Security

The creditor can require security to ensure repayment of the credit in case of debtor’s insolvency. As credit collateral, the creditor may accept mortgages and liens, as well as guarantees, which may be also be issued by banks (bank guarantee), insurance companies (credit insurance) or specialized credit institutions.

A real estate proprietor can take out a mortgage over the real estate for a specified monetary amount. An application to take out mortgage is submitted to the district court of the property’s location. When the mortgage is granted, the proprietor receives a mortgage deed, which may be used as credit collateral. See further regarding mortgage over real estate in [Mortgage]⁠.

A floating charge constitutes a security interest over all personal property assets [Movable Property]⁠ of the debtor company. Property, that has been separately granted as security, or otherwise excluded from the scope, is, however, excluded from the charge. The company is free to sell its assets, but the floating charge will automatically cover all assets replacing the sold assets. It is not, however, possible to create a third party lien over any of the assets subject to floating charge, with the only exception of securities, book-entries and receivables.

In case of possessory security (i.e., lien or pledge) the assets provided as security are transferred into the creditor’s possession pursuant to a pledge/lien agreement. The target property may include any forms of personal property (whether assets or rights), but not real property. In order to create a lien over securities in book-entry form, the pledge must be registered in the owner’s book-entry account, see [Book-Entry System and Book-Entry Shares]⁠.

A guarantee is a special undertaking, involving the person issuing the guarantee (the guarantor) assuming liability for another person’s (the debtor’s) obligation, i.e. the principal debt. The guarantee may be in the form of either a secondary guarantee, or a surety. A secondary guarantee means that the guarantor is only liable for the debtor’s debt in the event of default of the debtor. If the guarantee is a surety, the guarantor is liable for the debt as if the guarantor itself was the debtor – in other words, the creditor may turn directly to the guarantor for payment. In the absence of an agreement regarding the form of the guarantee, it is deemed to be a secondary guarantee covering only principal of the debt. In practice, surety is the most common form of guarantee, covering also interest and possible other debt-related charges. Although the shareholders of a limited liability company do not have liability for the company’s debts, a guarantee issued on behalf of the company may result in personal liability.

Bank guarantee is a particular form of guarantee meaning sureties issued by a bank on behalf of the bank’s client, as security for the client’s debt or other commitment. The bank usually requires the client, on whose behalf the guarantee is issued, to provide a counter-indemnity. The counter-indemnity can be e.g. a mortgage or a lien. From the creditor’s point of view, bank guarantees are low-risk securities.

Finally, it may be possible to use as security a credit insurance granted by an insurance company, which is similar to a bank guarantee. In credit insurance, the insurance company provides a surety against the insurance premium paid by the debtor.