During 2013 the Russian lawmakers had extensive discussions regarding amendments to be introduced to the Russian pledge law. As a result of these long-lasting debates, Federal Law No. 367-FZ “On Amendments to Part I of the Civil Code of the Russian Federation and Repeal of Certain Legal Acts (Provisions of Legal Acts) of the Russian Federation” was signed by the President of the Russian Federation on 21 December 2013 (the “Amendment Law”).
Most of the provisions of the Amendment Law come into force on 1 July 2014 and introduce, among other things, the following changes and developments:
- the concept of co-pledgees;
- revised terms and conditions for pledge agreements;
- regulations in relation to the register of notices of movable property pledges;
- new regulations and rules regarding subsequent pledges;
- the concept of a pledge management agreement; and
- the concept of a pledge of rights to a bank account.
Co-pledgees
According to the Amendment Law, an asset may be pledged in favour of several pledgees (or co-pledgees), who will enjoy pari passu ranking rights to the pledged asset. Such pledge may secure different obligations, and each co-pledgee may, unless otherwise stated in the pledge agreement itself or otherwise prescribed by Russian law, exercise their rights and obligations in relation to the pledge independently. Joint and several creditors are considered as joint co-pledgees, unless otherwise stated in the pledge agreement or by law.
When enforcing a co-pledgee pledge, the proceeds derived from the enforcement procedure must be distributed among the co-pledgees in proportion to their claims, unless otherwise agreed among the co-pledgees in a separate agreement.
Terms and conditions for pledge agreements
A pledge agreement must specify the following terms and conditions: the pledged asset, the nature of the pledge, the amount being secured and the term of the secured obligation. The Amendment Law also expressly states that the terms and conditions relating to the secured obligation are considered to be agreed if the pledge agreement refers to the underlying agreement under which the secured obligation has arisen or will arise in the future.
The secured obligation may also be broadly defined as all existing or future obligations owed by the debtor to the lender existing at the date of the enforcement. This construction will be possible if the pledgor carries out entrepreneurial activity (i.e. a commercial legal entity or an individual entrepreneur).
Another option applicable to commercial legal entities and individual entrepreneurs is that a pledged asset may be described in any way that allows for the identification of such asset on the enforcement date, including a reference to the pledge of all the assets of the pledgor or a specific part.
Register of notices of pledge over movable property
A pledge of movable property may be registered in the new register of notices of pledge over movable property (the “Movables Pledges Register”). The Movables Pledge Register is maintained by the federal notarial chamber in accordance with the current version of Fundamental Principles of the Russian Legislation on Notaries.
The registration application for a movable pledge may be submitted by either the pledgor or the pledgee. The Amendment Law does not stipulate any time period for the initial registration. However, if any information contained in the initial registration application is registered in the Movables Pledges Register and subsequently amended, the pledgee must submit a new application amending the relevant information to any notary no later than three days from the date of such amendments.
For the initial registration, the notary must be provided with a registration application identifying each movable asset to be pledged together with the relevant pledge agreement in Russian.
When the secured obligations have been discharged in full, the pledgee is responsible for the de-registration of the pledge from the Movables Pledges Register. If the pledgee fails to do so, the pledgor may claim for damages.
The Amendment Law stipulates that the pledgee may only refer only to the registered pledge in its relations with third parties.
In relation to any pledge of movable property agreement entered into before 1 July 2014, the enforcement priority will be determined by reference to its execution date. However, this interim regime will only be effective until 1 February 2015. From that date, the enforcement priority will be determined on the basis of the date of the relevant entry in the Movables Pledges Register. Pledgees should therefore consider registering any existing pledge of movable property agreements within the time period specified above.
Ranking/subsequent pledge
As a general rule, a claim by a second-ranking pledgee is to be satisfied after the claims of the first-ranking pledgee. However, the pledge ranking may be changed by agreement between the pledgees, or between the pledgees and the pledgor.
A pledge agreement cannot restrict the creation of a subsequent pledge. However, the initial pledge agreement may prescribe particular terms and conditions which must be adhered to by the parties to any subsequent pledge agreement.
