Pledge and retention of title under Russian LawPledge is a common solution for securing thesupplier’s interests under Russian law and it isgenerally easier accepted by the Russian customersif compared to the retention of title on the goodssupplied.
Pledge’s definition under Russian LawThe Russian law qualifies the pledge as a securityinterest granting to the Pledgee the right to obtainpayment of the amounts due from the value of thepledged goods with preference in respect of othercreditors, in case of failure of performance on thepart of the debtor.
Forms of Pledge under Russian Law The Russian lawexpressly provides for2different forms ofpledge:• pledge with transfer ofthe possession ofthe goods to the Pledgee;• pledge where the possessionof the goods remains with the Pledgor. This type of pledge is defined by the law as “hard pledge” in case there are marks on the pledged property attesting the pledge. However, the law does not regulate the “hard pledge” and therefore general rules onpledge apply.The pledge can be created on any type of movable property (whilst in case thesecurity is made on animmovable property the lawon hypothecs applies).
Legal pledge on the goods suppliedThe Russian law provides a legal pledge in favour of the seller on thegoods supplied, in case of delayed payment and payment byinstallments, until the complete payment of the contract price (suchprovisions apply only in casethe contractis governed by Russian law).However, it is advisable to stipulate a separate pledge contract, in orderto include a number of provisions finalized to a stronger protection ofthe Pledgee’s interests.
Pledge contract and related formalitiesThe pledge contract is valid if stipulated in written form (unless additional formalitiesrequested bythenature ofthesecured contract).The pledge contract shall indicate the subject matter of the pledge and its value, the contentof the secured obligations and the relevant amounts due, the terms of performance of theobligations, aswellastheindication ofthepartywhichshallhold thepledged goods.In case the pledge is referred to machinery and equipment, no registration is requested bythelawandthere isnopossibility toobtain sucharegistration neither onavoluntary basis.In case the Pledgor is a company/business it shall keep a special register of the pledgedgoods andshowsuchregister toanythirdparties, upon request.
The parties’ rights under the pledge obligationThe Pledgor can normally use the pledged goods according to itsnormal economical destination, unless otherwise provided bythe pledge contract.The Pledgor is not entitled to sell, rent or otherwise transfer thepledged goods without the Pledgee’s consent.The risk of loss or damages to the pledged goods is borne by thePledgor, if the latter holds the pledged goods.
Enforcement of pledge: right to claimThe Pledgee has the right to claim for the enforcement of the pledge in case thesecuredobligationisnotperformedorisimproperlyperformedontheduedate.However, the enforcement is not possible in case the contractual breach under thesecured obligation is of small importance and the amount claimed is too low ifcompared with the value of the pledged goods. In case the secured obligation shall beperformed by periodical payments, the enforcement of the pledge is possible in caseof“systematicbreach”ofthetermsofpayment.The Pledgee has the right to request the Pledgor the performance of the securedobligations before the due date (and consequently to request the enforcement of thepledge), in case of an unauthorized transfer of the pledged goods on the part of thePledgor.
Enforcement of pledge: the procedureThe Russian law provides a detailed procedure of sale of the pledged goodsin case of default.The general rule is that the sale of the pledged goods is carried out before thecourt. However, the parties can agree (also in the pledge contract) for an outof court sale procedure.The pledge contract may also provide the right for the Pledgee to (i) becomethe owner of the pledged goods in case of default, or (ii) sell the goodsdirectly to a third party. However, in both cases the Pledgee shall pay to thePledgor the difference between the current market value of the goods, asestimated by the expert, and the amount due under the secured obligation.
Enforcement of pledge: public auctionIfthepledgecontractprovidesforanoutofcourtsaleprocedure,thepledgedgoodsshallbesold by public auction, at the initial price amounting to the 80% of the market price asestimated bytheexpert (unless otherwise agreed bytheparties inthepledge contract).The public auction is not valid if (i) less than 2 bidders participate to the auction or (ii) theinitial price does not increase. In such case, a second public auction shall be held within amonth, withaninitial price reduced ofthe15%ofthepriceofthefirst auction.Incase the second public auction is not valid, the Pledgee is entitled to become the owner ofthe pledged goods for a price reduced of the 10% of the initial price of the second auction(provided that if such amount is higher than the amount of the secured obligation then thePledgeeshall paythedifference tothePledgor).In case the second public auction is not valid and the Pledgee does not buy the pledgedgoods, thenthepledge contract isterminated..
Enforcement of pledge: debtor’s rightsIn any moment before the transfer of the ownership of the goods,the debtor is entitled to interrupt/terminate the enforcementproceedings by performing the overdue secured obligation(even though the Pledgor has other pending secured obligationwhich are not expired vis-à-vis the Pledgee).Any waiver on the part of the Pledgor of the above right tointerrupt/terminate the enforcement proceedings by performingthe overdue secured obligation is null and void.