Definition and legal categorization of ‘Secured’
The term ‘Secured’ (German: ‘Besichert’ or ‘gesichert’) is used extensively in the legal context, particularly in the fields of contract, finance, and security law. ‘Secured’ typically describes a legal position in which a claim, demand, or asset is protected by additional collateral. The legal structuring and the consequences of such security are multifaceted and pertain particularly to civil law, insolvency law, as well as international commercial and capital market law.
Definition and classification
The characterization as ‘secured’ refers to the existence of a legal security or protection within the framework of a legal relationship. The essential point is the reduction or minimization of the risk of default for the beneficiary (e.g., the creditor). The collateral may be provided in the form of either real security or personal guarantees.
Distinction from ‘Unsecured’
In contrast to ‘unsecured’, a ‘secured’ claim is backed by a legal security that, in the event of default or delay by the debtor, offers a preferential enforcement opportunity or satisfaction from certain assets.
Legal significance of ‘Secured’ in various areas of law
1. Security rights in civil law
1.1. Real collateral
Real collateral provides the security holder (e.g., creditor) with direct access to a specific asset (e.g., real estate, movable property).
Examples:
- Real property liens (such as mortgage, land charge)
- Pledge on movable property or rights
A ‘secured’ position is created here because the creditor is entitled to preferential access to the collateral in the event the secured claim is not fulfilled.
1.2. Personal guarantees
Personal guarantees are created by providing additional obligors (‘guarantors’).
Example:
- Guarantee ((§§ 765 ff. BGB): The guarantor is liable for the principal debtor’s obligation.
2. Finance and capital market law
2.1. Secured financial instruments
In finance, ‘secured’ instruments (e.g., ‘secured bonds’) are securities that are backed by specific collateral:
- Secured bonds: Repayment is made with recourse to collateral, typically the issuer’s assets.
- Asset Backed Securities (ABS): Securities whose receivables are secured by pooling of assets.
2.2. Secured lending
In loan agreements, a fundamental distinction is made between ‘secured loans’ and ‘unsecured loans’. Secured loans are furnished with collateral that allows the lender to claim preferential satisfaction in the event of default.
3. Relevance under insolvency law
In insolvency law, the term ‘secured claim’ is used to refer to claims of creditors that are secured by security interests in the debtor’s assets.
- Right of separation (§§ 50 ff. InsO): The secured creditor is allowed preferential satisfaction from the collateral.
- Right of segregation: The (e.g., by retention of title) secured right to reclaim certain assets from the insolvency estate.
International context and terminology
1. Comparison: Anglo-American and Continental European law
In the Anglo-American legal system (particularly USA and UK), the distinction between ‘secured creditors’ and ‘unsecured creditors’ is of particular importance, both in business operations and in legal or insolvency proceedings. The most important instruments include:
- Security interests: Rights in specific collateral, mostly codified in the Uniform Commercial Code (UCC, Art. 9, USA).
- Floating charges: A specific form of global security in corporate law of the United Kingdom.
In German civil law, security is regularly provided through statutory security instruments such as pledges, mortgages, land charges, or suretyships.
2. International contract structuring
In international commercial practice, the agreement of collateral (‘secured transactions’) is common. However, recognition and enforceability of the collateral often need to be assessed and structured under multiple legal systems.
Further legal aspects and special features
1. Tax treatment
The legal treatment of secured claims and recognized collaterals can have tax consequences, for example with regard to the valuation of collateral or recovery in the context of insolvency challenges.
2. Priority and enforcement
A decisive aspect of ‘secured’ legal relationships is the priority of the secured claim over other creditors. This is often regulated through an explicit ranking (so-called subordination agreement).
3. Transferability and further use of collateral
In the context of trading claims, especially securitization, secured claims may be sold, assigned, or further exploited. Transferability depends primarily on the nature of the collateral and the requirements of the underlying law.
Conclusion
The term ‘Secured’ characterizes legal situations and structures in which claims, demands, or rights are protected by additional collateral. The precise legal structuring varies considerably depending on the area of law and the individual case. The essential purpose of securing is to reduce the risk of payment defaults and to create a preferential legal position in the event of a dispute or insolvency. Understanding ‘Secured’ is therefore of central importance, particularly in contract drafting, financing, and insolvency proceedings.
See also: Security rights, security transfer of ownership, pledge, right of separation, credit insurance, enforcement of claims, secured loan
Frequently Asked Questions
What legal requirements must be met for the valid creation of a secured right (Secured Interest)?
