Important legislative amendments relating to pledges

30.01.2014

Legal Update No. 447, 30 January 2014

Federal Law No. 367-FZ of 21 December 2013 “On Amendment of Part One of the Civil Code of the Russian Federation and Recognition of Individual Legislative Acts (Provisions of Legislative Acts (of the Russian Federation) as No Longer in Effect)” (the Law) envisaging changes to the legislation on pledges and other amendments (including in relation to replacement of a party to an obligation) has been adopted as part of a set of amendments to the Russian legislation on securitisation of financial assets changing various regulatory and legal acts, such as the legislation on joint-stock companies, the securities market, bankruptcy and others, and changing other provisions of the Russian Civil Code, among them those on nominal accounts and escrow accounts.

Apart from certain of its provisions, the Law is to come into effect on 1 July 2014, superseding Law of the Russian Federation No. 2872-1 of 29 May 1992 “On Pledges”, and the rules on state registration of a mortgage agreements contained in Federal Law No. 122-FZ of 21 July 1997 “On State Registration of Real Estate Title and Transactions” and Federal Law No. 102-FZ of 16 July 1998 “On Mortgages (Pledge of Real Estate)” (the Mortgage Law) will not apply to mortgage agreements concluded from this date.

Below we consider the key changes introduced by the Law into the legislation on pledges.

1. Specific types of pledge

1.1. The Law provides separately for regulation of pledge of rights under a bank account agreement, pledge of the rights of shareholders, and pledge of securities, as well as regulation of other types of pledge, including floating pledges and pawning of items.

1.2. Pledged items may consist in property rights (claims) deriving from the pledger’s obligation, including a future right arising from a current or future obligation, as a well as a set of rights (claims) deriving from separate obligations. Generally, pledge of a right does not require the consent of the debtor, though the Law specifies cases when pledge of a right is not permitted or is permitted only with the debtor’s consent.

2. State registration and recording of pledges

2.1. The rules governing state registration of mortgage agreements will not apply to such agreements concluded after 1 July 2014, yet those governing the need for state registration of a mortgage as an encumbrance on real estate remain in effect. The aim is to eliminate the need for double registration of the agreement and the ensuing encumbrance.

2.2. Provisions are introduced on state registration and recording of other types of pledge. For instance, pledge of the rights of a member (founder) of a limited liability company is subject to state registration. Pledges of securities are recorded in compliance with the current rules of the Russian Civil Code and laws on securities. Pledge of rights under a bank account agreement arises when the bank is notified and provided with a copy of the pledge agreement or, if the pledge-holder is the bank itself, when the agreement is concluded. Pledge of other property may be recorded by registering notices about the pledge in accordance with the legislation on notaries.

3. Pledged items and the content of a pledge agreement

3.1. A pledge agreement may be concluded to secure fulfilment of a future obligation. In this case, the pledge arises no earlier than the principal obligation and, until then, the parties must observe the requirements on the maintenance, disposal and safeguarding of the pledged item.

3.2. In relation to mortgages, it may be established by law that the mortgage is deemed to emerge, exist and terminate depending on the emergence, existence and termination of the secured obligation. The current Mortgage Law permits state registration of the mortgage before the principal obligation arises, whereas the rights of the pledge-holder emerge in conjunction with the principal obligation.

3.3. It is expressly stipulated that the conditions relating to the principal obligation are deemed agreed if the pledge contract refers to the agreement from which the principal obligation derives or will do so.

3.4. Alongside other mandatory conditions, a pledge agreement must specify the obligation entailing the right, information about the debtor and the party to the pledge agreement holding the original documents certifying the pledged right. The general rule is that the debtor fulfils its obligation to the pledge-holder and, if the pledge agreement so specifies, the debtor, when notified to this effect, is required to fulfil its obligation either to the pledge-holder or the person specified thereby.

3.5. If the pledger conducts business, the obligation may be described in a way allowing it to determine when execution is to be levied, including by specifying security for all current and future obligations of the debtor within a specific sum, whereas the pledged item may be described to allow the property to be identified when execution is levied. From 1 January 2015, it will be possible to describe the pledged item by specifying pledge of all the pledger’s property or a specific part of its property or pledge of property of a specific type.

Account should be taken of the special requirements imposed by the Mortgage Law on the content of a mortgage agreement.

4. Pledge in favour of several persons

4.1. The item may be pledged to several persons.

Such persons may enjoy equal pledge-holder (co-pledge-holder) rights to the security for different obligations under which the co-pledge-holders are independent creditors. Each co-pledge-holder exercises its rights and obligations as a pledge-holder independently and the proceeds from selling the pledged item are distributed in proportion to the claims.