Pledge management agreement
When there are several secured lenders acting as pledgees, they are entitled to enter into a pledge management agreement with one of the secured lenders or with any third party as pledge manager.
Under the pledge management agreement, the pledge manager, acting on behalf of all the lenders, must enter into a pledge agreement with the pledgor and act as pledgee under that pledge agreement. No lender may exercise their rights as pledgee until the pledge management agreement expires.
A pledge management agreement may state that some actions may be carried out by the pledge manager only upon a prior consent of the lenders. The authority of the pledge manager may be changed by amending the pledge management agreement. The proceeds received by the pledge manager during the enforcement procedure must be distributed among the lenders proportionately to their claims secured by the pledge, unless otherwise defined in the pledge management agreement.
Pledge of rights to a bank account
The Amendment Law introduces a new concept of the pledge of rights to a bank account. An account holder may only pledge their rights to a specific ‘pledge bank account’. Rights to a pledge account may be pledged in favour of the bank where that pledge account is opened and maintained (the “Account Bank”).
When a pledge account is opened for a client, there need not be a pre-existing pledging of the rights to it in favour of a pledgee. The pledge of rights to a bank account agreement (the “Pledge Agreement”) must provide the details of the pledge bank account, along with the nature, amount and term of the secured obligations. By default, the rights to the entire balance of funds kept in the pledge bank account are pledged under the Pledge Agreement. This rule may, however, be varied. The Pledge Agreement comes into force when the Account Bank is notified about the pledge and provided with a copy of the Pledge Agreement.
The pledgor may use the funds kept in the pledge account. If the Pledge Agreement states that the pledge covers only a particular amount held in the pledge account, the pledgor must not give any payment instructions which would result in the amount held in the account becoming less than the pledged amount and the Account Bank must not accept any such payment instructions.
As soon as an event of default is notified to the Account Bank, the latter is not allowed to perform any instructions of the client (pledgor) in relation to the pledge account if this would otherwise result in the balance of the pledge bank account being less than the pledged amount.
We expect that a more specific description of the pledge bank account regime will be provided in the Russian Central Bank regulations, which are yet to be published.
30/06/2014
During 2013 the Russian lawmakers had extensive discussions regarding amendments to be introduced to the Russian pledge law. As a result of these long-lasting debates, Federal Law No. 367-FZ “On Amendments to Part I of the Civil Code of the Russian Federation and Repeal of Certain Legal Acts (Provisions of Legal Acts) of the Russian Federation” was signed by the President of the Russian Federation on 21 December 2013 (the “Amendment Law”).
Most of the provisions of the Amendment Law come into force on 1 July 2014 and introduce, among other things, the following changes and developments:
Co-pledgees
According to the Amendment Law, an asset may be pledged in favour of several pledgees (or co-pledgees), who will enjoy pari passu ranking rights to the pledged asset. Such pledge may secure different obligations, and each co-pledgee may, unless otherwise stated in the pledge agreement itself or otherwise prescribed by Russian law, exercise their rights and obligations in relation to the pledge independently. Joint and several creditors are considered as joint co-pledgees, unless otherwise stated in the pledge agreement or by law.
When enforcing a co-pledgee pledge, the proceeds derived from the enforcement procedure must be distributed among the co-pledgees in proportion to their claims, unless otherwise agreed among the co-pledgees in a separate agreement.
Terms and conditions for pledge agreements
A pledge agreement must specify the following terms and conditions: the pledged asset, the nature of the pledge, the amount being secured and the term of the secured obligation. The Amendment Law also expressly states that the terms and conditions relating to the secured obligation are considered to be agreed if the pledge agreement refers to the underlying agreement under which the secured obligation has arisen or will arise in the future.
The secured obligation may also be broadly defined as all existing or future obligations owed by the debtor to the lender existing at the date of the enforcement. This construction will be possible if the pledgor carries out entrepreneurial activity (i.e. a commercial legal entity or an individual entrepreneur).
