In general, it is worth noting that Resolution 23 contains over 90 provisions, most of which reinforce the position that is enshrined in the law and was earlier set out in:
- Resolution of the Plenum of the Higher Arbitrazh Court No. 10 of 17 February 2011, entitled “On Certain Issues with the Application of Legislation on Pledges” (“Resolution 10”), which is found to be inapplicable in connection with the adoption of Resolution 23; and
- Resolution of the Plenum of Supreme Court No. 45 of 24 December 2020, entitled “On Certain Issues with the Resolution of Disputes over Suretyship” (“Resolution 45”); the application of Resolution 45’s clarifications was dictated by the application of a number of provisions on suretyship to a pledge where the pledgor is a third party.
General points
Potential exemption of a third-party pledge from the rules on suretyship
According to article 335(1) of the Russian Civil Code, relations between the pledgor as a third party, the debtor under the obligation being secured and the pledgee must be subject to the provisions of articles 364-367 of the Russian Civil Code unless the law or the agreement between such persons provides otherwise.
Resolution 23Clause 2 of Resolution 23 reaffirms that the discretion, that the Russian Civil Code gives to the parties, is restricted by rules that are imperative by nature. For example, a third-party pledgor may not be restricted in its right to raise objections that could be raised by the debtor. Generally, the position set out in Resolution 23 is not brand new (for instance, Resolution 45 made it absolutely clear that the provision limiting the surety’s right to raise objections is null and void). At the same time, in practice, banks quite often exempt pledge agreements from the scope of articles 364-367 of the Russian Civil Code and, consequently, add a provision disabling a third-party pledgor from raising objections. Therefore, from a practical standpoint, the clarification in question can serve as an additional argument to be used by pledgors when negotiating the terms of a pledge agreement and it gives every reason to believe that provisions of the kind are null and void.
Forms of arrangements associated with a pledge agreement
According to article 339(3) of the Russian Civil Code, a pledge agreement must be concluded in a notarial form in the instances stipulated by law or by the agreement of the parties.
Resolution 23Clause 15 of Resolution 23 gives clarifications on the form of arrangements “associated with a pledge agreement”. Examples of such arrangements are the pledge management agreement and the pledgors’ agreement on the seniority of pledges. Such arrangements associated with the pledge agreement should be concluded in a simple written form, inter alia, with the notarial certification of the pledge agreement.
At the same time, we believe that depending on the terms and specifics of each particular deal, the conclusion of such arrangements may still require notarial certification.
Limiting the scope of claims secured by the pledge
If the pledgor and pledgee agree on a cap on the secured debt, such agreement must definitely be stated in the pledge agreement. Otherwise, according to article 337 of the Civil Code, the pledge will secure the claim to the amount that accrues by the repayment date (including interest, penalties, damages, etc). Therefore, according to the clarifications set out in Resolution 23Clause 30 of Resolution 23 contradictions and ambiguities concerning the existence of a limitation on the claim secured by the pledge should be interpreted in favour of the non-existence of such limitation. To be more specific, if a pledge agreement does not contain a provision on the amount of interest on the credit and the procedure for paying such interest, it is no testament that the claims secured by the pledge are limited only to the amount of the principal debt under the credit agreement.
Consequences of a change in the obligation secured by a pledge where the pledgor is the principal debtor
According to the clarifications set out in Resolution 23, in the event of a change in the principal obligation secured by a pledge (for example, a change in the interest rate or maturity of the credit), the pledge granted by the pledgor, being the debtor under this principal obligation, will generally apply to such changes in the principal obligation. The pledge agreement may provide for other consequences of a change in the obligation secured by the pledgeClause 32 of Resolution 23.
Obligations of the item’s owner as pledgor in the case of the continuation of the pledge
According to article 335(2) of the Russian Civil Code, if an item leaves the possession of its owner of the owner’s free will and is then pledged by another person (a person other than the owner) to a bona fide third-party pledgee, (i) the pledge over such item will continue and (ii) the owner of the item so pledged will incur the rights and obligations of the pledgor stipulated, among other things, by the pledge agreement. Therefore, the literal interpretation of the provision indicated that not only the pledge would continue as a right in rem, but also other obligations set out in the pledge agreement. Resolution 23Clause 43 of Resolution 23, however, contains a clarification that the owner of the item does not incur any additional obligations set out in the pledge agreement. More specifically, the condition on the extrajudicial enforcement of the pledge, the obligation to provide additional security, the obligation to substitute the collateral and the insurance obligation do not apply to the owner.
A bona fide pledgee within the meaning of article 335 of the Russian Civil Code is the pledgee who was not aware and should not have been aware of the fact that the item in question was pledged by a person who was not the owner of the item or was otherwise unauthorised to dispose of such item. At the same time, the pledge will not continue in cases when the pledged item left the possession of the owner, or of the person in whose possession it was put by the owner, against their will.
