The Condition on the Possibility of Out-of-Court Foreclosure on Pledged Property
Formulating the Condition on the Possibility of Out-of-Court Foreclosure on the Pledged Asset
Law No. 405-FZ eliminated the term "agreement on out-of-court foreclosure on property," which could previously be interpreted as meaning that such an agreement is not an agreement on the terms of the pledge. Instead, Law No. 405-FZ uses the following definitions: "a pledge agreement containing a condition on out-of-court foreclosure on the pledged property," "a mortgage agreement (an agreement entailing the emergence of a mortgage by operation of law) which contains a condition on the possibility of out-of-court foreclosure on the pledged property," "a mortgage bond containing a condition on the possibility of out-of-court foreclosure on the pledged property."
Thus, under Law No. 405-FZ, to agree on the condition of the possibility of out-of-court foreclosure on the pledged asset, the parties must include it in the pledge agreement (mortgage agreement). If the pledge arises by operation of law, the parties must conclude a pledge agreement (the terms of which may be included in the agreement entailing the emergence of the pledge by operation of law) to agree on such a condition.
Notarization of the Pledge Agreement
In cases where the pledgee wishes to be able to initiate forced foreclosure based on a notary's executive endorsement (which is an enforcement document), notarization of the pledge agreement is required, and in case of a mortgage arising by operation of law – notarization of the agreement entailing the emergence of the mortgage by operation of law. For a notarized mortgage agreement (agreement entailing the emergence of a mortgage by operation of law), Law No. 405-FZ provides a number of advantages compared to non-notarized agreements:
l Entry of information in the Unified State Register of Real Estate (USRRE/EGRP) regarding the possibility of out-of-court foreclosure on the mortgaged property. Information on the possibility of out-of-court foreclosure on the pledged property must be entered into the USRRE;
l Reduced timeframe for state registration of the mortgage. State registration of mortgages of land plots, buildings, structures, and non-residential premises is carried out no later than within five working days from the date of acceptance of the application and documents necessary for state registration. The general term is 15 working days from the date of acceptance of the application and documents necessary for state registration.
Elimination of the Requirement for a Notarized Consent of the Pledgor for Out-of-Court Foreclosure
Law No. 405-FZ eliminates the requirement for a notarized consent of the pledgor for out-of-court foreclosure, which was previously applied in cases where the pledgor was an individual or where out-of-court foreclosure was agreed upon for a mortgaged asset. Now, in these cases, according to Law No. 405-FZ, to properly formalize the condition on the possibility of out-of-court foreclosure on the pledged asset, it is sufficient to include it in the agreement, and in case of a mortgage – also in the mortgage bond certifying the rights of the pledgee.
Methods of Disposing of the Pledged Asset
When agreeing on the condition of the possibility of out-of-court foreclosure on the pledged property, it is not mandatory to specify the disposal method.
For pledged real estate, this possibility is new, since before the entry into force of Law No. 405-FZ, specifying the method of disposal of the pledged real estate was an essential condition of the pledgor and pledgee's agreement on out-of-court foreclosure on the pledged property.
Disposal methods for pledged movable property
As a general rule, during out-of-court foreclosure on pledged movable property, three disposal methods can be used:
1. Public auction (used if no other method is agreed upon by the parties). Furthermore:
a) Law No. 405-FZ eliminated the possibility of disposing of the pledged asset, on which foreclosure has been applied out-of-court, through a closed auction;
b) the pledge agreement containing the condition on out-of-court foreclosure must specify the initial sale price of the pledged movable property or the procedure for determining it.
2. Retention of the pledged asset by the pledgee, if the parties to the pledge agreement concluded to secure obligations related to entrepreneurial activity are legal entities and/or individual entrepreneurs.
3. Sale of the pledged asset to a third party by the pledgee or a commission agent acting on the basis of a commission agreement concluded between them, if the parties to the pledge agreement concluded to secure obligations related to entrepreneurial activity are legal entities and/or individual entrepreneurs.
Furthermore, several methods for disposing of the pledged movable property may be provided, which the pledgee has the right to use at its discretion, including in a certain sequence or depending on any other conditions (unless otherwise provided by the agreement).
Disposal methods for pledged immovable property
During out-of-court foreclosure on pledged immovable property, the following two disposal methods can be used:
Public auction (used if no other method is agreed upon by the parties);
Retention of the pledged property by the pledgee – if the parties to the mortgage agreement concluded to secure obligations related to entrepreneurial activity are legal entities and/or individual entrepreneurs. This method can also be provided for in a mortgage of a land plot. Previously, this was only allowed for mortgages of land plots (land plot lease rights) on which buildings and structures transferred as mortgage to the same pledgee are located.
