COVID-19 | New derogatory provisions affecting loans while preserving the possibility of pledging assets and financial instruments as provided for in Article 61-1 of the Commercial Code

The Act, voted on 5 May 2020 by the National Council, aiming at adapting, exceptionaly and temporarily, Monegasque law to the effects of the COVID-19 epidemic, has just been published. 

This Act, published today (15 May 2020) in the Journal de Monaco, contains exceptional derogatory provisions which temporarily paralyse the prerogatives of banks by providing, in particular, for a suspension of the execution of certain contractual clauses applicable in the event of non-performance by the debtor (penalty payments, penalty clauses, termination clauses, forfeiture clauses). Consequently, the creditor's prerogatives are "blocked" from 18 March to 18 June 2020 (this period may be extended).

In fact, these provisions apply to all loans, concern all credit institutions, benefit all borrowers, but do not suspend the borrowers' obligations under loan agreements (only the consequences of their non-performance).

However, it is important to note that this Act doesn’t affect Article 61-1 of the Commercial Code, which concerns the terms and conditions for the execution of pledges on assets in currency and/or financial instruments.

Thus, a failure to pay a secured claim when due would allow a bank to execute the pledge under the usual conditions. The same applies to an unsuccessful margin call, which would still allow the creditor, where provided for in the contract, to declare the term of the customer's main commitment to lapse and thus, subsequently, to execute his pledge.

These exceptional exemption provisions are intended to apply retroactively to 18 March 2020 for a period of three months from that date, which may be extended.

They have a direct impact on the entire past and future period and raise questions about the strategy that the lenders will have to deploy to recover their outstanding debt at the end of this exceptional period (in particular, the value of the assets pledged as collateral by the defaulting borrower no longer enables it to meet its commitments).