Another option applicable to commercial legal entities and individual entrepreneurs is that a pledged asset may be described in any way that allows for the identification of such asset on the enforcement date, including a reference to the pledge of all the assets of the pledgor or a specific part.
Register of notices of pledge over movable property
A pledge of movable property may be registered in the new register of notices of pledge over movable property (the “Movables Pledges Register”). The Movables Pledge Register is maintained by the federal notarial chamber in accordance with the current version of Fundamental Principles of the Russian Legislation on Notaries.
The registration application for a movable pledge may be submitted by either the pledgor or the pledgee. The Amendment Law does not stipulate any time period for the initial registration. However, if any information contained in the initial registration application is registered in the Movables Pledges Register and subsequently amended, the pledgee must submit a new application amending the relevant information to any notary no later than three days from the date of such amendments.
For the initial registration, the notary must be provided with a registration application identifying each movable asset to be pledged together with the relevant pledge agreement in Russian.
When the secured obligations have been discharged in full, the pledgee is responsible for the de-registration of the pledge from the Movables Pledges Register. If the pledgee fails to do so, the pledgor may claim for damages.
The Amendment Law stipulates that the pledgee may only refer only to the registered pledge in its relations with third parties.
In relation to any pledge of movable property agreement entered into before 1 July 2014, the enforcement priority will be determined by reference to its execution date. However, this interim regime will only be effective until 1 February 2015. From that date, the enforcement priority will be determined on the basis of the date of the relevant entry in the Movables Pledges Register. Pledgees should therefore consider registering any existing pledge of movable property agreements within the time period specified above.
Ranking/subsequent pledge
As a general rule, a claim by a second-ranking pledgee is to be satisfied after the claims of the first-ranking pledgee. However, the pledge ranking may be changed by agreement between the pledgees, or between the pledgees and the pledgor.
A pledge agreement cannot restrict the creation of a subsequent pledge. However, the initial pledge agreement may prescribe particular terms and conditions which must be adhered to by the parties to any subsequent pledge agreement.
Pledge management agreement
When there are several secured lenders acting as pledgees, they are entitled to enter into a pledge management agreement with one of the secured lenders or with any third party as pledge manager.
Under the pledge management agreement, the pledge manager, acting on behalf of all the lenders, must enter into a pledge agreement with the pledgor and act as pledgee under that pledge agreement. No lender may exercise their rights as pledgee until the pledge management agreement expires.
A pledge management agreement may state that some actions may be carried out by the pledge manager only upon a prior consent of the lenders. The authority of the pledge manager may be changed by amending the pledge management agreement. The proceeds received by the pledge manager during the enforcement procedure must be distributed among the lenders proportionately to their claims secured by the pledge, unless otherwise defined in the pledge management agreement.
Pledge of rights to a bank account
The Amendment Law introduces a new concept of the pledge of rights to a bank account. An account holder may only pledge their rights to a specific ‘pledge bank account’. Rights to a pledge account may be pledged in favour of the bank where that pledge account is opened and maintained (the “Account Bank”).
When a pledge account is opened for a client, there need not be a pre-existing pledging of the rights to it in favour of a pledgee. The pledge of rights to a bank account agreement (the “Pledge Agreement”) must provide the details of the pledge bank account, along with the nature, amount and term of the secured obligations. By default, the rights to the entire balance of funds kept in the pledge bank account are pledged under the Pledge Agreement. This rule may, however, be varied. The Pledge Agreement comes into force when the Account Bank is notified about the pledge and provided with a copy of the Pledge Agreement.
The pledgor may use the funds kept in the pledge account. If the Pledge Agreement states that the pledge covers only a particular amount held in the pledge account, the pledgor must not give any payment instructions which would result in the amount held in the account becoming less than the pledged amount and the Account Bank must not accept any such payment instructions.
As soon as an event of default is notified to the Account Bank, the latter is not allowed to perform any instructions of the client (pledgor) in relation to the pledge account if this would otherwise result in the balance of the pledge bank account being less than the pledged amount.
We expect that a more specific description of the pledge bank account regime will be provided in the Russian Central Bank regulations, which are yet to be published.