To validly create a secured right (‘Secured Interest’), various legal requirements must be met, which may vary depending on the legal system concerned. In general, an effective security agreement between the collateral provider and the secured party is required in which the claim to be secured and the collateral, e.g., a movable object or a right, are specifically described. Compliance with formal requirements is also necessary— in many jurisdictions, a written agreement is required. For effectiveness against third parties, publicity is often necessary, for example through registration in a public register (such as the land register for real estate collateral or the commercial register for company shares) or by delivery of the collateral (for possessory securities such as a pledge). Furthermore, third-party consent may be required in certain situations, especially if third-party rights exist in the collateral. Finally, further material requirements such as a sufficiently defined security purpose, determinability of the secured claim, as well as compliance with statutory protection provisions—such as consumer protection regulations—must be observed.
What are the effects of establishing a ‘Secured Interest’ on subordinated creditors in the event of insolvency?
The creation of a ‘Secured Interest’, such as a security transfer of ownership or a mortgage, grants the secured creditor in the event of the debtor’s insolvency a right of separation, meaning they are satisfied first from the proceeds of the collateral. Subordinated, unsecured creditors gain access to the remaining surplus from the realization of the collateral only after the secured creditor has been fully satisfied. If multiple secured rights exist, generally the right that was created or registered first takes precedence. In some cases, special insolvency provisions (e.g., InsO § 51 ff. in Germany) regulate the exact implementation and order of satisfaction. Subordinated creditors therefore run the risk of receiving nothing in insolvency proceedings if the proceeds from the collateral are insufficient to cover the senior secured claims.
What typical forms of secured rights exist under German law and what legal framework applies to them?
Under German law, there are various forms of secured rights, including pledges (on movables or rights), mortgages and land charges (on real property and equivalent rights), security transfer of ownership, and assignment of claims for security purposes. Each of these collateral types is subject to specific statutory provisions, which may be found in the German Civil Code (BGB), Land Register Ordinance (GBO), Commercial Code (HGB), or security law. For example, pledges generally require agreement and delivery of the collateral; real property rights must be entered in the land register. For assignment of claims as collateral, clear designation of the security purpose and the determinability of the secured claim are legally essential. The protection of the parties’ interests and, where applicable, third-party protection—especially in the event of challenge or insolvency—must also be ensured.
How is the enforcement of a secured right carried out correctly in case of dispute?
Enforcement of a secured right in the event of a dispute generally requires that the security event has occurred, i.e., the secured claim is due or uncollectible. Depending on the type of collateral, the secured party must realize the collateral, for example through public auction for possessory pledges, foreclosure for real property liens, or realization as per agreed security contract (sale, collection of assigned claims, etc.). The legal procedures are particularly governed by enforcement law (ZPO, InsO) and the respective special statute. The collateral provider is generally entitled to information, proper realization, and surrender of any surplus after the debt is paid. Premature or improper realization may give rise to claims for damages.
What notification and registration requirements exist for the effectiveness of a secured right against third parties?
Many secured rights acquire effect against third parties only through publicity, i.e., in particular to other creditors or insolvency administrators. For example, a real property lien—mortgage or land charge—requires entry in the land register (§ 873 BGB), while for assignment of claims as collateral, notification of the debtor is often legally relevant (§ 409 BGB). For certain movable property, registration (e.g., in the ship or pledge register) can be an alternative to delivery. Without compliance with notification and registration requirements, a right may not be effective against third parties. Failure to comply can lead to competing creditors gaining priority or the right not being enforceable in insolvency.
What risks exist with respect to general terms and consumer protection regulations when agreeing on secured rights?
The agreement of secured rights in General Terms and Conditions (GTC) is subject to strict content control in accordance with §§ 305 ff. BGB. Prohibited clauses, for example, those that grant the secured party unjustified realization rights, blanket liability exclusions, or unreasonable waivers by the collateral provider, are invalid. Special attention is required where the collateral provider is a consumer, as additional protective regulations apply, such as the requirement of transparency or information obligations. Further, special prohibitions apply, such as the prohibition of realization without sale (§ 1228 para. 2 BGB), inadmissibility of overcollateralization, or prohibition of forfeiture clauses. Violations of these legal restrictions may render the corresponding contractual provisions invalid and, in individual cases, trigger compensation claims.
Is there a difference between security rights in national and international law, and how are conflicts resolved?
In international legal transactions, it is pivotal to determine which law applies to the secure interest (the so-called statute of the security right). While in national transactions the law of the location of the property (for real estate) or the law of the place where the movable property is situated is generally decisive, in the international context, conflicting legal systems may compete. This concerns issues such as creation, validity, enforceability, and ranking of security rights. International conventions such as the UN Sales Convention or the Hague Convention on Security Interests in Movable Assets may apply. Within the European Union, the Rome I Regulation governs choice of law for contractual obligations, but for real rights, property law statutes remain decisive (§ 43 EGBGB). In the event of a conflict, the courts of the location of the property or the relevant register will decide on the validity and priority of the security rights.
