The Best Are Fiduciary and Mortgage Insurances

Fiduciary insurance is a good means of security for the creditor, and it allows the debtor to continue using what has been given as security and potentially acquire funds to settle the claim.

Written by: Prof. Dr. Hrvoje Kačer

Fiducia is a means of securing claims that belongs to so-called real security, as opposed to personal securities such as promissory notes, and is not limited in terms of subjects in any way. The party can be anyone, including a foreigner. The introduction of the fiduciary ownership institute is a result of the need to improve the position of creditors through the security of claims and thus all potential and actual investors, which is very important in times of increased illiquidity. Since creditors and debtors have existed, there has been the problem of how to ensure that the creditor is satisfied and thus encouraged to make various investments. Objectively, every creditor should always keep in mind two dangers – the first is how much the debtor’s assets will be at the time of settlement, and the second is how many other creditors will be ‘attacking’ that same asset. Fiducia and real means of security (including mortgages) limit these risks because they place the creditor in a position where they only risk if the claim exceeds the value of what has been given in fiducia. It is necessary to pay special attention to the objective fact that the system is always quite socially sensitive and that in practice, the declarative protection of creditors from a series of laws often loses battles under the pressure of the media and the public (under slogans such as ‘why does a wealthy entrepreneur evict someone from an apartment when the amount of debt does not mean much to them’, while how the debt arose is of little interest to almost anyone).

Register of Claims Insurance

When real estate that is registered in the land registry is given in fiducia, everything is very simple and the creditor is registered – recorded as the so-called previous owner, with a note that it is for security purposes. Legal certainty and the rule of law are protected in these cases, and it should also be noted that the security agreement must certainly be signed by the spouse, whether married or cohabiting, so that due to the institute of marital property, under which everything acquired through work is co-owned in equal parts unless otherwise agreed in a marital contract, which almost no one in our country concludes, unlike in many developed countries where this is common.

For everything that is not recorded in public registers (and there is a lot of this, not only movable property but also real estate because the state of land registries is still disorganized or insufficiently organized), the situation is not simple. Therefore, it was necessary to find a solution that would ensure a sufficient degree of legal certainty for all participants. Since April 25, 2006, the Law on the Register of Judicial and Notarial Claims Insurance for Creditors on Movable Property and Rights has been in effect, within which the Financial Agency established the Register Service that maintains the register as a public book, and rights and measures that are not recorded in any other public book, such as a lien on movable property, rights, shares, stakes, and business shares in a company that are acquired through enforcement or insurance according to the law, are recorded in it. The Regulation on Vehicle Registration has also been harmonized, and it is provided for the registration in the vehicle booklet of the existence of restrictions when establishing fiduciary insurance on a vehicle.

The Problem of Unregistered Real Estate

A special problem remains unregistered real estate – these are not only buildings that are not registered but also entire cadastral municipalities where the land registry has not been established (unfortunately, this still exists). The problem is not in drafting the fiduciary insurance agreement – the problem is how to ensure publicity for the effect against all third parties to avoid various types of manipulation at the expense of the creditor. There is no usual enforcement in land registries, the mentioned register from 2006 does not mention unregistered real estate (application would be possible with very elastic interpretation), and enforcement remains in the so-called book of deposited contracts – the creditor who finds themselves in this situation should, if they can choose and do not refuse such insurance, wait (with payment or delivery or whatever will create the obligation that is being secured) until the finality of the decision on the registration in the book of deposited contracts. Namely, the practice is (even with banks, which are generally known to be very inflexible and rigid) that an extract from the land registry is accepted, while it is ignored that the registration is carried out before the decision is even made, not to mention its finality.

In addition to the monetary claim of the fiduciary, a non-monetary claim can also be secured, but in that case, the agreement must specify the monetary equivalent of that claim, and future claims can also be secured.
It is important that no taxes and other charges are paid on the transaction for security, except for court fees for registration. However, if and when it happens that what has been given in fiducia is sold or becomes the property of the creditor, then taxes (on the transfer of real estate, on value-added tax…) are calculated and collected just like in any other transaction.

Avoiding Litigation

It is provided that the debtor can already in the act of establishing fiduciary insurance submit to (by contracting an enforcement clause) forced execution of the claim for the delivery of things, thus avoiding litigation, and the success of this legislative solution lies in the fact that the fiduciary ownership agreement is concluded before a court or notary with the effect of a court settlement.

The Enforcement Act and its amendments do not contain provisions on prohibited clauses in fiduciary insurance agreements, but the rules on clauses that are prohibited in pledge agreements could be applied analogously, meaning that the subject of insurance will pass into the creditor’s ownership if the debt is not paid within a certain time, that the debtor can never redeem the subject of insurance, or that they cannot allow anyone else to establish a right of insurance on the same subject, or that the creditor should not even after the maturity of the secured claim be allowed to demand the sale of the secured item, etc. Therefore, fiduciary insurance is a good means of security, a means that allows the debtor to continue using what has been given as security and potentially acquire funds to settle the claim. During this time, the debtor can also dispose of that property, but this is more of a theoretical category because it will be difficult for anyone (except in exceptional cases) to accept disposal when something has already been given in fiducia. The creditor is quite protected by publicity in public registers, from the land registry to the newly established register. They have the right to access all these books, which should be done whenever possible (it is not, for example, when it comes to a claim arising from damage).

Enforcement Clause

Moreover, even when a relationship has already been established, it is good to monitor what the debtor does with their other property, because if payment does not occur through fiducia, the debtor is liable with their other property. Care should certainly be taken regarding marital and cohabiting partners at the time of acquiring property – it is best to obtain a marriage certificate from the debtor (original or certified copy) and then proceed accordingly (for example, the consent of a spouse who has recently married regarding previously acquired property is irrelevant, as is anyone for what has not been acquired through work but, for example, through inheritance).

Although many try to shorten all their contracts as much as possible, this is not always advisable. When something is already being done, the cost is the same (and the risk much smaller) when approached thoroughly. This means also confirming all checks of statements and guarantees of the debtor, but also including an enforcement clause despite some considering it superfluous because the Enforcement Act states that the agreement has the nature of a court settlement and, if at all possible, an insurance policy with a reputable insurer, which is especially important for vehicles given in fiducia.

If the debt is not paid, the further procedure goes through a notary (but not ex officio but at the request of the one who has an interest in it – that is, the creditor). It is important to know that if non-payment occurs, the subject is exposed to sale through the notary, and if this fails, the creditor can declare that they accept the transfer of what has been given in fiducia into full ownership in payment of the total debt with all interests and taxes. The price at which the subject will be offered is determined by the debtor, but not less than the secured claim with all costs. If it is sold for more, that money belongs to the debtor.