By Eldar Mansurov and Svetlana Seregina
Overview
In the course of reforms to Russian civil legislation, recently, significant amendments to pledge regulations were made. The Federal Law "On Pledges" was repealed and pledges are now regulated only by the Civil Code and the Federal Law "On Mortgages". This article will be a brief overview of the top 10 changes in Russian pledge regulations.
1. Pledge due to distraint
An entirely new notion - that of "pledge due to distraint" was introduced. Article 334 of the Russian Civil Code was supplemented with part 5, meaning that the creditor in whose benefit the distraint was made by a court obtains the rights of a pledgee in relation to such property. Thus the creditor is now provided with the possibility of "converting" his/her claims into the pledgee's rights and general rules on priority of rights of a pledge will apply to such creditor. However, the provision raises quite a few reasonable concerns. For instance, it is not clear whether the creditor obtains the pledgee's rights if the distraint is made by a bailiff and not a court. Another important concern is the emerging imbalance of the interests of creditors - when one creditor succeeds in obtaining the distraint to a debtor but another creditor failed to do so (to the same debtor).
2. The notion of "good faith" extended to pledge regulation
Another very important development is the extension of the "good faith" principle to pledge regulations. Not only is the list of grounds for termination of a pledge (article 352 of the Civil Code) made non-exhaustive, but also a bona fide purchase of a property will now result in termination of a pledge, unless the deal was gratuitous or the property illegally ceased to be possessed by the title holder. The extension of the bona fide principle to the notion of pledge correlates with the general course to further implement the said principle into Russian civil law. In terms of moveable property, in order to balance the interests of parties the bona fide principle was introduced together with implementation of a Register of Pledges of Movable Property. Hence the implementation of "good faith" by a purchaser presupposes checking the relevant Register before purchasing property.
3. Legal grounds for origin of right of pledge clarified
A new article, Article 334.1, of the Civil Code elaborates in more detail the rules of originating the pledge; in general the pledge occurs from the moment the agreement is signed. New rules also allow for the possibility of a pledge to be created under certain conditions. For instance, the pledge of a future thing originates from the moment the thing is created or acquired.
4. Register of Pledges of Movable Property introduced
One of the major developments is the adoption from 1 July 2014 of the Register of Pledges of Movable Property including proprietary rights ("Register"). Registration is voluntary and can be done by either party of the pledge agreement, irrespectively of whether the pledge agreement was executed before 1 July 2014 or after. In addition to this, the registration shall not influence the validity of the pledge agreement. However the registration gives the pledgee some additional advantages over the third parties, including the following: a registered pledge will have priority over an unregistered pledge or over pledges with a later registered date (even minutes can have an influence as the Register reflects the exact time of registration up to the second); Furthermore, registration allows the pledgee to defend against the "bona fide purchaser".
Thus the registration of the pledge can be considered as a necessary remedy of the pledgee against third-party claims. From our perspective it is also reasonable to register, by 1 February 2015, all pledges signed before 1 July 2014 as in accordance with the transitional period provisions, the priority of claims under those pledge agreements executed before 1 July 2014 and included in the register until 1 February 2015 is determined by the date of agreement, not the date of registration. A failure to comply with the registration during the transitional period gives rise to application of a general rule: a pledgee in a relationship with a third party can refer to the pledge only from the date of registration of the notice on the pledge in the Register, except if the third party knew or should have known of the earlier pledge.
Unfortunately, the Register is maintained only in the Russian language by the Federal Chamber of Notaries of Russia and is publicly accessible at: https://www.reestr-zalogov.ru. It is possible to make a search using information on the pledged assets though it can be problematic as quite often only a short description of movable assets, for instance, "equipment" is used for identification - with the exceptions of cars, searchable by VIN numbers, and pledged bonds, searchable by registration numbers. Because of this, it is more efficient to search by using the name or other corporate information such as the company number of a pledgor. Also an official excerpt from the Register can be requested by any person at the notary office.
5. Procedure of registration of the pledge of movable property
The notification may be submitted by a pledgor or a pledgee to any notary public, regardless of place of residence (location) of the parties of the pledge agreement, and regardless of the location and registration of movable property. Although there is no term for submitting the notification on a pledge, notification on changes or termination of the registered pledge must be submitted by a pledgee to the Register within 3 days after he/she knows or should have known about changes to or termination of the pledge. Otherwise he/she may be sued for damages by a pledgor.
It should be also noticed that the notary does not verify the correctness of the submitted notification and is not liable for any misleading information provided to the Register. No additional documents except the notification and a power of attorney (where necessary) are to be submitted to the notary.
