CHAPTER V – SPECIAL PROVISIONS WITH RESPECT TO COLLATERAL TRANSACTIONS
3. Collateral securities may be realised, and a close-out netting provision may be operated, under this Article:
(a) subject to any contrary provision of the collateral agreement, without any requirement that:
(i) prior notice of the intention to realise or operate the close-out netting provision shall have been given;
(ii) the terms of the realisation or the operation of the close-out netting provision be approved by any court, public officer or other person; or
(iii) the realisation be conducted by public auction or in any other prescribed manner or the close-out netting provision be operated in any prescribed manner; and
(b) notwithstanding the commencement or continuation of an insolvency proceeding in respect of the collateral provider or the collateral taker.
33-1. Article 33(1) sets out three different methods by which a collateral taker realises or otherwise enforces its interest in collateral securities. Where such securities are given under a security collateral agreement, the collateral taker may either sell or appropriate the collateral securities. In the event of a sale, the net proceeds are applied to discharge the relevant obligations, while upon appropriation the value of the collateral securities is applied in or towards the discharge of or set off against the relevant obligations. Appropriation, however, is possible only if it has been agreed upon in the collateral agreement and, in addition, if the agreement sets out the basis on which the collateral securities are to be valued for this purpose. A third method of enforcement that applies to all collateral agreements is the operation of a close-out netting provision (defined in Article 31(3)(j)).
33-2. Article 33(2) elaborates further on Article 33(1)(b) and applies to both title transfer and security collateral agreements. It specifies that, upon the occurrence of an enforcement event, the relevant obligations of the collateral provider and the collateral taker’s obligation to transfer equivalent collateral may be subject to a close-out netting provision.
33-3. Article 33(3) guarantees that enforcement takes place in an efficient and timely manner, to the extent specified in that paragraph. The law may not require that prior notice of the intention to enforce be given, that the terms of the enforcement be approved by a court, public officer or other person, or that the enforcement take place in a prescribed manner (e.g., by public auction). Only the parties themselves can agree that such requirements apply to their relationship. Moreover,
according to Article 33(3)(b), the commencement or continuation of an insolvency proceeding relating to the collateral provider or collateral taker is no impediment to enforcement.
33-4. The issue of enforcement or realisation of interests in securities has been within the scope of the project as of its very start (see Study LXXVII – Doc. 1, section 12), and features in the first preliminary drafts produced by the Study Group (see Study LXXVIII – Doc. 13, p. 12-13 and Study LXXVIII – Doc. 18, p. 11-12). For the Study Group’s explanatory notes to the initial enforcement provision, see Study LXXVIII – Doc. 19, p. 35.
33-5. During the first session of CGE hardly any substantive change was made to the enforce-ment provision. A first attempt was made to simplify paragraph 2 relating to the types of secured obligations. The only new element was that the requirement to realise in a commercially reasonable manner was no longer a Convention standard, but was made optional to Contracting States. See Study LXXVIII – Doc. 24, Appendix 1, p. 16-17 and Study LXXVIII – Doc. 23 rev., sections 170-174 and 194.
33-6. During the second session of the CGE, the first two paragraphs, which had until then formed part of the enforcement provision but did not really fit there, were replaced by the provision on scope and interpretation, and amended or deleted. Moreover, during this session, a provision on enforcement that originally formed part of the right of use provision was integrated into the enforcement provision. See Study LXXVIII – Doc. 42, Appendix 1, p. 17-18 and Study LXXVIII – Doc. 43, sections 145-148 and 190.
33-7. At the CGE’s third session explicit references to close-out netting provisions were inserted into the enforcement provision, in particular in light of the extension of the scope of the collateral chapter to title transfer collateral agreements. Moreover, during this session, “close-out netting”
was added as a definition. As a result, paragraph 3 of the enforcement provision became superfluous. In addition, the paragraph relating to commercial reasonability was moved to a separate article. See Study LXXVIII – Doc. 57, Appendix 1, p. 18-19 and Study LXXVIII – Doc. 58, sections 115-117, 123-127, 186.
33-8. No substantive changes were made to the provision at the CGE’s fourth session.
33-9. During the first session of the diplomatic Conference, current Article 33(2), which originally formed part of current Article 32 on title transfer collateral agreements, was added to the enforcement provision.
33-10. The purpose of Article 33 is, on the one hand, to specify the rights of the collateral taker on the occurrence of an enforcement event and, on the other, to eliminate obstacles to enforcement that may arise under national legislation, particularly with regard to insolvency proceedings.
33-11. Paragraph 1 specifies the rights of the collateral taker on the occurrence of an enforcement event, which is defined in Article 31(3)(h). For agreements that involve a security interest, sub-paragraph (a) sets out the rights that the collateral taker may exercise with regard to the collateral securities when an enforcement event occurs.
