09.07.2014 Natalia Zelentsova, Vyacheslav Suyazov, associates at Maxima Legal

Reform of the Civil Code affects provisions related to obligations

There was adopted a new set of amendments to the Civil Code of the Russian Federation regulating relationships arising with respect to pledge and substitution of parties in an obligation: Federal Law No.    367 On amendment of the first part of the Civil Code of the Russian Federation and invalidation of certain legislative acts (provisions of legislative acts) of the Russian Federation dated 21 December 2013 (further, the “Law”).

Terms and conditions of a pledge agreement. Description of a pledged item

For the first time the Law provides for the possibility to describe a pledged item by reference to the pledge of all the property of the pledgor. The pledged item can also be determined by specifying a clearly stated part of the pledgor’s property, or by indication of specific kind or type of property.  Such determination of the pledged item will be deemed valid if it allows identifying property as the pledged item at the time of enforcement. Such possibilities are provided by lawmaker to participants of civil circulation only for those relationships where the pledgor is an entrepreneur (Article 339.2 of the Civil Code of the Russian Federation as amended). The said rules will become effective on 1 January 2015.
For the first time the Law expressly determines that a future obligation can be the principle obligation secured by pledge. In this case the pledge is created not at the time of conclusion of the pledge agreement (general rule), but from the time such future obligation arises (Article 341 of the Civil Code of the Russian Federation as amended).

Protection of a bona fide pledgee

The Law additionally guarantees protection of rights of pledgee and third parties acquiring pledged property by introducing such concepts as bona fide pledgee and bona fide acquirer of pledged property.

A bona fide pledgee is defined in the Law as a person who did not and should not know that the pledged item had already been pledged by a person not authorized to so dispose of such an item. In the situation at issue the Law protects exactly this bona fide, yet deluded pledgee and the owner of the pledged item is deemed the pledgor and enjoys respective rights and obligations. In case the pledged item was withdrawn from ownership beyond the owner’s will, for example, was lost by him, the said rules do not apply; in this event the Law protects interests of the owner of the “pledged” property and the pledge is not preserved (Article 335.2 of the Civil Code of the Russian Federation as amended).

Protection of a bona fide acquirer of the pledged property

Interests of an acquirer of pledged property shall be protected by the Law if in the moment of property acquisition he did not and could not now that the property had already been pledged. Therefore, lawmaker for the first time addressed such problem as the absence of protection of rights of bona fide acquirers of the pledged property. Such bona fide persons who were deluded regarding the absence of pledge and acquired the pledged item on a paid-for basis will now have their rights duly protected: in this case the pledge is terminated with express reference to Article 352.1.2 of the Civil Code of the Russian Federation as amended. Moreover, the Law introduced a new tool permitting participants of civil circulation to avoid risks associated with the absence of publicly available information on moveable property pledge: a system of record (registration) of moveable property pledge in the movable property pledge notice register (Article 339.1 of the Civil Code of the Russian Federation as amended).

Moveable property pledge record system

The moveable property pledge notice register under the Law shall be kept by notary in accordance with procedure set forth in notaries laws to be amended respectively from 1 July 2014. Information about pledge shall be recorded in the register after notary receives pledge notice which may be sent either by the pledgor or by the pledgee (Article 103.3 of Fundamentals of the Russian Federation on notaries approved by the Supreme Court of the Russian Federation No. 4462-1 dated 11 February 1993, further “Fundamentals”). A notice on modification or elimination of pledge information shall be filed only by the pledgee within three days upon the time he became or should become aware of modification or termination of the pledge.

It is important that such a registration of moveable property pledge is not obligatory, the Law just offers such possibility to participants of civil circulation, and indicates respective risks associated with the absence of such registration. The absence of registration record, however, does not affect relationships between the pledgor and pledgee, including no influence on the validity of the pledge agreement concluded by them (Article 339.1.4 of the Civil Code of the Russian Federation as amended). The moment when record is made in the moveable property pledge notice register is very important for prioritizing the order of satisfaction of claims of the pledgees in case the same property is pledged several times.

Pledgee’s priority right to have his claims satisfied out of the pledgor’s property

In addition to the pledged item, the pledgee has possibility to have his claim satisfied out of other pedgor’s property. With respect to such property the pledgee has a preemptive right to have his claims satisfied; so, the “pledge priority” covers, therefore, not only the pledged item, but other property expressly indicated in the Law.

With some exceptions, the law came into force on 01 July, 2014.