It should be noted that Law No. 405-FZ eliminated the disposal method of acquisition of the pledged property by the pledgee for third parties, which was previously provided for by the Federal Law of July 16, 1998, "On Mortgage (Pledge of Real Estate)" (hereinafter – the Mortgage Law). This means an increase in the actual time for the pledgee to sell the pledged asset to a third party, as it will now first need to formalize the retention of the mortgaged asset. Another innovation of Law No. 405-FZ is the possibility to provide in the agreement for several methods of disposing of the mortgaged asset, which the pledgee has the right to use at its discretion, including in a certain sequence or depending on any other conditions (unless otherwise provided by the agreement). Before the entry into force of Law No. 405-FZ, specifying several methods of out-of-court disposal of the mortgaged asset entailed a lack of agreement on the out-of-court foreclosure condition, and the possibility of foreclosure on the mortgaged asset in such a case existed only by court decision.
The Pledgor and Pledgee May Agree on the Method and Procedure for Disposing of the Pledged Property upon Foreclosure by Court Decision.
The possibility to establish the method and procedure for disposing of the pledged property upon foreclosure by court decision
Law No. 405-FZ provides the pledgor and pledgee with a new opportunity – to agree on the method and procedure for disposing of the pledged asset upon foreclosure by court decision. This means that the pledgee, applying to the court with a claim for foreclosure on the pledged asset, has the right to demand the disposal of such pledged asset in accordance with the agreement between the pledgor and the pledgee.
In particular, such an agreement may provide for the disposal of the pledged asset not only through public auctions but also by any other lawful method of disposing of the pledged asset. Such methods are established by legislation in relation to out-of-court foreclosure on the pledged asset. In this case, the court, making a decision on foreclosure on the pledged property, establishes the method and procedure for its disposal according to the relevant conditions set out in the said agreement.
Requirements for Formalizing the Condition on the Method and Procedure for Disposing of the Pledged Property upon Foreclosure by Court Decision
The method and procedure for disposing of the pledged property upon foreclosure by court decision are terms of the pledge agreement (mortgage agreement) and cannot be agreed upon by the parties in a separate agreement that is not part of the pledge agreement (mortgage agreement).
If the mortgage arises by operation of law, the parties have the right to provide in a separate agreement a condition on the methods and procedure for disposing of the pledged property upon foreclosure on the mortgaged asset by court decision. The rules on form and state registration established by federal law for the mortgage agreement apply to this agreement.
This rule differs from the rule established for an agreement entailing the emergence of a mortgage by operation of law and containing a condition on out-of-court foreclosure on the pledged property. In that case, such an agreement is not subject to state registration, although it is attached to the application for state registration of the mortgage. The condition on out-of-court foreclosure on the pledged property can only be provided for in the agreement entailing the emergence of the mortgage by operation of law (or an addendum to such an agreement), or in the mortgage agreement.
Cases Where Out-of-Court Foreclosure on the Pledged Asset is Not Allowed Have Been Amended
Regarding any pledged asset
Law No. 405-FZ clarifies previous and establishes new cases where foreclosure on the pledged asset can only be applied by court decision.
1. The case where "the pledgor is absent, and it is impossible to establish his whereabouts" is clarified as follows: "the pledgor – an individual – has been declared missing in accordance with the established procedure."
2. The case where "for the conclusion of a pledge agreement for an individual's property, the consent or permission of another person or body was required" is eliminated. In particular, this means that it is allowed to include a condition on out-of-court foreclosure on the pledged property in the pledge agreement when an individual pledges a share (part of a share) in the charter capital of a limited liability company, as well as when pledging movable property in common joint ownership.
3. New cases are established:
l when the pledged property is the subject of prior and subsequent pledges, for which different procedures for foreclosure on the pledged asset or different methods of disposing of the pledged property apply;
l when the property is pledged to secure the performance of different obligations to several co-pledgees.
Regarding the mortgaged asset
Law No. 405-FZ clarifies previous and establishes new cases where foreclosure on the mortgaged asset can only be applied by court decision, in particular:
l The case where the subject of the mortgage is a land plot from agricultural land is clarified. This refers only to those land plots from agricultural land on which there are no buildings, structures, constructions, or which are provided to a citizen for individual housing construction, personal subsidiary farming, dacha farming, horticulture, animal husbandry or vegetable gardening;
l The case where the subject of the mortgage is property in common ownership, and any of its owners does not give consent in written or other form established by federal law for satisfying the pledgee's claims out-of-court, is eliminated.
Rules When Foreclosure on the Pledged Asset is Not Allowed Have Been Clarified
Law No. 405-FZ clarifies the norms excluding the possibility of foreclosure on the pledged asset.
1. Insignificance of the breach and disproportionateness of the pledgee's claims. The disproportionateness of the pledgee's claims must be determined based on the value, not the appraisal, of the pledged asset, i.e., based on the market value of the pledged asset proven by the pledgor, not the collateral value specified in the pledge agreement. Furthermore, regarding judicial foreclosure on the mortgaged asset, it is expressly established that the conditions of insignificance of the breach and disproportionateness of the pledgee's claims must be met at the time the court decides to foreclose.
2. Systematic violation of the terms for making periodic payments. Such systematicity, namely violation of the payment deadline more than three times within twelve months, in case of judicial foreclosure, must be determined as of the date of applying to the court, and in case of out-of-court foreclosure – as of the date of sending the notification of out-of-court foreclosure on the pledged property.