The item is also pledged to joint and several pledge-holders, generally understood to be joint and several or common creditors. A joint and several creditor that obtains performance must reimburse the other sums due to the other creditors in different shares and, in relation to common creditors, the proceeds are distributed in proportion to their claims.

Pledge seniority may be changed by agreement between the pledge-holders or an agreement between one, several or all the pledge-holders and the pledger. Yet the parties may not prohibit subsequent pledge in the agreement (apart from a mortgage, for which this possibility is retained).

4.2. If the previous pledge-holder levies execution, the subsequent pledge-holder, according to the general rule, is entitled to demand acceleration and, if this is not fulfilled, to levy execution on the previous pledge-holder at the same time (if this right is not exercised, the subsequent pledge terminates). The agreement with the subsequent pledge-holder may restrict the right to claim acceleration (other than of joint and several co-pledge-holders).

When execution is levied under claims secured by a subsequent pledge, the previous pledge-holder is entitled to demand acceleration and levying of execution simultaneously (if this right is not exercised, the property transfers to the acquirer encumbered by the previous pledge).

4.3. Default interest, losses and other penalties are distributed in order of priority after distribution of the sales proceeds from the pledged property among all the pledge-holders.

4.4. The possibility is envisaged of concluding a pledge management agreement in relation to a pledge securing an obligation associated with commercial activities. Under such an agreement, creditors have the right to entrust one of their number or a third party with concluding a pledge agreement in their name or exercising the rights and obligations of the pledge-holder under the pledge agreement.

5. Disposal of pledged property

5.1. The general rule is that the pledger may not dispose of the pledged item without the consent of the pledge-holder but is entitled to hand it over for temporary possession and use by other persons. The Law stipulates the consequences of disposing of the property without the pledge-holder’s consent.

5.2. The Law specifies the grounds for termination of a pledge, including by securing that a pledge terminates in the event of the property being acquired for a consideration by a person who did not know and should not have known about the pledge.

5.3. If an item was pledged by an unauthorised person and the pledge-holder did not know and should not have known this, it is now established that the owner of the pledged item enjoys the rights and obligations of the pledger (other than when the item was lost, stolen or otherwise removed from the owner’s possession against its will).

5.4. The Law also amends the legislation on pledges in relation to ensuring the safekeeping of the pledged property, restoration thereof, sale of pledged obligation rights and so on.

6. Assignment of rights and obligations under a pledge agreement

6.1. The pledge-holder may assign its rights and obligations provided, at the same time, it assigns to the same person the receivables under the secured obligation, otherwise, unless the law specifies differently, the pledge terminates. The pledge also terminates when the debt under the obligation secured by the pledge is transferred to another person (unless the agreement between the pledger and the creditor specifies otherwise).

6.2. According to the Mortgage Law (as amended by Federal Law No. 363-FZ of 21 December 2013, which also comes into effect on 1 July 2014), the pledge-holder is entitled to assign its rights (receivables) under a mortgage agreement or a secured principal obligation to third parties, unless otherwise is stipulated by law or the agreement.

The person receiving the rights under a mortgage agreement takes the place of the previous pledge-holder and, unless it is proven otherwise, assignment of the rights under the mortgage agreement also means assignment of the rights under the principal obligation. In addition, unless the agreement specifies otherwise, the person to which the rights under the principal obligation are transferred also receives the rights securing fulfilment of the obligation and takes the place of the previous pledge-holder.

7. Levying of execution and sale of pledged property

7.1. The general rule is now that the value of a pledged item agreed by the parties is recognised as the sales price (start price) of the pledged item if execution is levied thereon.

7.2. The Law establishes that an agreement on out-of-court levying of execution does not deprive the pledge-holder of the right to file a court claim but the additional costs associated with this are borne by the pledge-holder (unless it can prove that the terms of the agreement were not fulfilled as a result of actions on the part of the pledger or third persons).

7.3. Pledged property is sold by public auction (if execution is levied on the basis of a court decision) or auctions held in accordance with the Russian Civil Code or by agreement between the pledger and the pledge-holder (if execution is levied out of court). If the pledger conducts business, the agreement may stipulate realization of the pledged item by the pledge-holder retaining it or selling it to a third party at a price at least equal to the market price.

7.4. A pledged right is sold by auction or public auction (depending on the procedure for levying execution). In addition, when execution is levied through the courts, the parties may agree to the pledged right being transferred to the pledge-holder by court decision and, when execution is levied out of court, to the pledged right being assigned to the pledge-holder or a third person specified thereby.

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