What are securities and what can you do with them?

If you lend money to someone, you want that person to repay that amount no matter what. You want that even if that person goes bankrupt. Yet the chance that you will see some of your money back in that case is less than 5%. To make sure that does not happen to you, you can use collateral. Then you will have the best chance of getting your money back. In this article I will describe the most important securities.

They are:

1. Pledge;
2. mortgage right;
3. joint and several liability;
4. bail;
5. guarantee.

Which security is most appropriate in your situation depends on the situation and circumstances of the case.

1. Pledge

A lien can be established on goods that are not registered property. Examples include movable property such as stock and inventory, but also (trade) receivables or shares.

A lien gives you two major advantages over unsecured creditors.

First, you have the right of immediate execution. This means that you can execute ("sell") the pledged property and recover on the proceeds without having to go to court first.

Second, you are a separatist in bankruptcy. This means that you do not have to file your claim in bankruptcy and you may also proceed to foreclosure if your debtor goes bankrupt. Thus, a lien is "bankruptcy-proof."

2. Mortgage right

A mortgage right can be established on registered property such as land, buildings or registered ships or aircraft. A mortgage right offers the same benefits described above as a lien.

Because liens and mortgages are established on different property, there are also differences particularly in the requirements for establishment and enforcement.

For example, the establishment and enforcement of mortgage rights will always require the involvement of a notary, whereas pledge rights generally do not.

In both cases, it is important that the value of the security covers the outstanding claims: after all, you want to avoid the situation where the value of a commercial property mortgaged to you is only €500,000.00, while your claim is €1,000,000.00.

3. Joint and several liability

With joint and several liability, multiple parties are liable for repayment of the same amount.

As a creditor, you can choose whom you wish to address. The person addressed must pay the entire amount to you. Possibly he can try to get this amount or part of it back from the other debtors. However, as a creditor, you are not involved in this.

The foregoing can be a significant advantage if one of the debtors cannot pay or goes bankrupt. After all, you can then still appeal to the other debtors.

The most common example in practice is the compte joint and several liability agreement that a bank often enters into with several group companies.

4. Bail

A third party can act as guarantor for a debt of another. The most telling example is the Director-Major Shareholder who binds himself to the financier as guarantor if his company cannot repay the financier.

The main difference with joint and several liability is that the guarantor only has to pay if the original debtor fails to pay. Only then can you sue the guarantor.

5. Warranty

With a guarantee, a third party - often a bank or a parent company - undertakes to pay an amount to you if you, as the beneficiary, claim it. This is generally the case if the debtor fails to pay his debt to you after being summoned to do so or goes bankrupt.

The most common example in practice is the first-call bank guarantee.

Conclusion

In this article, I have described what I believe to be the most important collateral. These can ensure that you get your money back, even if your borrower goes bankrupt.

In addition to the securities mentioned above, there are other security rights. For example, you can think of the right of retention, the right of claim and the retention of title.

Settlement can also be used as collateral.

In short, there are many ways to achieve repayment of your money through collateral. Which security is most suitable depends on the situation. It is therefore important to get proper advice.