Download pledge – recent in russian

01 technical
pledge – recent
in russian
and other related aspects of related corporate law
This article goes into more detailed
knowledge than is expected from
Paper F4 candidates. Please read the
Syllabus and Study Guide in order to
familiarise yourself with the learning
objectives for this paper.
This article provides a brief overview
of recent amendments made to the
corporate and business law legislation
of the Russian Federation. Drastic
changes were implemented to the Civil
Code1, the law on pledge2, the law on
mortgage3, and the Bankruptcy Law4
under Federal Law No. 306 FZ, 30
December 2008.
These amendments directly affect
the relationship between a lender and
a borrower, as a pledge is generally a
subsidiary obligation in credit relations.
The need to sell a debtor’s property
only arises when a debtor cannot
fulfil their obligations under the main
(credit) agreement.
Article 348 of the Civil Code
now provides that in both a pledge
contract and afterwards (in the case of
non‑fulfillment of obligations secured
by the pledge) the ability to sell the
pledged property (and to set a price) is
possible without recourse to the court.
If the pledger (the debtor – the person
providing the pledge) is a ‘natural
person’, or the pledge is of real estate
(ie a mortgage) such agreements must
be notarised.
Also, in situations where periodic
payments are due, the systematic
infringement of payment terms
(occurring more than three times
within 12 months) will result in the
seizure of the pledged property.
Even if the pledger does not fulfil
their agreed obligations on the
seizure of the pledged property, a
special execution may be based on a
notarised endorsement.
The pledgee (the creditor) must
inform the pledger on the initiation
of the recovery procedure without
recourse to court.
In certain cases (eg selling of
securities) an independent appraiser,
invited by both parties, must evaluate
the mortgaged property.
EXECUTION BY COURT DECISION
A court decision to levy an execution
on the object of a pledge can only
take place in certain circumstances,
including the following:
¤ With the consent or permission of
the other person or body, required for
the conclusion of the contract on the
pledge of property of the individual.
¤ When the object of the pledge is
property of considerable historic,
artistic or other cultural value
for society.
¤ If the pledger is absent and is
impossible to locate.
¤ When the object of the pledge is
residential accommodation belonging
to a natural person under the right
of ownership.
¤ When the pledge contract does not
stipulate the order on levy execution
on the pledged property.
A claim for levying execution on the
pledged property may be rejected by
the court if the violation, committed
by the debtor (with respect to the
obligation secured by the pledge), is
utterly insignificant.
This is when the sum of the overdue
obligation is worth less than 5% of
the value of the subject of the pledge,
and the overdue period is less than
three months.
For this reason, the amount of
the pledger’s claim is obviously
disproportionate to the cost of the
pledged property.
Article 348 of the Civil Code now provides that
in both a pledge contract and afterwards
(in the case of non‑fulfillment of obligations
secured by the pledge) the ability to sell the
pledged property (and to set a price) is possible
without recourse to the court.
student accountant issue 10/2010
02
changes
legislation
relevant to acca qualification paper f4 (RUS)
The amendments to corporate and business law legislation of the
Russian Federation directly affect the relationship between a lender
and a borrower, as a pledge is generally a subsidiary obligation in
credit relations.
SALE OF PLEDGED PROPERTY
A sale of pledged property is
executed by open auction in the
order established by the procedural
legislation5, unless otherwise provided
for by law.
The initial selling price of a pledged
property, from which the bidding
starts, is 80% of its market valuation
as determined by an independent
appraiser, unless otherwise provided for
by the pledge agreement.
The pledged property is sold to the
highest bidder.
Re-auction
At a re-auction, the initial selling
price is 15% lower than that at the
first auction.
If the re-auction is also declared as
having failed, the pledgee has the right
to keep the pledged property, appraised
at a value not less than 10% below its
initial selling price at the first auction.
If the pledgee does not avail himself
of this right within one month from
the date of declaring the re-auction as
having failed, the contract of pledge
is terminated.
Right of pledgee
If the auction is declared as having
failed, the pledgee has the right, by an
agreement with the pledger concluded
within one month from the date of
the auction, to acquire the pledged
property and to offset the sale price
by the amount of his claims, secured
against the pledge. The rules of a sale
and purchase contract apply to such
an agreement.
Amount realised
If the amount realised from the pledged
property is insufficient to cover the
claims, the pledgee has the right (in
the absence of any other provisions in
the law or in the contract) to demand
the shortfall from other property of the
debtor, but without the right of priority
based on pledge.
If the amount realised exceeds the
claims secured by the pledge, the
excess must be returned to the pledger
within 10 days from the date of due
payment by the purchaser.
Right to terminate sale
The debtor and the pledger (if the
pledge is provided by a third party)
have the right, at any time before the
sale of the pledged object, to terminate
the sale by fulfilling the obligation
secured by pledge. An agreement
restricting this right is insignificant6.
The debtor has the right to petition
for delay of the sale for up to one year.
BANKRUPTCY
In case of bankruptcy, the debtor’s
bankruptcy estate includes all property
available as at the date the receivership
is initiated, and any revealed during
receivership proceedings, except for:
¤ those properties, the sale of which is
prohibited by law
¤ exclusive rights, including rights
to engage in specific types of the
debtor’s activity
¤ residential premises, pre-school
institutions and public facilities.
After inventory and appraisal, the
property of the bankruptcy estate
is sold at auction or by bidding,
unless another procedure has been
established by the creditors’ meeting or
the committee.
