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)
Signed
agreement
and
Value given by
secured party
Debtor has rights
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 General rule: First to: or Purchase Money
General rule:
First to: or
Purchase
Money
exception
Ordinary
Course
Consumer
Goods
exceptions
Miscellaneous
Register
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

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