One notification of a pledge of movable property can be made for all movable pledged assets included into one pledge agreement. The notification can be filed either electronically or in written from. Though the electronic form at the initial stage is much more complicated as it requires receiving an encrypted digital signature and being in compliance with some other procedural technicalities, in future it will make the process of registration cheaper and quicker (up to several days may be required for the notary in order to include in the Register an application submitted in a written form).
6. "Total pledge"
New rules on defining the scope and subject of the pledge agreement were substantially loosened, in accordance with the new article 339 of the Civil Code. The subject of the pledge can be described in any way that would allow the identification of the property as being pledged including by referring to "all Pledgor's property". Therefore, effectively, the new concept already called by many as the "total pledge" has been implemented in Russian civil legislation. Apparently, the legislators tried to adopt the concept of the "floating charge" which exists in the common law system. The goal, however, seems not to have been achieved as the notion of "total pledge" turned out to be too harsh and not very elegant – the security interest is not crystallizing into a fixed charge under certain conditions, but rather "embraces" all the property right from the moment the agreement is executed. Furthermore, one should consider that the "total pledge" is different from the already existed concept of a floating pledge of goods in stock. The essential difference is that in a floating pledge the property is released from the encumbrance automatically after the item is removed from the pledged lot during its sale. On the contrary, the concept of the "total pledge" implies that the pledge follows all and any property irrelevant of the fact of title transfer to a third person. Also, no exemptions even for consumers (purchasers) are provided which in our opinion is quite an excessive approach - we doubt that every consumer will check the relevant Register of pledges before purchasing anything from a company in order to be considered as a bona fide acquirer.
7. Rules on certain types of pledge are specified, new type of pledge introduced
Rules on pledge of rights (receivables), pledge of participatory interest in limited liability companies and shares in joint-stock companies have been substantially developed. The main difference between the pledge of participatory interest and shares is that if shares are pledged, the rights of a shareholder (participant) are still exercised by a pledgor and vice versa, unless agreed otherwise between the parties.
Pledges of securities have also been comprehensively detailed, a pledgee is now entitled to execute either all rights possessed by a pledgor under the security or all rights, except the right to receive income under the security.
The registration of the agreement on a pledge of immovable property is finally abolished; from the 1 July 2014, the only encumbrance is being registered itself.
In addition, a new type of security - a pledge over bank accounts has been adopted. The bank where the client opened a bank account can be a pledgee as well. In general, the entire amount of money in an account at any moment is considered as being pledged; parties however may limit such amount in the agreement.
8. Subsequent pledges and priority of pledges
The provision of the Civil Code that the parties in a pledge agreement may prohibit any subsequent pledges has been abolished, instead, the parties may agree on the priority of pledges of the same property and the conditions of its execution. We think however that in practice this provision may be used to effectively prohibit any subsequent pledges, for example, by agreeing that the prior consent of the first pledgee shall be received in order to make any subsequent pledges. A pledgee will also be entitled to claim for damages from a pledgor if the subsequent pledge was executed contrary to the provisions of the preceding pledge agreement.
9. Pledge management agreement
A new type of agreement - the pledge management agreement has been adopted. Article 356 of the Civil Code provides creditors whose rights are secured by the pledge to choose one of the creditors of the same debtor or a third person and agree on the management of a pledge(s), provided that the main claim(s) is connected with entrepreneurship. The pledge manager shall be either a commercial company or a sole proprietor. It should be noted that the pledge manager is entitled to remuneration for the managing services, which shall be stipulated in the managing agreement. The pledge manager executes the pledge agreement with a pledgor (debtor) on behalf of the creditors and executes the rights of pledgees or only executes the rights of pledgees under the pledge agreement for the benefit of creditors. During the term of the managing agreement, the creditors are not entitled to execute their rights directly as pledgees. However, any creditor is entitled to unilaterally terminate the pledge managing agreement at any time and not need to give any reason whatsoever. It should also be noted that according to the relevant rules on mandates and simple partnerships, the pledge management agreement applies to subsidiaries.
10. Co-pledgees (joint pledgees)
Finally, the issue of co-pledgees - pledgees having the same priority of claims - is regulated in more detail. Thus, the new rules divide joint pledgees into two categories, the first one is pledgees who have separate claims secured by the same pledged property, and the second is joint creditors under the same obligation as the debtor, secured by a pledge.
Conclusion
Although very important and long-awaited changes have been made to pledge rules, some issues remain unclear and apparently will be elaborated in subsequent court practice. It is for this reason that it is important for practicing lawyers to keep an eye on the emerging court practice regarding the application of the new rules.