Enforcement issues
Enforcement in case of falling behind on regular paymentsAccording to article 348(3) of the Russian Civil Code, if a pledge secures an obligation that is being discharged through regular payments, the enforcement of the pledge becomes admissible if the obligor regularly falls behind on payments. Following this logic, Resolution 23 reaffirms that performance of an overdue portion of the obligation secured by a pledge (including payment of an overdue amount of the regular payment) stops the initiation of the enforcement of the pledge.
The Supreme Court reaffirmed the existing understandingClause 53 and 55 of Resolution 23 that in the case of debt acceleration resulting from a default on regular payments, the fact of the repayment of an overdue debt on regular payments will not serve as a ground preventing one from enforcing the pledge. In such case, the sale may only be stopped if the entire amount of debt payable before it matures (in an accelerated manner) is repaid before the court issues a judgement.
Minor violation criteria for enforcement purposes
Article 348(2) of the Russian Civil Code sets out the criteria of a minor violation enabling one to establish that the violation is not commensurate with the value of the pledge unless proven otherwise. If such criteria are met, enforcement of the pledge will not occur.
According to the clarifications set out in Resolution 23Clause 54 of Resolution 23, the criteria stipulated by the Russian Civil Code may be revised only upwards upon the agreement of the parties. For example, the agreement may state that a violation is deemed to be minor if the amount of the obligation defaulted on is less than 10% of the value of the pledge (instead of the 5% stipulated by the law).
However, if collateral is comprised of several items, then for the purpose of applying the minor violation criteria, one can take the value of one item rather than the value of the pledge as a whole. Enforcement of the pledge against all items may generally be stipulated by contract or by lawClause 56 of Resolution 23.
Extrajudicial enforcement agreement
An extrajudicial enforcement agreement may be executed as a separate document or may be incorporated in a pledge agreement. Unless the law provides otherwise, the parties may enter into such agreement at any time, inter alia, after concluding the pledge agreementClause 59 of Resolution 23.
Please note that if the extrajudicial enforcement agreement does not contain a condition on the value of the pledged item or the procedure for measuring such value, the extrajudicial enforcement procedure will be deemed non-agreed. In such case, enforcement will only be possible in courtClause 62 of Resolution 23. At the same time, Resolution 23 does not depart from a statutory provision written into the law that generally the sale price (starting sale price) is the value of the pledge negotiated by the parties and indicated in the pledge agreement (the so-called pledge valueClause 83 of Resolution 23). This requirement should be taken into account when drafting an extrajudicial enforcement agreement if such agreement is executed as a separate document.
Enforcing a pledge in court
According to article 348(1) of the Russian Civil Code, the pledged property may be foreclosed in the event of a default on or improper performance of the debtor’s obligations secured by the pledge. Resolution 23 clarifies that before bringing a claim to court, the pledgee does not need to (i) bring a claim against the debtor requesting the debtor to perform the obligation secured by the pledge, (ii) lodge a complaint or (iii) bring a lawsuit requesting the obligor be compelled to perform the obligation secured by the pledgeClause 65 of Resolution 23. The parties may agree otherwise in the pledge agreement.
This clarification is a logical continuation of an earlier position of the Supreme Court according to which the pledgee is generally not obliged to pursue a pre-trial dispute resolution procedure if it brings a claim only for the levy of execution on the pledged propertyClause 1 of an Overview of the Practice of Application, by Arbitrazh Courts, of the Provisions of Procedural Legislation on the Mandatory Pre-Trail Resolution of Disputes (as adopted by the Supreme Court's Presidium on 22 July 2020). However, if the pledgee at the same time also brings monetary claims, for example, a claim for the performance of the principal obligation, the pledgee will be obliged to pursue the pre-trial dispute resolution procedure in relation to the claims for recovering monetary funds.
Specifics of enforcing a pledge and selling collateral comprised of several items
Resolution 23 clarifies a number of issues associated with the enforcement of pledges and the sale of collateral in situations when the collateral is comprised of several items:
- as a rule, to determine whether the violation of an obligation secured by the pledge is a minor one, the amount of the outstanding obligation may be compared to the value of one of the items comprising the pledge rather than to the total value of the pledgeClause 56 of Resolution 23;
- it is allowed to establish the order of foreclosing on the items comprising the pledge. Such order may be established by court on the motion of the pledgor or pledgee or it may be set out in the pledge agreementClause 68 of Resolution 23;
- as a rule, the court may levy execution on some of the items comprising the pledge if:
- this is not contrary to the purpose of the property; and
- the pledgor succeeds in proving that the proceeds received from the sale of such items will be sufficient to fully satisfy the pledgee’s claims (which was also earlier reaffirmed in Resolution 10).