The Moment for Commencing Disposal of Pledged Movable Property
Notification of foreclosure on the pledged asset
Before the entry into force of Law No. 405-FZ, according to the Law of May 29, 1992, "On Pledge" (hereinafter – the Pledge Law), the procedure for out-of-court foreclosure on the pledged asset began from the moment the pledgee sent the pledgor a notification of the commencement of foreclosure on the pledged asset. The Pledge Law as amended by Law No. 405-FZ does not contain a direct indication of the need for the pledgee to send a notification of out-of-court foreclosure on the pledged property. However, this notification is mentioned in the norms of the Civil Code of the Russian Federation and other provisions of the Pledge Law as amended by Law No. 405-FZ.
In this regard, it seems that the need to send such a document still exists. When preparing this notification, the pledgee should be guided by clause 9 of Article 24.1 of the Pledge Law as amended by Law No. 405-FZ (to reduce risks associated with the pledgor's objections regarding violation of the foreclosure and disposal procedure), which establishes the content of the notification, including a proposal to perform the pledge-secured obligation, which should be sent only if the parties have agreed on the condition of out-of-court foreclosure and the pledged asset is held by the pledgee.
Regarding notification of the parties to the pledge agreement, the Pledge Law as amended by Law No. 405-FZ provides a detailed procedure for sending notifications and determining the moment from which a party to the pledge agreement is considered to have received it (Art. 28.6).
When applying these norms of the Pledge Law as amended by Law No. 405-FZ, the following must be considered. Notifications provided for both by this Law and by the pledge agreement must be sent to two addresses: to the address specified in the pledge agreement, and to the location of the legal entity or place of residence of the individual, determined according to the data from the Unified State Register of Legal Entities (USRLE/EGRЮЛ) or the Unified State Register of Individual Entrepreneurs (USRIE/EGRИП). However, the moment of receipt of the notification by the relevant party is tied to the address (location, place of residence) specified in the pledge agreement (clause 3, Art. 28.6 of the Pledge Law as amended by Law No. 405-FZ). In the absence of an address for sending notifications in the pledge agreement, the moment of its receipt should apparently be determined in relation to the address indicated in the USRLE/USRIE.
New Rules for Determining the Moment from Which Disposal of the Pledged Asset is Permitted
Law No. 405-FZ establishes new rules for determining the moment from which disposal of the pledged asset is permitted.
Before the entry into force of Law No. 405-FZ, disposal of pledged movable property was allowed from the moment of expiration of 10 days from the date the pledgor received the notification or 45 days from the date the pledgee or auction organizer sent such notification to the pledgor, if this period expired earlier.
Law No. 405-FZ contains two norms on the moment from which disposal of the pledged asset is permitted.
1. If a longer period is not established by the agreement between the pledgee and the pledgor, disposal of the pledged movable property is not allowed before the expiration of 10 days from the day the pledgor is considered to have received the "relevant notification" in accordance with the Pledge Law.
2. The pledgee has the right to dispose of the pledged asset according to the terms of the pledge agreement if the pledgor, within 20 days from the date the pledgor is considered to have received the notification sent to him, does not provide documents confirming the fact of performance of the pledge-secured obligation.
Considering that Law No. 405-FZ establishes special rules for notifying the pledgor when the pledged asset is held by the pledgee, these rules apparently mean that disposal of the pledged asset is permitted from one of the following moments:
l if the pledged asset is not held by the pledgee – then upon expiration of 10 days from the day the pledgor is considered to have received the notification of foreclosure on the pledged property in accordance with the Pledge Law;
l if the pledged asset is held by the pledgee – then upon expiration of 20 days from the date the pledgor is considered to have received the notification sent to him containing a proposal to perform the pledge-secured obligation (in the absence of documents held by the pledgee confirming the fact of performance of the pledge-secured obligation).
Furthermore, in the pledge agreement, the parties may agree on a period within which the disposal of the pledged movable property must be carried out. In this case, this period is counted from the expiration of 10 days from the day the pledgor is considered to have received the notification of foreclosure on the pledged property in accordance with the Pledge Law, and if the pledged asset is held by the pledgee, then from the expiration of 20 days from the date the pledgor is considered to have received the notification sent to him containing a proposal to perform the pledge-secured obligation (since it is from these moments that disposal of the pledged asset is permitted).
Consequences of Missing the Disposal Deadline for the Pledged Asset
Law No. 405-FZ expressly states that in case of missing the disposal deadline for the pledged asset, determined according to the Pledge Law or the pledge agreement, the pledgor has the right to demand compensation for losses caused by the disposal of the pledged asset after the established deadline. At the same time, the pledgee does not lose the right to dispose of the pledged property by the method indicated by it in the relevant notification.
