New Pledge Regulations in Russian Civil Code

On 1 July 2014, the Russian Civil Code introduced new pledge regulations. The changes greatly affect not only the relationship between pledgors and pledgees, but shall also have a considerable impact on the banking and finance sector. In this review we provide the most important developments of the new pledge regulations.

The concept of the pledge (art. 334)
In addition to pledgee’s right to obtain satisfaction from the value of pledged property, a pledgee is entitled to obtain satisfaction also by means of:
• compensation for the pledged property that was given to a pledgor in exchange for pledged property. In particular, this regulation is applied in case of nationalization of the pledged property;
• income gained from use of the pledged property by third persons and due to pledgee or pledgor;
• property owed to the pledgor by a third party if the right of claim to the third party is subject of the pledge.

Pledgor (art. 335)
If the pledgor is not a debtor but a third party, regulation on surety (Articles 364-367 of the Civil Code) is applied.
The term “good faith pledgee” refers to a pledgee who did not know and was not supposed to know that the pledgor did not have the right to dispose of the pledged property. In such case the pledge is deemed valid and the owner of the pledged property shall have the rights and obligations of the pledgor. This provision shall not apply if the owner was divested from possession of the property against his/her will.

Co-pledgees (art. 335.1)
The new law has made changes concerning pledgees of equal rank. Two types of co-pledgees exist:
• pledgees that are creditors of several independent obligations, each of which is secured by the pledge over the same property;
• pledgees that are joint or equity creditors on the same obligation secured by a pledge.
In both cases, if one of co-pledgees demands the enforcement of a pledge, then all co-pledgees are entitled to demand early performance of obligations secured by the pledge. Co-pledgees may conclude an agreement to limit this right.

Subject of the pledge (art. 336)
According to the new provisions, products and income gained from use of pledged property can now be the subject to the same pledge.
If pledgor fails to notify pledgee of all third party rights on the pledged property in writing, the pledgee is entitled to demand early fulfillment of the main obligation or to request amendments to the conditions of the pledge agreement accordingly.
Registration of notices of pledge of movable property (art. 339.1)
The following regulation regarding pledge registration was introduced:
• notices on movable property pledges are registered with respective public registry by a public notary. Though registration is not obligatory and does not affect the performance and validity of the pledge agreement, in relationships with third parties, pledgee is not entitled to refer to his right of pledge until registration has occurred. Moreover, pledgee ranking shall be determined by the priority of the record in the registry;
• the public notary who performs a registration is not liable for the validity and truthfulness of pledge registration data;
• this regulation is not applicable to pledges concerning participant rights in limited liability company, funds and pledges on rights granted under bank account agreements;
• free access to registry data is available online, under

Preceding and subsequent pledges (art. 342)
If the pledged property becomes a subject of another pledge agreement (subsequent pledge), the demands of a subsequent pledgee could be satisfied after the demands of preceding pledgee. This priority of satisfying pledgee demands can be changed via an agreement.
According to the new provisions, subsequent pledges can only be prohibited by law. Parties to a pledge are no longer permitted to prohibit subsequent pledges contractually. However, they may set conditions regarding subsequent pledges in the pledge contract. Violation of such conditions would entitle the pledgee under preceding pledge:
• to demand compensation of losses from pledgor;
• to require that pledgor satisfy outstanding obligations in accordance with the conditions of the preceding pledge agreement if the subsequent pledgee knew or was supposed to know that subsequent pledge has been executed in violation of conditions set forth in a preceding pledge agreement.

The sequence for satisfying pledgee demands (art. 342.1)
The sequence for satisfying pledgee demands is determined according to the date of the pledge unless otherwise stipulated by the law. If the priority could not be established, pledgee demands shall be satisfied proportionally.
For movable property, pledgee ranking is determined by the priority of the record in the registry of the notices of pledge irrespective of the date when the pledge agreement entered into force.

Pledge management agreement (art. 356)
Russian Civil Code permits creditors to enter into pledge management agreements. Parties to the agreement are the creditor(s) and pledge manager. Pledge manager who acts on behalf of and for the benefit of the creditor(s) may enter into a pledge agreement with the pledgor and (or) exercise all rights and obligations of the pledgee under the pledge agreement.

The amended Russian Civil Code specifically regulates types of pledges

Pledge on obligation (art. 358.1-358.8)
Subject to the pledge are pledgor’s rights (future or existing ones) as a creditor of a certain obligation. Such pledge does not require consent of a debtor of the said obligation unless otherwise stipulated by law or in the pledge agreement. In particular, debtor’s consent for a pledge is required if, in course of pledge execution, the acquirer of the pledged rights shall incur certain obligations related to the pledged rights.
The pledge agreement shall include information on the obligation in which a pledgor is a creditor. In order to satisfy pledgee demands, the parties to a pledge agreement may agree that a debtor perform its obligation in favour of a pledgee directly.

Pledge on rights granted under bank account agreements (art. 358.9-358.14)
Rights under a bank account agreement can now be the subject of a pledge including rights granted under a bank deposit agreement.
Pledge agreement enters into force as of the date when respective bank is notified about the pledge and receives the copy of the pledge agreement. The bank shall open a pledge account for the client for the pledge agreement to be performed.
A pledgor is entitled to use the funds on the bank account according to its own discretion unless otherwise stipulated in the pledge agreement. After receiving pledgee notice regarding non-performance or improper performance of secured obligation by a pledgor, the bank is not entitled to execute pledgor orders that could reduce the amount of monetary funds on the account to an amount below the secured obligation specified in the agreement.

Pledge on rights of members of legal persons (art. 358.15)
Only the rights of the participants of limited liability company and shareholders of joint-stock company can be pledged.
Unless otherwise provided in the pledge agreement:
• the pledgor (shareholder) still exercises the rights, certified by the pledged shares;
• the pledgee is authorized to exercise the pledged rights of the participant of limited liability company.

Pledge of securities (art. 358.16-358.17)
Regulation concerns documentary and non-documentary securities. Pledges of documentary security are effective as soon as the security is transferred to pledgee unless otherwise stipulated by law or agreement. Pledges of non-documentary security are effective upon entry of the pledge record in the registry of the security owners unless a later date has been established by law or agreement.
If explicitly stipulated in the pledge agreement, pledgee, can, on its own behalf, exercise the rights granted by pledged security including the right to collect income to be paid to a security owner.

Pledge on intellectual property rights (art. 358.18)
Intellectual property rights can be subject to pledge agreement if the law allows their disposal. General provisions on pledge are applicable to such agreements. If the subject of pledge are the rights under the agreement of assignment of intellectual property rights or license (sublicense) contract, such pledge is governed by the rules on pledge of obligations.
Unless otherwise stipulated in the pledge agreement, a pledgor is entitled to use its intellectual property rights without pledgee’s consent. Disposal of the intellectual right shall be agreed with a pledgee unless otherwise stipulated in the agreement.