GERMANY Law and Practice Contributed by: Michael Josenhans, Lucas Lengersdorf and Beatrice Zobel, Freshfields
notified to the relevant debtors (if they have also been notified of the pledge or assignment). 5.7 Rules Governing the Priority of Competing Security Interests and/or Claims Certain security interests (in particular, security trans - fers of movable assets and assignments of receiva - bles) can only be established once and can there - fore only exist in one rank. However, it is possible to ensure that the proceeds of such security be applied in a different order to groups of creditors, by provid - ing the security to a security agent and contractually agreeing on the order of application – for example, in an intercreditor agreement. Such arrangement will, however, not have an in rem effect on the ranking of said security interest, but it will survive the insolvency of the borrower. Security interests over shares/interests/stocks, bank accounts and land can be provided in different ranks. Such security interests will rank in the order of the timing of their valid establishment (priority rule). None - theless, in non-distressed financings, usually only one rank of security is established, and the order of application is agreed in an intercreditor agreement, as described above. In deviation thereof, in scenar - ios in which different secured claims face different insolvency claw-back rights, it is common to provide individual, different-ranking security rights to different creditor groups. Further, lenders may require security confirmations and junior ranking pledges when doing an upsize or amend/extend transaction. With regard to add-on acquisitions financed by incremental debt, borrower’s counsel should ensure that securing such incremental debt is pre-baked into the security documents to the extent legally possible. 5.8 Priming Liens and/or Claims There are two types of security that, in practice, usu - ally rank prior to the contractual security rights of lenders. Pledge by the Account Bank Account banks usually have a right of pledge over the accounts opened with them based on their general terms and conditions for any claims arising against the
pledgor. Account pledge agreements therefore usually request the pledgor to undertake reasonable efforts such that the account bank waives or subordinates such pledge. A strict requirement for such waiver or subordination is usually not included, given the limited scope of the secured obligations under such a pledge pursuant to the general terms and conditions. Landlord’s Right to Movable Assets on Leased Premises A landlord of leased premises has a statutory right of pledge over the lessee’s assets brought onto the premises for any claims arising in connection with the lease. Given the limited scope of the secured obliga - tions under such a pledge, it is unusual to include a requirement that such a pledge be waived. However, recent transactions have sometimes seen a require - ment for the lessee to regularly provide proof of rent payments, in order for lenders to be able to assess the risk associated with the prior ranking pledge of the landlord. 5.9 Cash Pooling and Hedging/Cash Management Obligations Cash pooling is widely used in Germany for corporate liquidity management, with funds centralised into a single account typically managed by a parent com - pany. While efficient, this practice poses challenges for private credit lenders, especially in insolvency sce - narios. The cash pooling bank is typically not secured by the security package provided under the financing agreements and, therefore, is not considered a “ben - eficiary” under the intercreditor agreement. Instead, the cash pooling bank is secured solely by the general terms and conditions pledge ( AGB-Pfandrecht ) and is, as such, a “competing secured party” relative to the private credit lenders. Secured hedging is common in private credit trans - actions. Unlike the cash pooling bank, hedge parties typically participate in the intercreditor agreement but usually as “silent secured parties,” meaning they are formally co-secured, but generally do not have voting rights. 5.10 Appointment of Collateral Agent The taking or holding of collateral in German transac - tions is usually administered by a collateral/security
65 CHAMBERS.COM
Powered by FlippingBook