A new version of the draft Federal Law "On the Registration of Notices of Pledge of Movable Property" has been presented in the Russian Federation. This draft essentially proposes introducing an administrative registry for pledges of vehicles and equipment, rather than a security rights registry built on civil law principles. The article provides an analysis of the main provisions of the draft and an example of the functioning of a pledge notice registry in France.
The draft Federal Law "On the Registration of Notices of Pledge of Movable Property" (hereinafter – the Draft) provides for the introduction of mandatory registration of notices of pledge for machinery, equipment, and vehicles having a VIN or a code from the All-Russian Classifier of Fixed Assets OK 013-94 (hereinafter – OKOF). Furthermore, administrative liability for the pledgee is envisaged for failure to register (or untimely registration) of a pledge notice.
In general, the introduction of a pledge notice registry system is necessary to significantly improve the quality of Russian legislation and secured lending practice.
The Draft includes a number of valuable rules (e.g., maintaining the registry in electronic form, establishing the priority of pledgees' rights based on registration), however, overall, its adoption will not ensure the introduction in Russia of a pledge notice registry system that guarantees the interests of the debtor, pledgor, secured creditor (pledgee), and third parties. Furthermore, the principles of functioning and structure of the pledge notice registry proposed in the Draft do not comply with the recommendations of international instruments in this area and do not take into account the experience of pledge registries in foreign states.
Limited List of Property
According to clause 2, article 1 of the Draft, the registry of pledge notices contains information on pledges regarding a limited list of movable property objects (machinery, equipment, and vehicles having a VIN or an OKOF code). However, a pledge registry should not be limited to specific types of movable property. As the experience of operating similar registries in foreign states shows, a pledge notice registry should extend to any property, except for those types for which special legislation exists (e.g., for financial assets) or for which special registries exist. In relation to Russia, such special registries include, in particular, the real estate rights registry, the registry of registered securities owners (for shares), the Unified State Register of Legal Entities (for shares in the charter capital of a limited liability company), and the registry of intellectual property rights. For example, in Australia, Hungary, Poland, the United States of America, and France, the pledge notice registry is general in nature (from the perspective of the objects of the pledge) and does not extend to property of a particular type in cases expressly provided for by law.
Mandatory Registration of Pledge Notice
According to the Draft, registration of a pledge notice is a legally established obligation of the pledgee (clause 2, art. 3; clause 3, art. 6). This does not fully correspond to the purpose of a pledge notice registry. The latter is created not for the mandatory collection of information about existing pledges, but to create a registry of information about pledges that is open to all persons, where notices are registered at the discretion of the parties to the pledge relationship, who may decide not to register their pledge for various reasons. Accordingly, in states where a pledge notice registry exists, such registration is not mandatory, except for the registration of a notice of termination of the pledge (which has also been criticized, as parties can extend a previously registered pledge to new obligations of the same or a new debtor of the creditor).
Therefore, the pledgee should not be liable for registering a preliminary notice (registered before the pledge arises) or for untimely registration of a notice, as provided for in the Draft.
Prohibition on Describing the Pledged Asset by Generic Characteristics
According to the Draft, pledge notices are required to contain precise information about the pledged asset, down to the serial number of production lines for machinery and equipment (clause 2, art. 5). However, the registry should allow the registration of pledge notices with a description of the property by generic characteristics, in order to enable the registration of pledge notices for future property or a pool of property.
Registration and Search in the Registry by Property
The Draft provides for the registration of pledge notices and the provision of registry extracts based on information about the property (clause 5, art. 2; clause 1, art. 8; clause 6, art. 12). This is explained by the fact that, according to the Draft, pledge notices can only be registered for property having an identification number (VIN or OKOF code). However, such a structure for the registry will not allow interested parties to obtain the necessary information about the pledge of a particular property of a specific person (pledgor) with whom they intend to transact.
Furthermore, an identifier based on a property code is insufficient for a registry system that allows for indicating other descriptions of the pledged asset besides the identification number. Thus, identification of the same property in different pledge agreements can be done in different ways, for example, by description indicating the location of the pledged asset, general identifying characteristics (such as brand, color, etc.).
In these cases, a person's counterparties can only obtain information about the pledge of its property by using the person's identification characteristics (name, primary state registration number) as the criterion for searching for information in the registry.
Searching for information about pledges granted by a person, using the property as an identifier, is possible as an additional option only in cases where that property has an identification number (e.g., automobiles – as proposed in the Draft). However, this can only be an additional method of searching the registry; the main criterion for registering pledge notices and searching for information in the registry should be information about the pledgor.
Registration of Pledge Notice in Cross-Border Transactions
According to the Draft, in cases where the pledgor is a foreign entity, filing a pledge notice with the registry is only possible provided that at the moment the pledge rights arise, the pledged asset is located on the territory of the Russian Federation (clause 1, art. 3). However, in practice, in cross-border transactions, creditors prefer to register a pledge notice in the state where foreclosure and disposal of the pledged asset may be possible in the future, in advance, i.e., before the pledged property is moved to the relevant territory. Consequently, the law must provide for the possibility of registering a pledge notice for property that may be located on the territory of the Russian Federation in the future (having a connection to Russian law).
