The pledgee (creditor) must clearly understand the rules for the forced extra-judicial sale of the pledged property if the pledger (borrower) does not fulfill the obligations properly. When can the forced extra-judicial sale of the pledged property be carried out? What is required for the forced extra-judicial sale? What documents and within what time frame must be drawn up?
The realization (sale) of the pledged property, provided for in Article 319 of the Civil Code of the Republic of Kazakhstan (General Part), is carried out by sale at public auction.
Article 20 of the Law of the Republic of Kazakhstan "On Mortgage of Real Estate" provides for methods of implementing a mortgage. In the event of failure by the debtor to fulfill the main obligation, the pledgee has the right to satisfy his claims by:
- realization of a mortgage in court;
- realization of a mortgage out of court, if this is provided for by legislative acts or in the contract or subsequent agreement of the parties;
- repossession of the pledged property in the event of the auction being declared void.
What regulates the procedure for the sale of mortgaged property?
The specifics of the sale of mortgaged property in a compulsory extrajudicial manner are established by the Civil Code of the Republic of Kazakhstan and the Law "On Mortgage of Real Estate". At the same time, the rules and procedures established by the said Law for the sale of mortgages apply to the sale of property when executing other types of collateral (for example, movable property), unless otherwise established by the Civil Code.
Consequences of non-compliance with the rules of extra-judicial implementation
Compliance with the established procedure and sequence of extra-judicial sale of pledged property by means of auctions is important, because failure to comply with these rules for extra-judicial sale of pledged property may lead to the auction being declared invalid if challenged by the pledgor, and, consequently, to a delay in the debt recovery procedure.
When does a pledgee have the right to sell the pledged property out of court?
In accordance with paragraph 2 of Article 318 of the Civil Code, the pledgee may independently sell the pledged property in a compulsory extra-judicial manner by holding an auction (bid), if this right is provided for by the pledge agreement. The pledgee bank has the same right to sell the subject of the pledge securing the cash loan.
Cases in which extrajudicial enforcement of collateral is not permitted are established by law .
Who carries out the extra-judicial sale of mortgaged property?
According to Article 320 of the Civil Code and Article 25 of the Law "On Mortgage of Real Estate", when selling mortgaged property in a compulsory extra-judicial manner, the auction is conducted by a trusted person, which is a legal entity or a citizen who has a power of attorney from the mortgagee to sell the mortgaged property.
Clause 2 of Article 24 of the said Law provides that the authorized person may be determined by the parties in the mortgage agreement. If the authorized person is not determined in the mortgage agreement, he/she is appointed by the mortgagee.
Procedures that a trustee must follow when selling mortgaged property
The attorney-in-fact, in accordance with paragraph 2 of Article 320 of the Civil Code, must perform the following procedures:
- draw up a notice to the pledger regarding the failure to fulfill obligations and register it with the authority where the pledge agreement was registered;
- if the requirements arising from the notice are not met, but not earlier than 30 days from the date of its sending to the pledgor, draw up a notice of auction of the pledged property, register it with the body where the pledge agreement was registered, and deliver it to the pledgor or send it to the pledgor by registered mail to the address specified in the pledge agreement;
- officially publish an announcement of the tender in the local press. Clause 4 of Article 25 of the said Law states that at least 10 days must pass from the moment of the first publication of the announcement of the tender until the moment of its holding.
Requirements for the place and time of the auction
In accordance with Article 29 of the Law "On Mortgage of Real Estate" the auction:
- are carried out in the populated area (city, district, village, aul, hamlet) where the pledged property is located;
- are scheduled for any day of the week from 9:00 to 18:00.
Notice of Default
The notice of default must contain the following information, as provided for in Article 26 of the Law "On Mortgage of Real Estate":
- name (title) and place of residence (location) of the pledger;
- name (title) and place of residence (location) of the pledgee;
- a summary of outstanding obligations;
- summary of the main obligation;
- a summary of all other fees, costs and expenses that must be paid by the pledgor prior to the possible sale of the mortgaged real estate;
- an offer to pay all outstanding debts in full within thirty days of receipt of the notice;
- warning about the possibility of holding an auction on real estate that is the subject of a mortgage;
- a condition on the right of the pledger under a mortgage housing loan, who is an individual, to submit, within twenty-five calendar days from the date of delivery or sending by registered mail of the notice, a written refusal to carry out the realization of the mortgage out of court, registered with the body where the mortgage agreement was registered;
- name (title), place of residence (location) and telephone number of the authorized person.
