The 2005 Serbian Law on Hypothec (Official Gazette of the Republic of Serbia, No. 60/2005), introduced the possibility of out-of-court collection and in particular the so-called ‘subsequent agreements’, allowing appropriation of encumbered real property instead of satisfaction of secured claim (Article 27 of the Law on Hypothec), but had its flaws that were severely exposed by the case law.
Subsequent agreement is an agreement entered into between the hypothecary creditor and the owner of the encumbered real property, that may provide for the appropriation of encumbered real property by the hypothecary creditor instead of satisfaction of secured claim. Such agreement, reads the law, is allowed once the secured claim matures and should be assembled in the form of an authentic instrument (notarial act) or the authenticated private deed.
However, even though the intent of the legislature was to allow for the swift and effective satisfaction of secured claims, appropriation of encumbered real property, as well as any other form of out-of-court enforcement of hypothec, was made practically inoperative through an inadequate wording of the law itself and subsequent judicial interpretations of such wording.
Prior to the statutory changes of 2015, the lower ranking hypothecs remained existing even after the out-of-court enforcement was carried through. This applied to subsequent agreements, as well. In accordance with the judicial interpretations of both first instance and appellate courts, the lower ranking hypothec remained existing, since subsequent agreement concluded between the creditor whose claim was secured by the prior ranking hypothec and the owner of the encumbered real property were considered to be res inter alios acta, hence incapable to affect adversely the rights of the creditor whose claim was secured by the lower ranking hypothec and who was not a party to such contract.
This all created a paradox: instead of satisfying claim by the appropriation of encumbered real property, the appropriating creditor whose claim was secured by the prior ranking hypothec got him-self compelled to substitute in the place of the encumbered real property owner.
While the issue was resolved by the statutory changes of 2015, for a significant number of cases that took place before the changes, decision of the Supreme Court of Cassation of Serbia No. Prev. 194/2015 in AIK Banka v. Agrobanka in bankruptcy case, reported here earlier, may provide a breakthrough. In that particular case, the Supreme Court of Cassation held, for the first time, that the rights of lower ranking hypothecary creditors remain reserved only to the extent the value of appropriated real property exceeds the claim secured by the prior ranking hypothec (hypothec of the appropriating creditor). If, on the other hand, the value of appropriated real property falls short of the claim secured by the prior ranking hypothec, or is equal to it, the appropriating creditor should be entitled to request the remaining lower ranking hypothecs to be extinguished and erased.
If you have any questions regarding the above, please contact Živković Samardžić Dispute Resolution Associate Ivan Ljubisavljević (ivan.ljubisavljevic@zslaw.rs), or any of your regular contacts at Živković Samardžić. In preparing this insight, Ivan was assisted by Danica Vlaović, trainee attorney at law.