1. Legal and Institutional
Frameworks for Secured Lending
Moscow
December 2012

2. Antecedent Work on Reform
• EBRD critique and recommendations on
Codification Committee’s 2010 draft
amendments to Chapter 23 of Civil Code
• Identified positive changes in draft and
numerous remaining deficiencies
• Developed proposed amendments to draft
that is now before Duma (without those
amendments)

3. Determine Approach to Reform
• Amend existing law or replace? The question
needs to be considered
• Start by describing the desired end state, by
whatever route it is reached
• At the highest abstract level, end state must fit
core concepts of modern secured lending, to
be addressed serially as:
– Comprehensive coverage
– Functional approach
– Flexibility and autonomy of parties
– Simplicity

4. Comprehensive Coverage
• One set of rules for all arrangements in which
an obligation (monetary or otherwise) is
secured by a legal interest in movable property
• All types of:
– Parties – natural and juridical
– Legal forms of security
– Movable property

5. Functional Approach
• Not defined by narrow rules of specific legal
forms of interest in movable property
• Concerned with what the transaction
does, not what name we use for it
• Approach does not require abolishment of
legal forms, only that they be treated with one
set of rules with regard to coverage of this law

6. Flexibility and Party Autonomy
• Principally with respect to description of the
obligation and property
• Also with respect to other terms of agreement
such as definition of terms of default
• General idea is that parties should be free to
frame their own agreements within broad
scope of the law

7. Simplicity
• No requirements that are not necessary to
core purpose of law
• Eliminate formalities, e.g. notarization of
agreements
• Eliminate need for paper in registration
• KISS rule as guiding mantra

8. Legal Framework
Framework must have four major
components – may be in different legal
sources, e.g. CC, special law, regulation
• Creation of security interest
• Priority scheme and requirements
• Registration and registry
• Enforcement
Will address each in turn

9. Component 1 – Creation of Security
Interest
• Parties make security agreement
• Agreement in writing – any tangible
medium
• Parties set own terms – no
unnecessary requirements in law
• Binding on parties upon conclusion of
agreement – no registration required

10. A Security Interest May:
Secure one or more obligations that
may:
• Be described specifically or generally
• Be monetary or non-monetary
• Be pre-existing, present or future; or a
line of credit

11. Description of Collateral
• Description may be specific or general;
may include future collateral
• Must reasonably identify collateral
• “All equipment” or “all accounts
receivable” is sufficient description
• Purchase money exception – specific
description necessary

12. Types of Interests Covered
• Pledge
• Chattel mortgage
• Sale with retained title
• Installment seller’s right to re-take
• Finance lease
• Other interest in movables that secures
an obligation

13. Types of Movables
• Equipment
• Inventory and raw goods
• Cash-flows (receivables & secured sales
contracts)
• Intangibles and documents (e.g.
securities, warehouse
receipts, instruments, contract
rights, intellectual property, etc.)
• Crops and livestock
• Fixtures – movables fixed to real estate
• Consumer goods
• Cash & deposit accounts
• Minerals and timber to be severed from land

14. Attachment (Effectiveness between
Parties) of Security Interest
Attachment relates to making the security
interest enforceable between the parties
Three requisites:
• Security agreement signed by debtor
• Secured party has given value
• Debtor has rights in the collateral (not
necessarily ownership)
A security interest attaches to proceeds of
original collateral

15. Attachment of Security Interest
(legal enforceability)
Attachment
Signed Value given by Debtor has rights
and and
agreement secured party in collateral

16. Continuity of Security Interest
• General Rule: Security interest
continues in collateral even if
sold, leased, licensed or otherwise
disposed
• Exceptions are laid out in Law

17. Component 2 – Priority Scheme
• General principle – priority determined
by when security interest is made
transparent, e.g. by registration,
possession or control
• Exceptions:
– Purchase money
– Proceeds
– Purchase in ordinary course of business

18. Perfection a/k/a Completion or
Third Party Effectiveness
• Perfection means optimization of secured
creditor’s rights against third parties
• Generally achieved by making security interest
transparent
• Requires attachment and means of perfection
• Four means of perfection:
– Registering notice in registry
– Possession
– Control
– Automatic (purchase money, proceeds)

19. Priority Rules
Priority
Purchase Ordinary Consumer
General rule: Miscellaneous
or Money or Course or Goods or
First to: exceptions
exception exception exceptions
Register or Perfect

20. Priority Is Against Following:
• Buyers of collateral
• Unsecured creditors
• Other secured creditors
• Lessors of equipment
• Bankruptcy liquidator
• Other interests (government and
judgment liens, etc.) if politically
possible to include in law

21. Special Priority Provisions Facilitate
MSME and Agricultural Financing
• Purchase money security interest has priority
over security interest in a class of movables;
enables business to use second financer for
purchase of a specific asset
• Interest in crops, growing or to be grown has
priority over interests in the land
• Interest in crops or livestock for costs of
production has priority over a general security
interest in crops or livestock

22. Component 3 – Registration and Registry
• Secured party registers only a notice, not
the security agreement
• Notice includes only:
– Debtor name or identification number
– Secured party name and address
– Description of collateral – general or specific
• No formalities required – notice does not
create rights; it only publicizes the interest

23. Purpose of Registry
• To give notice of the secured creditor’s
interest in the collateral
• To establish the secured creditor’s
priority by time of registration of the
notice

24. Core Tenets of Registry
• Notice registration
• Unified as to types of movable property
and types of legal interests
• Centralized – geographically and
structurally
• Observe international best practices
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25. Registry Best Practices
• Accuracy – capture exactly information presented
• Speed – speed of registration and searching
• Accessibility – any time, from any place
• Cost effectiveness – fees cover costs of operation; not
general revenue source for government
• Simplicity – reduce risk of error and encourage use
• Limited to purposes of registration – give notice and
establish priority
• Rule-based decision-making – no bureaucratic
discretion in registration and searching

26. Form of Registry
• Electronic registry – web-based
• Accessible to all via internet
• Automated acceptance or rejection
• Reliable, fully automated search process
• No unnecessary formalities for registration
• Uniform treatment of notices of all types
• Automated fee payment system
• Secure from tampering and corruption

27. Component 4 – Enforcement
• Secured creditor has immediate right to
possession of collateral
• Self-help or expedited judicial action
• Secured creditor may dispose of collateral in
commercially reasonable manner
• Distribution of proceeds in priority order
• Secured creditor has fiduciary duty to
debtor and other claimants, including notice