Rules for Making an Executive Endorsement on a Pledge Agreement, an Agreement Entailing the Emergence of a Mortgage by Operation of Law, or a Mortgage Bond Have Been Amended
A notary's executive endorsement, as before the entry into force of Law No. 405-FZ, is required to carry out the procedure for foreclosure on the pledged asset in a compulsory manner (established by legislation on enforcement proceedings), but without applying to the court in cases where the parties have agreed on the condition of out-of-court foreclosure on the pledged property, and the pledgee is deprived of the opportunity to freely carry out the foreclosure procedure on the pledged asset (for example, if the pledgor refuses to transfer the pledged asset and documents necessary for its disposal to the pledgee). At the same time, a notary's executive endorsement (and, accordingly, notarization of the pledge agreement) is not required if the pledge agreement contains a condition on out-of-court foreclosure on the pledged asset and, according to the agreement, the pledged asset is held by the pledgee. Law No. 405-FZ changes the rules regulating the procedure for affixing a notary's executive endorsement.
A notary's executive endorsement can only be affixed if the agreement containing the condition on out-of-court foreclosure on the pledged property is notarized
When the pledgor and pledgee agree on the condition of out-of-court foreclosure on the pledged property, to obtain the possibility of making a notary's executive endorsement, the relevant pledge agreement (agreement entailing the emergence of a mortgage by operation of law) must be notarized.
No more than 2 years have passed from the day the obligation should have been performed
According to the Fundamentals of Legislation on Notaries as amended by Law No. 405-FZ, an executive endorsement is made if no more than 2 years have passed from the day the obligation should have been performed. Before the entry into force of Law No. 405-FZ, an executive endorsement could be made if no more than 3 years had passed from the moment the pledgee acquired the right to out-of-court foreclosure on the pledged property.
Requirements for documents submitted to the notary for making an executive endorsement have been clarified
Law No. 405-FZ clarifies some requirements for the documents on the basis of which the notary makes an executive endorsement, in particular for the following documents:
1. Calculation of the debtor's indebtedness. Such calculation must contain information on the amounts and dates of receipt of performance towards repayment of the debtor's obligations under the pledge-secured agreement.
2. An extract from the USRRE must confirm that the mortgage has not been terminated – such an extract must have an issue date no later than two weeks before applying to the notary.
Furthermore, when the rights of the pledgee under the mortgage-secured obligation are certified by a mortgage bond, the pledgee is not obliged to submit the mortgage agreement (agreement entailing the emergence of a mortgage by operation of law) to the notary if such agreements are not in its possession. In this case, the notary requests from the body carrying out state registration of rights to real estate and transactions with it a copy of the relevant agreement certified by that body. For such a request, Law No. 405-FZ endowed the notary with the appropriate powers, including those enshrined in the Federal Law of July 21, 1997, "On State Registration of Rights to Real Estate and Transactions Therewith."
The notary sending a notification to the pledgor and the debtor under the pledge-secured obligation with a proposal to perform the said obligation
In accordance with Law No. 405-FZ, the notary must send a notification to the pledgor and the debtor under the pledge-secured obligation with a proposal to perform it. Such notification is sent in the manner established by the legislation on pledges for sending notifications to the pledgor, debtor under the pledge-secured obligation.
Before the entry into force of Law No. 405-FZ, the notary had to send a notification about the upcoming making of an executive endorsement.
The pledgor is given 14 days after receiving the notification to submit documents confirming the fact of performance of the pledge-secured obligation
From the date the pledgor is considered to have received the proposal to perform the pledge-secured obligation sent to him by the notary, the pledgor is given 14 days to submit the following documents to the notary, in the absence of which the notary makes the executive endorsement:
a) documents confirming the fact of performance of the pledge-secured obligation; or
b) documents confirming the absence of grounds for foreclosure on the pledged property or the presence of grounds under which foreclosure is not allowed; or
c) evidence confirming the adoption of interim measures by a court or arbitral tribunal in relation to the pledged property. According to the Fundamentals of Legislation on Notaries as amended by Law No. 405-FZ, in case a court adopts interim measures in relation to the pledged property, established by procedural legislation, the performance of notarial acts must be postponed until the court cancels the relevant interim measures.
Before the entry into force of Law No. 405-FZ, the pledgor was given 7 days to send his objections to the notary. Moreover, the fact of the notary receiving objections from the debtor or pledgor regarding the pledge-secured obligation or foreclosure on the pledged asset was sufficient grounds for refusing to make the executive endorsement.
A Clear List of Grounds for the Notary's Refusal to Foreclose on the Pledged Property Has Been Established
The Fundamentals of Legislation on Notaries as amended by Law No. 405-FZ are supplemented by a new article, which expressly establishes the grounds for the notary's refusal to affix an executive endorsement on the pledge agreement (agreement entailing the emergence of a mortgage by operation of law, mortgage bond).
Such grounds are:
a) submission of the specified documents, in the absence of which the notary makes the executive endorsement; or
b) establishment by the notary of the absence of grounds for foreclosure on the pledged asset; or
c) establishment by the notary of the inadmissibility of foreclosure on the pledged asset (including if the breach of the pledge-secured obligation committed by the debtor is extremely insignificant and the amount of the pledgee's claims is clearly disproportionate to the value of the pledged property).