Notice of auction
The notice of the auction must contain the following information, as provided for in Article 27 of the Law "On Mortgage of Real Estate":
- 1 name (title) and place of residence (location) of the pledger;
- name (title) and place of residence (location) of the pledgee;
- a summary of the outstanding obligations and the total amount of all debts of the mortgagor to the mortgagee, subject to satisfaction by the sale of the mortgage;
- the name, description and characteristics of the real estate that is the subject of the mortgage and is being put up for auction;
- time and place of the auction;
- name (title), place of residence (location) and telephone number of the authorized person.
Announcement of auction
The announcement of the auction must contain the following information, as provided for in paragraph 2 of Article 28 of the Law "On Mortgage of Real Estate":
- name, description and characteristics of the real estate being offered for auction;
- the exact location of the real estate;
- the amount of the bidder's security deposit, if provided for by the bidding conditions;
- the procedure and terms for payment of the purchase price;
- time and place of the auction;
- the name (title) and place of residence (location) of the authorized person conducting the auction, his telephone number for inquiries and payment details.
Bidders
Any legal entities and citizens, including the pledger and pledgee, have the right to participate in the auction; such right is provided for in paragraph 4 of Article 319 of the Civil Code.
In order for the auction to be considered valid, there must be at least two participants.
Margin
Before the start of the auction, the authorized representative (Article 320 of the said Code) has the right to demand that each participant in the auction make a security deposit. Security deposits are subject to return upon completion of the auction. The security deposit of the participant who wins the auction is counted towards the final price. The security deposit of the participant who wins the auction but does not pay the final price is not returned and remains at the disposal of the authorized representative.
Payment of the purchase price
Before the start of the auction, the authorized representative has the right to demand from each participant in the auction a security deposit or proof of his ability to pay the proposed purchase price, as provided for in Article 31 of the Law of the Republic of Kazakhstan "On Mortgage of Real Estate". Before the end of the auction, the authorized representative has the right to demand from the participant who offered the final price an immediate payment of this amount in full or to demand proof of his ability to pay the named price after the end of the auction in the ways and within the timeframes specified in the auction announcement.
Clause 2 of the said article stipulates that if the buyer refuses to make immediate payment or if he has no evidence of the ability to pay within the timeframes stipulated in the auction announcement, he is excluded from the list of bidders. In such a case, the auction is considered to be continued. If it is impossible to continue it, as well as if the buyer fails to pay for the property acquired at the auction, a new auction is scheduled, which is conducted in the manner established by the said Law.
The pledgee participating in the auction is exempt from making a security deposit, and also, in the event of winning the auction, from paying the purchase price within the amount of the principal obligation.
The security deposit of a participant who has won the auction but has not paid the purchase price remains at the disposal of the authorized representative and is used by him in the manner established by Article 36 of this Law.
When is an auction considered invalid?
The attorney-in-fact declares the auction invalid in the cases provided for in paragraph 1 of Article 32 of the Law "On Mortgage of Real Estate", when:
- less than two buyers showed up for the auction;
- the person who won the auction did not pay the purchase price within the specified time.
The auction must be declared void on the day following the occurrence of any of the above circumstances.
The announcement of new tenders is published according to the general rules.
Transfer of the collateral to the buyer
After the auction is completed and the buyer has paid the final price and all other payments required of him, the authorized representative, in accordance with Article 34 of the Law "On Mortgage of Real Estate", hands him a document on the acquisition of real estate at the auction, which must contain the following information:
- basis for conducting the auction;
- place and time of their holding;
- name, description and characteristics of the property acquired at auction, its location;
- name (title) and place of residence (location) of the pledger - the previous owner of the property;
- name (title) and place of residence (location) of the buyer;
- the purchase price paid by the buyer;
- name (title) and place of residence (location) of the authorized person who conducted the auction.
The document on the acquisition of real estate at auction is certified by the signature of the authorized person.
If the authorized person is a legal entity, the signature of its representative is certified by the seal of this legal entity; if the authorized person is an individual, his signature is certified by a notary.
How are proceeds from trades distributed?
The attorney-in-fact shall distribute the proceeds from the auction in accordance with Article 36 of the Law "On Mortgage of Real Estate" in the following order of priority:
- to cover the costs and expenses of conducting tenders;
- to pay off the principal obligation secured by the mortgage;
- for payment of overdue obligations secured by secondary pledges and re-pledges, as well as other encumbrances on real estate in the order of priority established by legislative acts;
- to return the remaining amount to the pledger.