Lack of Protection for Senior Pledgee's Rights upon Foreclosure and Disposal by Junior Pledgee
In case property is pledged to different creditors to secure various obligations and multiple pledgees arise, the interests of the senior pledgee (whose pledge right has higher priority) must be protected upon foreclosure on the pledged property by a junior pledgee (whose pledge right has lower priority), in order to preserve the privileges of the senior pledge. In particular, upon foreclosure on the pledged asset, the junior pledgee must notify the senior pledgee thereof, so that the latter can initiate foreclosure proceedings on the pledged asset and replace the procedure started by the junior pledgee.
Notification of the senior pledgee can also be done through the registry: the pledgee is obligated to register a notice of commencement of foreclosure on the pledged asset in the registry, whereupon a notification of the registration of such notice is automatically sent to the debtor, pledgor, and other pledgees.
The Draft does not provide for these rules, and the junior pledgee has the right to foreclose on and dispose of the pledged asset without any protection for the rights of the senior pledgee. The right to compensation for losses provided for in clause 3, article 4 of the Draft does not guarantee the rights of the senior pledgee – they can only be guaranteed by ensuring its right to obtain satisfaction from the pledged asset, not by filing a claim for damages (otherwise the value of the pledge is lost).
Exclusion of Preliminary Registration of Pledge Notice
The Draft does not provide for the possibility to register a pledge notice preliminarily, before concluding the relevant agreement and the emergence of rights to the pledged asset (clause 1, art. 3; clause 3, art. 6). However, such a possibility is typically provided in jurisdictions where a pledge notice registry functions, since the registration of a pledge notice is not constitutive or confirmatory in nature (registration of a pledge notice is not a condition or evidence of the creation of a pledge over property).
Furthermore, the possibility to register a pledge notice before the moment the pledge over property arises is required when pledging future property.
Transitional Provisions
According to the Draft, if a pledge arises after its entry into force and a notice thereof is registered in the registry, such a registered pledge does not have priority if a pledge agreement concluded before the Draft's entry into force exists (clause 2, art. 15). Such a system of transitional rules may create uncertainty for pledgees due to the risk of the existence of a pledge agreement concluded before the Draft's entry into force.
When introducing a pledge notice registry, the law should provide for a specific transitional period (limited in time). During this period, pledgors and/or pledgees should have the right to register a pledge notice, so that the date of the priority of the pledge right is determined according to the dates of the pledge agreements on the basis of which notices were registered during the transitional period. Accordingly, during this (short) transitional period, a copy of the pledge agreement should be attached to the notice. When registering a pledge notice after the end of the transitional period, copies of the pledge agreement or other documents should not be required.
The draft Federal Law "On the Registration of Notices of Pledge of Movable Property" (hereinafter – the Draft) provides for the introduction of mandatory registration of notices of pledge for machinery, equipment, and vehicles having a VIN or a code from the All-Russian Classifier of Fixed Assets OK 013-94 (hereinafter – OKOF). Furthermore, administrative liability for the pledgee is envisaged for failure to register (or untimely registration) of a pledge notice.
In general, the introduction of a pledge notice registry system is necessary to significantly improve the quality of Russian legislation and secured lending practice.
The Draft includes a number of valuable rules (e.g., maintaining the registry in electronic form, establishing the priority of pledgees' rights based on registration), however, overall, its adoption will not ensure the introduction in Russia of a pledge notice registry system that guarantees the interests of the debtor, pledgor, secured creditor (pledgee), and third parties. Furthermore, the principles of functioning and structure of the pledge notice registry proposed in the Draft do not comply with the recommendations of international instruments in this area and do not take into account the experience of pledge registries in foreign states.
Limited List of Property
According to clause 2, article 1 of the Draft, the registry of pledge notices contains information on pledges regarding a limited list of movable property objects (machinery, equipment, and vehicles having a VIN or an OKOF code). However, a pledge registry should not be limited to specific types of movable property. As the experience of operating similar registries in foreign states shows, a pledge notice registry should extend to any property, except for those types for which special legislation exists (e.g., for financial assets) or for which special registries exist. In relation to Russia, such special registries include, in particular, the real estate rights registry, the registry of registered securities owners (for shares), the Unified State Register of Legal Entities (for shares in the charter capital of a limited liability company), and the registry of intellectual property rights. For example, in Australia, Hungary, Poland, the United States of America, and France, the pledge notice registry is general in nature (from the perspective of the objects of the pledge) and does not extend to property of a particular type in cases expressly provided for by law.
Mandatory Registration of Pledge Notice
According to the Draft, registration of a pledge notice is a legally established obligation of the pledgee (clause 2, art. 3; clause 3, art. 6). This does not fully correspond to the purpose of a pledge notice registry. The latter is created not for the mandatory collection of information about existing pledges, but to create a registry of information about pledges that is open to all persons, where notices are registered at the discretion of the parties to the pledge relationship, who may decide not to register their pledge for various reasons. Accordingly, in states where a pledge notice registry exists, such registration is not mandatory, except for the registration of a notice of termination of the pledge (which has also been criticized, as parties can extend a previously registered pledge to new obligations of the same or a new debtor of the creditor).
