Overview (November 2000) - International Law Office

Introduction
Act on Public Auctions
Voluntary Public Auction
Involuntary Public Auctions
Comment

Introduction
There have been few changes to banking legislation this year although substantial amendments are being prepared. One recent change indirectly affecting the banking sector merits discussion, namely the Act on Public Auctions.

Act on Public Auctions

The main instrument by which to exercise a mortgage or pledge has been the sale of the respective property in execution. However, the courts are overloaded with work and do not always function efficiently. Lengthy initial procedures render the mortgage or pledge somewhat ineffective and unfavourable for the secured lender. Thus, legislation has been passed in the form of the Act on Public Auctions. This provides an alternative to the enforcement of certain security interests by judiciary procedure and removes from the courts the burden of execution of certain decisions. The act took effect on April 1 2000.

The act regulates all extra-judicial public auctions, with the exception of those already regulated by special laws (eg, the Administration and Collection of Taxes Act). Since the act introduces a plethora of new terminology, one of its first articles is reserved for definitions of terms.

'Public auction' is defined as "a public activity having as its purpose the transfer of the ownership or other right to the subject of the auction, the respective public activity being performed on the basis of a proposal of a petitioner".

The public auction is organized by an auctioneer who must possess a trade licence or trade certificate (depending on whether she/he organizes voluntary or involuntary public auctions). Licences and certificates are granted provided that the potential auctioneer shows sufficient experience and moral integrity. Auctioneers are obliged to take out adequate insurance covering their public auction activities.

The act stipulates:

• the obligation of the auctioneer to archive all documents regarding the auctions organized by her/him;

• the scope of the participants in a public auction;

• the possibility of representation at a public auction;

• the scope of property that may be the subject of a public auction;

• the manner of establishing the value of the subject of a public auction; and

• the circumstances in which an auction deposit should be demanded.

Property and rights that cannot be handled due to a court or state decision may not form the subject matter of a public auction.

Voluntary Public Auction

A voluntary public auction is undertaken at the request of the property's owner. The auction can be carried out on the basis of a written agreement between the petitioner and auctioneer. Property encumbered with pre-emption rights cannot be the subject of a public auction. The act introduces the possibility of selling at least part of an enterprise in a voluntary public auction.

Ownership of an auctioned item is transferred to the winning participant provided that the bidding price is paid within the given timescale. The bidding price cannot be subsequently reduced and if it is lower than Kr200,000 it must be paid immediately after the auction. When an auction deposit is paid it shall be credited against full payment of the auction price.

Proceeds from the auction are given to the former owner of the relevant property. The rights of third parties resulting from an encumbrance of the auctioned property remain unaffected by the auction.

The act regulates:

• the manner of announcing a public auction and the contents of the official notice;

• the auction procedure;

• the conditions for cancellation and annulment of an auction and consequences thereof;

• the consequences of failure to sell the subject of the auction;

• the manner of settlement of proceeds from the auction; and

• the possibility of undertaking a joint public auction in case the lowest bid for movable property is less than Kr1 million per item.

Involuntary Public Auctions

An involuntary public auction is undertaken at the creditor's request against the will of the property's owner. The act is applicable even where the mortgage or pledge was lawfully realized before the act came into effect, provided that the petitioner files a notarial statement to the effect that she/he has a due claim against the debtor.

An involuntary public auction can be undertaken only with a written agreement between the auctioneer and the petitioner. The debtor, her/his spouse and, in the case of a legal entity, its statutory and supervisory bodies may not participate in the auction.

Creditors may register receivables against the debtor for up to 15 days prior to the auction. The receivables must be adequately documented. Unregistered receivables that are newer than the oldest registered receivable (with respect to the period of their existence) are, under certain conditions, deemed to be registered.

Mortgages securing receivables which are older than the oldest registered receivable remain in existence upon transfer of the ownership to the participant of the auction, and continue to be effective against the new owner.

The exercise of the mortgage or pledge in an involuntary public auction does not affect the existence of liens and encumbrances attached to the property. Co-owners and other persons with pre-emption rights to the property may exercise these rights in the auction. Upon the transfer of the property the contractual pre-emption rights cease to exist but, alternatively, the lawful pre-emption rights of the state, as well as lessees and co-owners of the property, remain.

The act stipulates further conditions for organizing public involuntary auctions and details:

• the procedure for an involuntary public auction;

• the consequences of failure to sell the property; and

• the division of finances from the sale of the property in the public auction amongst creditors.

Comment

An official notice must be delivered to the debtor (ie, the mortgagor or pledgor) as a prerequisite for the auction. This process has been criticized for hindering auctions or even rendering them impossible, for example when the debtor successfully evades the delivery of the official notice.

Further, the credentials of auctioneers have been questioned, as the position requires only a university education and one year of practice in a relevant industry. These qualifications are thought by many to be insufficient, given that the auctioneer must evaluate legal documents, relationships and instruments.

The provisions regulating the existence of mortgages also pose problems. If the creditor, whose receivable is to be satisfied first, refuses to register then the mortgage is automatically enforceable against the new owner. This fact diminishes the importance and use of the public auctions, since potential owners realize that some unregistered mortgages may remain in existence after the sale of a property at auction, and they risk enforcement against them.

Regardless of the aforementioned problems, the act represents a positive change in the area of enforcement of security interests and regulates an area that deserves proper attention. The act provides an alternative to judicial execution, and provides banks and other lenders and creditors with an effective instrument to secure their lawful rights. The act is particularly relevant to banks that provide long-term loans secured by mortgages, which now have a better security interest in the mortgage. Previously banks were forced to use other means of securing their receivables, and mortgages have not generally been considered by the bank supervisory authorities to be sufficient security instruments.

For further information on this topic please contact Alena Banyaiova at Altheimer & Gray by telephone (+420 224 81 2782) or by fax (+420 224 81 0125) or by e-mail (banyaiovaa@altheimer.cz).

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