It is now practicable to pledge an owner's account, after new rules were introduced by the Central Securities Depository.
The new rules contain the essential information needed to enable creditors to decide whether to opt for a pledge of the whole account, or of individual shares. The pledging of an owner's account has been permitted under Czech law for about eight months.
Given its newness, the usefulness of this tool is difficult to assess but the flexibility it offers may well make it popular with creditors and lead to it being used in increasingly creative ways.
The procedure is broadly similar to that for pledging a single share:
- an order must be issued (usually by the pledgor, but possibly by the pledgee) to the participant in the depository that administrates the pledge (ie the bank or broker)
- the original pledge agreement (or a notarised copy) must be attached to the order
- once an order is issued, the pledge is normally registered within a day or so
Under Czech law, no share can be pledged twice so there are some 'no transfer, no pledge' rules:
- no account can be pledged where it includes one or more already pledged shares
- no share registered in a pledged account can itself be pledged
- no pledged share can be transferred into a pledged account
This makes the account static and thus unsuitable for smooth and prompt trading of the shares or securities it contains. The owner must constantly bear in mind that it is not allowed to acquire all the shares it might intend to buy and that not all shares can be transferred to the pledged account.
The pledgee's prior consent is needed for any transfer (sale or gift) of shares from a pledged account, otherwise the shares will remain pledged when transferred to the third party. This aims to stop the pledgor from being able to reduce the value or quality of the pledge (excluding stock exchange fluctuations) and to spare pledgees the expense of having to monitor movements on the account.
A pledge on an account offers flexibility to both creditors and debtors. Its main advantage is that every share added to the account from the moment it has been pledged will also become pledged. Thus its value can only increase and not decrease without the creditor's prior consent.
There is a risk for the debtor that, if many shares are registered after the pledge takes effect, the value of the pledge could easily multiply and outgrow the value of the loan. The debtor should therefore set up more accounts and create a pledge over only some of them.
However, where the value of the pledge falls below that of the loan (eg due to stock market fluctuations), the creditor is entitled to ask for it to be increased by the transfer of additional shares into the account.
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 31/08/2011.