Formulating the Condition on the Possibility of Out-of-Court Foreclosure on the Pledged Asset
Law No. 405-FZ eliminated the term "agreement on out-of-court foreclosure on property," which could previously be interpreted as meaning that such an agreement is not an agreement on the terms of the pledge. Instead, Law No. 405-FZ uses the following definitions: "a pledge agreement containing a condition on out-of-court foreclosure on the pledged property," "a mortgage agreement (an agreement entailing the emergence of a mortgage by operation of law) which contains a condition on the possibility of out-of-court foreclosure on the pledged property," "a mortgage bond containing a condition on the possibility of out-of-court foreclosure on the pledged property."
Thus, under Law No. 405-FZ, to agree on the condition of the possibility of out-of-court foreclosure on the pledged asset, the parties must include it in the pledge agreement (mortgage agreement). If the pledge arises by operation of law, the parties must conclude a pledge agreement (the terms of which may be included in the agreement entailing the emergence of the pledge by operation of law) to agree on such a condition.
Notarization of the Pledge Agreement
In cases where the pledgee wishes to be able to initiate forced foreclosure based on a notary's executive endorsement (which is an enforcement document), notarization of the pledge agreement is required, and in case of a mortgage arising by operation of law – notarization of the agreement entailing the emergence of the mortgage by operation of law. For a notarized mortgage agreement (agreement entailing the emergence of a mortgage by operation of law), Law No. 405-FZ provides a number of advantages compared to non-notarized agreements:
l Entry of information in the Unified State Register of Real Estate (USRRE/EGRP) regarding the possibility of out-of-court foreclosure on the mortgaged property. Information on the possibility of out-of-court foreclosure on the pledged property must be entered into the USRRE;
l Reduced timeframe for state registration of the mortgage. State registration of mortgages of land plots, buildings, structures, and non-residential premises is carried out no later than within five working days from the date of acceptance of the application and documents necessary for state registration. The general term is 15 working days from the date of acceptance of the application and documents necessary for state registration.
Elimination of the Requirement for a Notarized Consent of the Pledgor for Out-of-Court Foreclosure
Law No. 405-FZ eliminates the requirement for a notarized consent of the pledgor for out-of-court foreclosure, which was previously applied in cases where the pledgor was an individual or where out-of-court foreclosure was agreed upon for a mortgaged asset. Now, in these cases, according to Law No. 405-FZ, to properly formalize the condition on the possibility of out-of-court foreclosure on the pledged asset, it is sufficient to include it in the agreement, and in case of a mortgage – also in the mortgage bond certifying the rights of the pledgee.
Methods of Disposing of the Pledged Asset
When agreeing on the condition of the possibility of out-of-court foreclosure on the pledged property, it is not mandatory to specify the disposal method.
For pledged real estate, this possibility is new, since before the entry into force of Law No. 405-FZ, specifying the method of disposal of the pledged real estate was an essential condition of the pledgor and pledgee's agreement on out-of-court foreclosure on the pledged property.
Disposal methods for pledged movable property
As a general rule, during out-of-court foreclosure on pledged movable property, three disposal methods can be used:
1. Public auction (used if no other method is agreed upon by the parties). Furthermore:
a) Law No. 405-FZ eliminated the possibility of disposing of the pledged asset, on which foreclosure has been applied out-of-court, through a closed auction;
b) the pledge agreement containing the condition on out-of-court foreclosure must specify the initial sale price of the pledged movable property or the procedure for determining it.
2. Retention of the pledged asset by the pledgee, if the parties to the pledge agreement concluded to secure obligations related to entrepreneurial activity are legal entities and/or individual entrepreneurs.
3. Sale of the pledged asset to a third party by the pledgee or a commission agent acting on the basis of a commission agreement concluded between them, if the parties to the pledge agreement concluded to secure obligations related to entrepreneurial activity are legal entities and/or individual entrepreneurs.
Furthermore, several methods for disposing of the pledged movable property may be provided, which the pledgee has the right to use at its discretion, including in a certain sequence or depending on any other conditions (unless otherwise provided by the agreement).
Disposal methods for pledged immovable property
During out-of-court foreclosure on pledged immovable property, the following two disposal methods can be used:
Public auction (used if no other method is agreed upon by the parties);
Retention of the pledged property by the pledgee – if the parties to the mortgage agreement concluded to secure obligations related to entrepreneurial activity are legal entities and/or individual entrepreneurs. This method can also be provided for in a mortgage of a land plot. Previously, this was only allowed for mortgages of land plots (land plot lease rights) on which buildings and structures transferred as mortgage to the same pledgee are located.