However, if the funds so received are insufficient to fully satisfy the pledgee’s claims, the pledgee may go to court to levy execution on the other portion of items comprising the pledgeClause 69 of Resolution 23; and
- where a public auction to sell the collateral comprised of several items is declared to have failed, the pledgor or pledgee may — before holding another public auction — bring a claim in court seeking to sell such items separately (which was also earlier reaffirmed in Resolution 10) and initiate a procedure for selling the pledged property from the very beginningClause 85 of Resolution 23.
Resolution 23 contains conditions for refuting the presumption of the market nature of the sales price of the collateral. For instance, the sales price of the collateral may be found to be non-market if the person concerned (the list is open-ended and includes the debtor, third-party pledgor and the subsequent pledgee) succeeds in proving:
- a breach of the procedure for holding an auction (including the non-transparency of the terms and conditions of such auction);
- a lack of publicity;
- a restriction of access to participation in the auction; and/or
- another significant violation of the auction procedure resulting in the incorrect determination of the sales price.
At the same time, the debtor may also challenge the value of the collateral that was determined by the pledgee when appropriating the collateral or selling it to another person with reference to the substantial variance between the price of sale or appropriation and its market value. In addition to this, Resolution 23 provides for various methods of defending the rights of the pledgor and the subsequent pledgee: the pledgor may seek to recover damages and the subsequent pledgee may seek to recover unjust enrichment if it is proven that in the absence of such variance the amount of proceeds to be received by the former pledgee in the course of such recovery should have exceeded the amount of the secured claimClause 74 of Resolution 23. We recommend taking these clarifications of the Supreme Court into account when devising a rights defence strategy for the relevant persons.
Enforcement in court in case of the violation of an extrajudicial procedure
According to article 350.1(3) of the Russian Civil Code, the pledgor has the right to bring a claim in court seeking to cancel extrajudicial enforcement where its rights are being violated or there is a significant risk of their violation. Examples of when such right emerges in practice are given in Resolution 23:
- the pledgee has commenced enforcement of the pledge in the absence of grounds for doing so;
- the pledgee has breached the procedure for holding an auction that affects the determination of the value of the collateral; and
- there have occurred objective unavoidable circumstances resulting, among other things, in a significant increase in the costs of selling the pledged item on an earlier agreed trading platform, in the restriction of access to the platform or a more complicated sales procedure;
The Resolution emphasises that the pledgor may take advantage of such right only before the completion of the collateral sales procedure. However, the pledgor may request that provisional remedies be put in place to suspend the enforcement and sale of the collateral until the determination of the claimClause 75 of Resolution 23.
Deferring the sale of collateral
Resolution 23 looks into issues of a deferred sale of collateral where enforcement against the pledged item occurs in court via a public auction procedure as is dictated by the legislation on enforcement proceedingsChapter 9 of Federal Law
In addition to statutory provisions, Resolution 23 sets out the conditions for granting a deferment. A court may therefore oblige the debtor or a third-party pledgor to periodically pay certain amounts on account of the repayment of the debt on the secured claim. The consequence of defaulting on such obligation is that the court may revoke the deferment on the motion of the pledgeeClause 78 of Resolution 23. However, if the debt on the secured claim is repaid while the deferment is still in place, the court’s order to enforce will be recognised, upon the application of the pledgor, as not being subject to further fulfilmentClause 82 of Resolution 23.
Resolution 23 also clarifies the provisions of the law on the duration of the deferment. It states the deferment may be given more than once, but its entire duration must not exceed one year of the date when the court order to enforce a pledge takes effect.
While being flexible in regulation, the Supreme Court points out that the deferment may be cancelled before its expiry date or that its terms may be revised in the event of a change of circumstances underlying the deferment. A motion to this effect can be brought by the pledgor or debtor or pledgeeClause 80 of Resolution 23.
Appropriating pledged Items
Resolution 23 reaffirms the approach deeply enshrined in the legislation and case law that the appropriation of collateral is generally admissible:
- by virtue of an extrajudicial pledge enforcement agreement; or TM·80 Enforcement of pledge
- in the case the auction is declared to have failed where the sale of the pledged item is by public auctionClause 89 of Resolution 23.
An exception to this rule is, for example, a situation when the price of appropriation of the pledged item by the pledgee following a failed auction exceeds the amount of the claim secured by the pledge. In such case, ownership title to the pledged item will be conferred on the pledgee only after it makes a payment that must be made within the time frames set for the auction participantsClause 91 of Resolution 23.
It is important to note that appropriation of a pledged item does not require the execution of a separate sale and purchase agreementClause 90 of Resolution 23.