Therefore, the pledgee should not be liable for registering a preliminary notice (registered before the pledge arises) or for untimely registration of a notice, as provided for in the Draft.
Prohibition on Describing the Pledged Asset by Generic Characteristics
According to the Draft, pledge notices are required to contain precise information about the pledged asset, down to the serial number of production lines for machinery and equipment (clause 2, art. 5). However, the registry should allow the registration of pledge notices with a description of the property by generic characteristics, in order to enable the registration of pledge notices for future property or a pool of property.
Registration and Search in the Registry by Property
The Draft provides for the registration of pledge notices and the provision of registry extracts based on information about the property (clause 5, art. 2; clause 1, art. 8; clause 6, art. 12). This is explained by the fact that, according to the Draft, pledge notices can only be registered for property having an identification number (VIN or OKOF code). However, such a structure for the registry will not allow interested parties to obtain the necessary information about the pledge of a particular property of a specific person (pledgor) with whom they intend to transact.
Furthermore, an identifier based on a property code is insufficient for a registry system that allows for indicating other descriptions of the pledged asset besides the identification number. Thus, identification of the same property in different pledge agreements can be done in different ways, for example, by description indicating the location of the pledged asset, general identifying characteristics (such as brand, color, etc.).
In these cases, a person's counterparties can only obtain information about the pledge of its property by using the person's identification characteristics (name, primary state registration number) as the criterion for searching for information in the registry.
Searching for information about pledges granted by a person, using the property as an identifier, is possible as an additional option only in cases where that property has an identification number (e.g., automobiles – as proposed in the Draft). However, this can only be an additional method of searching the registry; the main criterion for registering pledge notices and searching for information in the registry should be information about the pledgor.
Registration of Pledge Notice in Cross-Border Transactions
According to the Draft, in cases where the pledgor is a foreign entity, filing a pledge notice with the registry is only possible provided that at the moment the pledge rights arise, the pledged asset is located on the territory of the Russian Federation (clause 1, art. 3). However, in practice, in cross-border transactions, creditors prefer to register a pledge notice in the state where foreclosure and disposal of the pledged asset may be possible in the future, in advance, i.e., before the pledged property is moved to the relevant territory. Consequently, the law must provide for the possibility of registering a pledge notice for property that may be located on the territory of the Russian Federation in the future (having a connection to Russian law).
Lack of Protection for Senior Pledgee's Rights upon Foreclosure and Disposal by Junior Pledgee
In case property is pledged to different creditors to secure various obligations and multiple pledgees arise, the interests of the senior pledgee (whose pledge right has higher priority) must be protected upon foreclosure on the pledged property by a junior pledgee (whose pledge right has lower priority), in order to preserve the privileges of the senior pledge. In particular, upon foreclosure on the pledged asset, the junior pledgee must notify the senior pledgee thereof, so that the latter can initiate foreclosure proceedings on the pledged asset and replace the procedure started by the junior pledgee.
Notification of the senior pledgee can also be done through the registry: the pledgee is obligated to register a notice of commencement of foreclosure on the pledged asset in the registry, whereupon a notification of the registration of such notice is automatically sent to the debtor, pledgor, and other pledgees.
The Draft does not provide for these rules, and the junior pledgee has the right to foreclose on and dispose of the pledged asset without any protection for the rights of the senior pledgee. The right to compensation for losses provided for in clause 3, article 4 of the Draft does not guarantee the rights of the senior pledgee – they can only be guaranteed by ensuring its right to obtain satisfaction from the pledged asset, not by filing a claim for damages (otherwise the value of the pledge is lost).
Exclusion of Preliminary Registration of Pledge Notice
The Draft does not provide for the possibility to register a pledge notice preliminarily, before concluding the relevant agreement and the emergence of rights to the pledged asset (clause 1, art. 3; clause 3, art. 6). However, such a possibility is typically provided in jurisdictions where a pledge notice registry functions, since the registration of a pledge notice is not constitutive or confirmatory in nature (registration of a pledge notice is not a condition or evidence of the creation of a pledge over property).
Furthermore, the possibility to register a pledge notice before the moment the pledge over property arises is required when pledging future property.
Transitional Provisions
According to the Draft, if a pledge arises after its entry into force and a notice thereof is registered in the registry, such a registered pledge does not have priority if a pledge agreement concluded before the Draft's entry into force exists (clause 2, art. 15). Such a system of transitional rules may create uncertainty for pledgees due to the risk of the existence of a pledge agreement concluded before the Draft's entry into force.
When introducing a pledge notice registry, the law should provide for a specific transitional period (limited in time). During this period, pledgors and/or pledgees should have the right to register a pledge notice, so that the date of the priority of the pledge right is determined according to the dates of the pledge agreements on the basis of which notices were registered during the transitional period. Accordingly, during this (short) transitional period, a copy of the pledge agreement should be attached to the notice. When registering a pledge notice after the end of the transitional period, copies of the pledge agreement or other documents should not be required.