It should be noted that Law No. 405-FZ eliminated the disposal method of acquisition of the pledged property by the pledgee for third parties, which was previously provided for by the Federal Law of July 16, 1998, "On Mortgage (Pledge of Real Estate)" (hereinafter – the Mortgage Law). This means an increase in the actual time for the pledgee to sell the pledged asset to a third party, as it will now first need to formalize the retention of the mortgaged asset. Another innovation of Law No. 405-FZ is the possibility to provide in the agreement for several methods of disposing of the mortgaged asset, which the pledgee has the right to use at its discretion, including in a certain sequence or depending on any other conditions (unless otherwise provided by the agreement). Before the entry into force of Law No. 405-FZ, specifying several methods of out-of-court disposal of the mortgaged asset entailed a lack of agreement on the out-of-court foreclosure condition, and the possibility of foreclosure on the mortgaged asset in such a case existed only by court decision.
The Pledgor and Pledgee May Agree on the Method and Procedure for Disposing of the Pledged Property upon Foreclosure by Court Decision.
The possibility to establish the method and procedure for disposing of the pledged property upon foreclosure by court decision
Law No. 405-FZ provides the pledgor and pledgee with a new opportunity – to agree on the method and procedure for disposing of the pledged asset upon foreclosure by court decision. This means that the pledgee, applying to the court with a claim for foreclosure on the pledged asset, has the right to demand the disposal of such pledged asset in accordance with the agreement between the pledgor and the pledgee.
In particular, such an agreement may provide for the disposal of the pledged asset not only through public auctions but also by any other lawful method of disposing of the pledged asset. Such methods are established by legislation in relation to out-of-court foreclosure on the pledged asset. In this case, the court, making a decision on foreclosure on the pledged property, establishes the method and procedure for its disposal according to the relevant conditions set out in the said agreement.
Requirements for Formalizing the Condition on the Method and Procedure for Disposing of the Pledged Property upon Foreclosure by Court Decision
The method and procedure for disposing of the pledged property upon foreclosure by court decision are terms of the pledge agreement (mortgage agreement) and cannot be agreed upon by the parties in a separate agreement that is not part of the pledge agreement (mortgage agreement).
If the mortgage arises by operation of law, the parties have the right to provide in a separate agreement a condition on the methods and procedure for disposing of the pledged property upon foreclosure on the mortgaged asset by court decision. The rules on form and state registration established by federal law for the mortgage agreement apply to this agreement.
This rule differs from the rule established for an agreement entailing the emergence of a mortgage by operation of law and containing a condition on out-of-court foreclosure on the pledged property. In that case, such an agreement is not subject to state registration, although it is attached to the application for state registration of the mortgage. The condition on out-of-court foreclosure on the pledged property can only be provided for in the agreement entailing the emergence of the mortgage by operation of law (or an addendum to such an agreement), or in the mortgage agreement.
Cases Where Out-of-Court Foreclosure on the Pledged Asset is Not Allowed Have Been Amended
Regarding any pledged asset
Law No. 405-FZ clarifies previous and establishes new cases where foreclosure on the pledged asset can only be applied by court decision.
1. The case where "the pledgor is absent, and it is impossible to establish his whereabouts" is clarified as follows: "the pledgor – an individual – has been declared missing in accordance with the established procedure."
2. The case where "for the conclusion of a pledge agreement for an individual's property, the consent or permission of another person or body was required" is eliminated. In particular, this means that it is allowed to include a condition on out-of-court foreclosure on the pledged property in the pledge agreement when an individual pledges a share (part of a share) in the charter capital of a limited liability company, as well as when pledging movable property in common joint ownership.
3. New cases are established:
l when the pledged property is the subject of prior and subsequent pledges, for which different procedures for foreclosure on the pledged asset or different methods of disposing of the pledged property apply;
l when the property is pledged to secure the performance of different obligations to several co-pledgees.
Regarding the mortgaged asset
Law No. 405-FZ clarifies previous and establishes new cases where foreclosure on the mortgaged asset can only be applied by court decision, in particular:
l The case where the subject of the mortgage is a land plot from agricultural land is clarified. This refers only to those land plots from agricultural land on which there are no buildings, structures, constructions, or which are provided to a citizen for individual housing construction, personal subsidiary farming, dacha farming, horticulture, animal husbandry or vegetable gardening;
l The case where the subject of the mortgage is property in common ownership, and any of its owners does not give consent in written or other form established by federal law for satisfying the pledgee's claims out-of-court, is eliminated.
Rules When Foreclosure on the Pledged Asset is Not Allowed Have Been Clarified
Law No. 405-FZ clarifies the norms excluding the possibility of foreclosure on the pledged asset.
1. Insignificance of the breach and disproportionateness of the pledgee's claims. The disproportionateness of the pledgee's claims must be determined based on the value, not the appraisal, of the pledged asset, i.e., based on the market value of the pledged asset proven by the pledgor, not the collateral value specified in the pledge agreement. Furthermore, regarding judicial foreclosure on the mortgaged asset, it is expressly established that the conditions of insignificance of the breach and disproportionateness of the pledgee's claims must be met at the time the court decides to foreclose.
2. Systematic violation of the terms for making periodic payments. Such systematicity, namely violation of the payment deadline more than three times within twelve months, in case of judicial foreclosure, must be determined as of the date of applying to the court, and in case of out-of-court foreclosure – as of the date of sending the notification of out-of-court foreclosure on the pledged property.
