Pledge

underRussianLaw

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 LawTheRussianlawexpressly providesfor2differentformsofpledge:

• pledgewithtransferofthepossessionofthegoodstothePledgee;

• pledgewherethepossessionofthegoodsremainswiththePledgor.Thistypeof pledge is defined by the law as “hard pledge” in case there are marks onthe pledged property attesting the pledge. However, the law does notregulatethe“hardpledge”andthereforegeneralrulesonpledgeapply.

The pledge can be created on any type of movable property (whilst in case thesecurity ismadeonanimmovablepropertythelawonhypothecsapplies).

Legal pledge

on the goods supplied

The 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 (suchprovisionsapplyonlyincasethecontractisgovernedbyRussianlaw).

However, it is advisable to stipulate a separate pledge contract, in orderto include a number of provisions finalized to a stronger protection ofthePledgee’sinterests.

Pledge contract

and related formalities The pledge contract is valid if stipulated in written form (unless additional formalitiesrequestedbythenatureofthesecuredcontract).

The pledgecontractshall indicate thesubject matterof the pledgeandits value, thecontentof the secured obligations and the relevant amounts due, the terms of performance of theobligations,aswellastheindicationofthepartywhichshallholdthepledgedgoods.

In case the pledge is referred to machinery and equipment, no registration is requested bythelawandthereisnopossibilitytoobtainsucharegistrationneitheronavoluntarybasis.

In case the Pledgor is a company/business it shall keep a special register of the pledged

goodsandshowsuchregistertoanythirdparties,uponrequest.

The parties’ rights under the pledge obligation

The 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 claim The 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 ifcomparedwiththevalueof thepledgedgoods. Incasethesecuredobligationshallbeperformed 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 lawprovidesa detailed procedureofsale of thepledged goodsincaseofdefault.

Thegeneralrule is that thesaleof thepledgedgoodsiscarriedoutbeforethecourt. However, the parties can agree (also in the pledge contract) for an outofcourtsaleprocedure.

The pledge contract mayalso provide the right for the Pledgeeto (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 bytheexpert,andtheamountdueunderthesecuredobligation.

Enforcement of pledge: public auctionIfthepledgecontractprovidesforanoutofcourtsaleprocedure,thepledgedgoodsshallbesold by public auction, at the initial price amounting to the 80% of the market price asestimatedbytheexpert(unlessotherwiseagreedbytheparties inthepledgecontract).

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,withaninitialpricereducedofthe15%ofthepriceofthefirstauction.

Incasethesecondpublicauctionisnotvalid, thePledgeeisentitledtobecometheownerofthe pledged goods for a price reduced of the 10% of the initial price of the second auction(providedthat if suchamount is higher thantheamountof thesecuredobligationthenthePledgeeshallpaythedifferencetothePledgor).

In case the second public auction is not valid and the Pledgee does not buy the pledgedgoods,thenthepledgecontract isterminated.

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Enforcement of pledge: debtor’s rights

Inany momentbefore the transfer of the ownershipof 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.

Pledge

underRussianLaw