03 technical
Any property the sale of which
requires special permit is sold by
closed bidding.
Property not sold by the first bidding
is submitted for re-bidding or sold
without bidding. A bankruptcy estate
consists of two parts:
¤ All of the debtor’s assets indicated
in their balance sheet or similar
documents, as at the date of the
receiver’s appointment.
¤ Property revealed during
the receivership.
Not all of the debtor’s property is
included in the bankruptcy estate, only
that on which recovery is sought. The
following property in the possession of,
but not legally owned by the debtor, is
excluded from the bankruptcy estate:
¤ Leased property or property in the
safe keeping of the debtor.
¤ Personal property of the employees
of the enterprise, but not of the
founders of the legal entity.
Priority in satisfaction
Article 134 of the Bankruptcy Law
stipulates the following order of
priority when satisfying creditors’
claims, according to the Register of
creditors’ claims:
i) legal costs and the arbitrage
manager’s fees
ii) debts on salaries and
dismissal payments
iii) current maintenance expenses
iv) other claims on liabilities
which emerged during the
bankruptcy procedures.
¤ Settlements with creditors of each
priority are only conducted after full
settlement has been made to the
creditors of the preceding priority.
Within each priority, creditors
are satisfied according to the
following turns:
– First turn – claims of individuals
for payments for harm caused
to life and health.
– Second turn – discharge pay
and labour remuneration under
labour contracts.
– Third turn – all other creditors:
obligatory payments to the
budget and non-budgetary
funds and settlements with
creditors on the remaining civil
law obligations.
If claims of creditors on current
payments belong to the same turn they
are satisfied in chronological order.
Pledged property is exempted from
the estate. Seventy per cent of the
money raised after realisation of the
pledged property is directed to the
creditor whose rights are secured by
the pledged property.
If there is money left after selling off
the pledged property, 20% is directed
to the special banking account of
the debtor for settlements with first
and second turns, and the rest is for
reimbursement of court expenses and
arbitrage manager’s fees. If the creditor
secured under pledge is a bankruptcy
creditor, they receive 80% of the money
raised after realisation of the pledged
property. If there is money left after
selling off the pledged property, 15% is
directed to the special banking account
of the debtor for settlements with first
and second turns, and the rest is for
reimbursement of court expenses and
arbitrage manager’s fees.
The receiver is obliged to eliminate
all the debtor’s existing bank accounts
other than the sole bank account used
to satisfy the claims of the debtor’s
creditors. The funds in this account
are replenished by the proceeds from
public sales of the debtor’s property
(and, failing that, through private
contracts) and by collection of the
debtor’s accounts receivable.
If the debtor has insufficient funds
to cover creditors’ claims of a single
priority, the remaining funds are
allocated pro rata to the amount of
creditors’ claims.
Pledged property is exempted from the estate. Seventy per cent of the
money raised after realisation of the pledged property is directed
to the creditor whose rights are secured by the pledged property.
student accountant issue 10/2010
If a claim is submitted after the
settlements had been started, and this
claim has a higher priority compared
to the priority of claims currently
being settled, settlements should be
postponed until the claim with a higher
priority is repaid.
Claims made after the Register of
claims has been closed have the lowest
priority and should be settled only if
there is debtor’s property remaining.
This includes:
¤ arbitrage manager’s fees presented
after closing of the Register of
claims, and
¤ claims on obligatory payments
arising after opening of the
receivership notwithstanding the
term of their presentation7.
If claims were not settled due to
insufficient funds, they are deemed
cancelled. Creditors may claim from the
third parties, if the debtor’s property
has been obtained illegally.
When dealing with any debtor
property remaining after full
settlements with creditors of all
priorities, if creditors refuse to take the
property for execution of obligations
before them, the property goes to the
local self-government bodies of the
Russian Federation where the debtor
is located.
04
When dealing with any debtor property
remaining after full settlements with creditors
of all priorities, if creditors refuse to take
the property for execution of obligations
before them, the property goes to the local
self-government bodies of the Russian
Federation where the debtor is located.
If the debtor’s property is insufficient
to settle the arbitrage manager’s
remuneration, such expenses in the
part not covered by the debtor’s
property, is reimbursed by the
creditor claimant8.
CONCLUSION
The current procedure regarding
the sale of a debtor’s property reflects
the current market situation when,
due to the global economic crisis,
many businesses cannot execute
their obligations.
REFERENCES
1 The Civil Code of the Russian
Federation: Part I No.51-FZ, 30
November 1994; Part II No.14-FZ, 26
January 1996; Part III No.146-FZ, 26
November 2001; Part IV No.230-FZ,
24 November 2006.
2 The Law of the Russian Federation
No.2872-1 On Pledge, 29 May 1992.
3 The Federal Law of the Russian
Federation No.102-FZ, On Mortgage,
16 July 1998.
4 The Federal Law of the Russian
Federation No.127-FZ, On Insolvency
(Bankruptcy), 26 October 2002.
5 The Civil Procedural Code of the
Russian Federation No.138-FZ, 14
November 2002.
6 The Civil Code, Article 350.7.
7 The Ruling of the Federal
Arbitrazh Court of Moscow,
Circuit No.KG-A40/9322-05, 9
November 2005.
8 The Ruling of the Presidium of the
High Arbitrazh Court No.6007/08, 13
November 2008.
Dr Anna Shashkova is a visiting
lecturer at ATC in Russia, professor
of law at the Moscow State University
for International Relations (MGIMO),
and lawyer of the Moscow Region
Bar Association