Supreme Court Restricts Contractually Agreed Pledgee's Right Of Realisation

Originally published in ILO 17.06.2011

Introduction

In the context of secured financings, lending banks often require a pledgor to issue a sale power of attorney for the asset pledged (ie, shares, real property or other assets). This sale power of attorney is to facilitate realisation of the pledged asset in the event of default, without any involvement required on the side of the pledgor.

However, in recent decisions (the latest dated February 11 2010), the Austrian Supreme Court has held that such a sale power of attorney may be considered an illegal circumvention or breach of Section 1371 of the Civil Code.

Section 1371 of the Civil Code

Under Section 1371, all conditions and side agreements that are contrary to the nature of pledge agreements are void. In particular, the section arguably requires a pledgee to take into account the pledgor's interests when realising pledged assets. Provisions stipulating a minimum sales price and a 'best efforts' clause