33-12. Paragraph 1(a) outlines (i) realisation in the strict sense, by selling the collateral securities and (ii) realisation by appropriating the collateral. This provision must be read in conjunction with paragraph 3, which specifies the (very flexible) modalities for exercising these rights.
UNIDROIT 2009 – CONF. 11/2 – Doc. 5 – Article 33 149.
33-13. As regards realisation in the strict sense, the provision enables the collateral taker to sell the collateral securities and be paid by applying the net proceeds of the sale towards the amounts due. The proceeds of the sale are thus applied in discharge – in some cases partial – of the secured debt. Where the amount of the net proceeds of the sale is higher than the amount of the secured debt, the difference will have to be repaid to the collateral provider.
33-14. Although no prior court approval is required in order to realise the collateral securities (see paragraph 3 below), under Article 35, the non-Convention law may, for example, introduce a posteriori control in order to verify whether the collateral taker made an effort to sell the securities at the most advantageous price for the debtor and within the shortest possible time, given the relevant market and the volume of the transactions (see commentary on Article 35 below).
33-15. The second way of realising collateral securities referred to under letter (a) is the appropriation of the collateral securities. This manner of realisation is permitted only with the consent of the parties and if the parties have specified the basis on which the collateral securities are to be valued. As in the case of realisation by the sale of the securities, appropriation means applying the estimated value of the collateral securities in or towards the discharge of the secured obligation. Thus, in cases where, in applying the valuation methods agreed by the collateral provider and the collateral taker, the estimated value of the collateral securities exceeds the amount of the secured obligation, the surplus will have to be reimbursed to the collateral provider.
33-16. The purpose of paragraphs 1(b) and 2 of Article 33 is to confirm the availability of close-out netting. Since the definition of a close-out netting provision in Article 31(3)(j) is very broad, encompassing any such provision in a collateral agreement or a set of connected agreements of which a collateral agreement forms part, the scope of paragraphs 1(b) and 2 is likewise very broad.
Paragraph 1(b) is a general provision stating that a close-out netting provision – defined in Article 31(3)(j) – may be operated on the occurrence of an enforcement event.
33-17. Paragraph 2 relates to the effectiveness of a close-out netting provision in the specific situation where an enforcement event occurs before the collateral taker has performed its obligation to transfer equivalent collateral under the terms of the collateral agreement. Specifically, this paragraph refers to two scenarios which, in terms of legal drafting, could have been handled under Article 32 on title transfer collateral agreements and under Article 34 on the right to use collateral securities.
33-18. The first scenario is close-out netting that is the intrinsic and popular manner of enforcing a title transfer collateral agreement. The second scenario to which paragraph 2 may apply concerns situations (which are the subject of Article 34) where, in a security collateral agreement, the collateral provider has agreed to allow the collateral taker to use the securities given as collateral, on the condition that it returns equivalent collateral at the latest by the time when the secured obligation is discharged. In this scenario, in order to offset the risk borne by the collateral provider in respect of the collateral taker, paragraph 2 allows for a close-out netting provision to be triggered.
33-19. Paragraph 3 is intended to avoid the obstacles to the realisation of the collateral which traditionally exist in some jurisdictions. It thus complements paragraph 1 as regards the scope of the rights enjoyed by the collateral taker under the terms of a security collateral agreement (paragraph 1(a)) or under a close out netting provision in a security or title transfer collateral agreement (paragraph 1(b)).
33-20. The introductory part of paragraph 3 specifies its scope. Insofar as this paragraph addresses the possibility of realising collateral securities, it applies equally to the securities given under the terms of a title transfer collateral agreement and to those given under the terms of a security collateral agreement. Similarly, this paragraph covers the operation of close-out netting provisions defined in Article 31(3)(j).
33-21. On the substance of the matter, sub-paragraph 3(a) sets out a default rule, which means that the parties to the collateral agreement may provide otherwise and limit the rights of the collateral taker (this is not allowed for under sub-paragraph 3(b)).
33-22. Points (i) to (iii) permit the realisation of collateral securities – according to the methods described in paragraph 1 – without prior notification to the debtor of the secured obligation (or to the collateral provider, if different), without prior approval by a court, a public or ministerial officer or other person, and without the requirement that the realisation be conducted by public auction or in any other prescribed manner.
33-23. The provision thus eliminates the formalism that may traditionally exist in some national laws with respect to the realisation of collateral. The provision applies the same approach to close- out netting provisions.
33-24. Paragraph 3(b), moreover, provides that realisation as well as the implementation of a close-out netting provision takes effect notwithstanding the opening of an insolvency proceeding that affects the collateral provider or the collateral taker. In the event that the collateral provider is not the same person as the debtor of the secured obligation, although this is not explicit in the provision, realisation should also be possible where the insolvency proceeding involves the debtor of the secured obligation. The definition of an insolvency proceeding (Article 1(h)) includes a reorganisation as well as a liquidation.
Right to use collateral securities
1. If and to the extent that the terms of a security collateral agreement