered into force almost immediately at the end of last year. Insurers in Bulgaria have not yet prepared themselves to issue these new types of insurance policies. The law is not clear whether a specific insurance policy is required for each specific pledge enforcement or whether for example a general professional indemnity insurance policy would suffice. So, at present no lawyer or auditor has yet such a special insurance cover and unless the general professional indemnity insurances of lawyers or auditors are also deemed to suffice for the purposes of the law there is no one who can currently take on the role of a depository in pledge enforcement.

Second, prior to the amendments the special pledge was appealing to both creditors and debtors because it was relatively inexpensive to create and enforce (in case of private enforcement). The amendment introduced in practice a new enforcement cost as depositories would pass on the cost of obtaining this new special insurance cover to the secured creditor who will in turn pass on the cost to the pledger. Since the cost of obtaining such special insurance cover will depend on the amount of the insurance coverage, which in turn will depend on the amount for which the pledge enforcement is made, the cost of the insurance is likely to be material. This means that one of the main benefits of the special pledge – that enforcing it was relatively inexpensive, is now gone.

Given that the role of the depository is quite limited – to prepare a list of the creditors secured by a special pledge over the same property and their ranking (if more than one) based on public records, to receive the cash proceeds from the pledge enforcement and distribute them among the creditors in the list and that the list prepared by the depository is subject to judicial control (i.e. if a creditor is not content with the list he is entitled to appeal it in court), the potential damages that a depository might cause seem quite limited in practice to merit such an insurance.

In conclusion, from a general public interest point of view, on balance the overall disadvantages of the new requirement for insurance overweigh the benefit of it.

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