The Moment for Commencing Disposal of Pledged Movable Property
Notification of foreclosure on the pledged asset
Before the entry into force of Law No. 405-FZ, according to the Law of May 29, 1992, "On Pledge" (hereinafter – the Pledge Law), the procedure for out-of-court foreclosure on the pledged asset began from the moment the pledgee sent the pledgor a notification of the commencement of foreclosure on the pledged asset. The Pledge Law as amended by Law No. 405-FZ does not contain a direct indication of the need for the pledgee to send a notification of out-of-court foreclosure on the pledged property. However, this notification is mentioned in the norms of the Civil Code of the Russian Federation and other provisions of the Pledge Law as amended by Law No. 405-FZ.
In this regard, it seems that the need to send such a document still exists. When preparing this notification, the pledgee should be guided by clause 9 of Article 24.1 of the Pledge Law as amended by Law No. 405-FZ (to reduce risks associated with the pledgor's objections regarding violation of the foreclosure and disposal procedure), which establishes the content of the notification, including a proposal to perform the pledge-secured obligation, which should be sent only if the parties have agreed on the condition of out-of-court foreclosure and the pledged asset is held by the pledgee.
Regarding notification of the parties to the pledge agreement, the Pledge Law as amended by Law No. 405-FZ provides a detailed procedure for sending notifications and determining the moment from which a party to the pledge agreement is considered to have received it (Art. 28.6).
When applying these norms of the Pledge Law as amended by Law No. 405-FZ, the following must be considered. Notifications provided for both by this Law and by the pledge agreement must be sent to two addresses: to the address specified in the pledge agreement, and to the location of the legal entity or place of residence of the individual, determined according to the data from the Unified State Register of Legal Entities (USRLE/EGRЮЛ) or the Unified State Register of Individual Entrepreneurs (USRIE/EGRИП). However, the moment of receipt of the notification by the relevant party is tied to the address (location, place of residence) specified in the pledge agreement (clause 3, Art. 28.6 of the Pledge Law as amended by Law No. 405-FZ). In the absence of an address for sending notifications in the pledge agreement, the moment of its receipt should apparently be determined in relation to the address indicated in the USRLE/USRIE.
New Rules for Determining the Moment from Which Disposal of the Pledged Asset is Permitted
Law No. 405-FZ establishes new rules for determining the moment from which disposal of the pledged asset is permitted.
Before the entry into force of Law No. 405-FZ, disposal of pledged movable property was allowed from the moment of expiration of 10 days from the date the pledgor received the notification or 45 days from the date the pledgee or auction organizer sent such notification to the pledgor, if this period expired earlier.
Law No. 405-FZ contains two norms on the moment from which disposal of the pledged asset is permitted.
1. If a longer period is not established by the agreement between the pledgee and the pledgor, disposal of the pledged movable property is not allowed before the expiration of 10 days from the day the pledgor is considered to have received the "relevant notification" in accordance with the Pledge Law.
2. The pledgee has the right to dispose of the pledged asset according to the terms of the pledge agreement if the pledgor, within 20 days from the date the pledgor is considered to have received the notification sent to him, does not provide documents confirming the fact of performance of the pledge-secured obligation.
Considering that Law No. 405-FZ establishes special rules for notifying the pledgor when the pledged asset is held by the pledgee, these rules apparently mean that disposal of the pledged asset is permitted from one of the following moments:
l if the pledged asset is not held by the pledgee – then upon expiration of 10 days from the day the pledgor is considered to have received the notification of foreclosure on the pledged property in accordance with the Pledge Law;
l if the pledged asset is held by the pledgee – then upon expiration of 20 days from the date the pledgor is considered to have received the notification sent to him containing a proposal to perform the pledge-secured obligation (in the absence of documents held by the pledgee confirming the fact of performance of the pledge-secured obligation).
Furthermore, in the pledge agreement, the parties may agree on a period within which the disposal of the pledged movable property must be carried out. In this case, this period is counted from the expiration of 10 days from the day the pledgor is considered to have received the notification of foreclosure on the pledged property in accordance with the Pledge Law, and if the pledged asset is held by the pledgee, then from the expiration of 20 days from the date the pledgor is considered to have received the notification sent to him containing a proposal to perform the pledge-secured obligation (since it is from these moments that disposal of the pledged asset is permitted).
Consequences of Missing the Disposal Deadline for the Pledged Asset
Law No. 405-FZ expressly states that in case of missing the disposal deadline for the pledged asset, determined according to the Pledge Law or the pledge agreement, the pledgor has the right to demand compensation for losses caused by the disposal of the pledged asset after the established deadline. At the same time, the pledgee does not lose the right to dispose of the pledged property by the method indicated by it in the relevant notification.
Rules for Making an Executive Endorsement on a Pledge Agreement, an Agreement Entailing the Emergence of a Mortgage by Operation of Law, or a Mortgage Bond Have Been Amended
A notary's executive endorsement, as before the entry into force of Law No. 405-FZ, is required to carry out the procedure for foreclosure on the pledged asset in a compulsory manner (established by legislation on enforcement proceedings), but without applying to the court in cases where the parties have agreed on the condition of out-of-court foreclosure on the pledged property, and the pledgee is deprived of the opportunity to freely carry out the foreclosure procedure on the pledged asset (for example, if the pledgor refuses to transfer the pledged asset and documents necessary for its disposal to the pledgee). At the same time, a notary's executive endorsement (and, accordingly, notarization of the pledge agreement) is not required if the pledge agreement contains a condition on out-of-court foreclosure on the pledged asset and, according to the agreement, the pledged asset is held by the pledgee. Law No. 405-FZ changes the rules regulating the procedure for affixing a notary's executive endorsement.
A notary's executive endorsement can only be affixed if the agreement containing the condition on out-of-court foreclosure on the pledged property is notarized
When the pledgor and pledgee agree on the condition of out-of-court foreclosure on the pledged property, to obtain the possibility of making a notary's executive endorsement, the relevant pledge agreement (agreement entailing the emergence of a mortgage by operation of law) must be notarized.
No more than 2 years have passed from the day the obligation should have been performed
According to the Fundamentals of Legislation on Notaries as amended by Law No. 405-FZ, an executive endorsement is made if no more than 2 years have passed from the day the obligation should have been performed. Before the entry into force of Law No. 405-FZ, an executive endorsement could be made if no more than 3 years had passed from the moment the pledgee acquired the right to out-of-court foreclosure on the pledged property.
Requirements for documents submitted to the notary for making an executive endorsement have been clarified
Law No. 405-FZ clarifies some requirements for the documents on the basis of which the notary makes an executive endorsement, in particular for the following documents:
1. Calculation of the debtor's indebtedness. Such calculation must contain information on the amounts and dates of receipt of performance towards repayment of the debtor's obligations under the pledge-secured agreement.
2. An extract from the USRRE must confirm that the mortgage has not been terminated – such an extract must have an issue date no later than two weeks before applying to the notary.
Furthermore, when the rights of the pledgee under the mortgage-secured obligation are certified by a mortgage bond, the pledgee is not obliged to submit the mortgage agreement (agreement entailing the emergence of a mortgage by operation of law) to the notary if such agreements are not in its possession. In this case, the notary requests from the body carrying out state registration of rights to real estate and transactions with it a copy of the relevant agreement certified by that body. For such a request, Law No. 405-FZ endowed the notary with the appropriate powers, including those enshrined in the Federal Law of July 21, 1997, "On State Registration of Rights to Real Estate and Transactions Therewith."
The notary sending a notification to the pledgor and the debtor under the pledge-secured obligation with a proposal to perform the said obligation
In accordance with Law No. 405-FZ, the notary must send a notification to the pledgor and the debtor under the pledge-secured obligation with a proposal to perform it. Such notification is sent in the manner established by the legislation on pledges for sending notifications to the pledgor, debtor under the pledge-secured obligation.
Before the entry into force of Law No. 405-FZ, the notary had to send a notification about the upcoming making of an executive endorsement.
The pledgor is given 14 days after receiving the notification to submit documents confirming the fact of performance of the pledge-secured obligation
From the date the pledgor is considered to have received the proposal to perform the pledge-secured obligation sent to him by the notary, the pledgor is given 14 days to submit the following documents to the notary, in the absence of which the notary makes the executive endorsement:
a) documents confirming the fact of performance of the pledge-secured obligation; or
b) documents confirming the absence of grounds for foreclosure on the pledged property or the presence of grounds under which foreclosure is not allowed; or
c) evidence confirming the adoption of interim measures by a court or arbitral tribunal in relation to the pledged property. According to the Fundamentals of Legislation on Notaries as amended by Law No. 405-FZ, in case a court adopts interim measures in relation to the pledged property, established by procedural legislation, the performance of notarial acts must be postponed until the court cancels the relevant interim measures.
Before the entry into force of Law No. 405-FZ, the pledgor was given 7 days to send his objections to the notary. Moreover, the fact of the notary receiving objections from the debtor or pledgor regarding the pledge-secured obligation or foreclosure on the pledged asset was sufficient grounds for refusing to make the executive endorsement.
A Clear List of Grounds for the Notary's Refusal to Foreclose on the Pledged Property Has Been Established
The Fundamentals of Legislation on Notaries as amended by Law No. 405-FZ are supplemented by a new article, which expressly establishes the grounds for the notary's refusal to affix an executive endorsement on the pledge agreement (agreement entailing the emergence of a mortgage by operation of law, mortgage bond).
Such grounds are:
a) submission of the specified documents, in the absence of which the notary makes the executive endorsement; or
b) establishment by the notary of the absence of grounds for foreclosure on the pledged asset; or
c) establishment by the notary of the inadmissibility of foreclosure on the pledged asset (including if the breach of the pledge-secured obligation committed by the debtor is extremely insignificant and the amount of the pledgee's claims is clearly disproportionate to the value of the pledged property).