Amendments to the Russian Civil Code on financial transactions
On 1 June 2018, a Federal Law* (the “Law”), which significantly impacts the regulation of Russia’s financial sector, came into force, and must be considered when structuring financial transactions.
The Law amends, among others, the first and second parts of the Russian Civil Code (the “Civil Code”), Federal Law No. 17-FZ “On Banks and Banking Activities, Federal Law No. 102-FZ “On Mortgage (Real Estate Pledge)” and Federal Law No. 127-FZ “On Insolvency (Bankruptcy)” (the “Bankruptcy Law”).
Below we outline key changes affecting:
- loan and credit agreements;
- escrow accounts and escrow agreements;
- letters of credit;
- cash pooling;
- joint accounts; and
Loan and credit agreements
Under the Law, a loan agreement (“dogovor zayma”) is deemed to be concluded as soon as the amount of the loan is agreed and not when the funds are provided. The lender is obliged to grant the loan, and if it does not do so, the borrower is entitled to claim damages for improper performance of the loan agreement by the lender.
Previously, loan agreements were considered concluded only upon transfer of the money or material goods and did not establish any rights and obligations binding on the parties before the provision of the funds or goods.
The Law also entrenches the approach developed by court practice whereby the banks have a right to charge various commissions and fees in connection with the provision of a credit facility, which significantly lowers the risk of such commissions and fees being challenged in court.
The following has also now been established at the legislative level: the right of a creditor under a credit agreement concluded between legal entities to demand early repayment in cases provided by the credit agreement.
Escrow accounts and escrow agreements
The Law amends the section on escrow accounts and introduces a new concept of “escrow agreement”, which was not previously covered in legislation:
- The procedure for identifying the ownership of funds on an escrow account is now established. Before the date on which the transfer of funds is to occur, the funds in the escrow account belong to the depositor, and after this date – to the beneficiary.
- Unlike escrow accounts, under escrow agreements, not only funds, but also non-documentary securities, as well as any other movable assets can be deposited. For example, escrow instruments could be used in transactions for the sale and transfer of shares.
- While in relation to an escrow account, functions of the escrow agent can only be performed by banks, any person can be an escrow agent under an escrow agreement. If non-cash funds are deposited, and the escrow agent does not have the status of a bank, a nominal escrow agent account (not an escrow account) is to be used.
- The deposited assets cannot be seized to satisfy the claims of creditors of the depositor or the escrow agent. At the same time, creditors of the beneficiary can enforce the beneficiary’s right to require the transfer of the deposited assets from the escrow agent.
- Amendments to the Bankruptcy Law provide that the bankruptcy of a depositor does not prevent the escrow agent from transferring assets to the beneficiary to fulfil the obligations of the depositor. Thus, the deposited assets are not subject to inclusion in the bankruptcy estate of the debtor (unless the grounds for transferring the assets to the beneficiary do not occur within six months from the beginning of bankruptcy proceedings).
Letters of credit
The Law also amends the provisions on letters of credit:
- The concept of a “transferable letter of credit” is introduced in the Civil Code for the first time.
- A transferable letter of credit allows the beneficiary to specify another person in favour of whom the letter of credit will be fulfilled (the second beneficiary of funds), without the rules on the substitution of persons in an obligation applying in this case.
- By default, the letter of credit is considered irrevocable (previously, the opposite rule was in effect).
Amendments concerning cash pooling
Previous Russian legislation did not provide for any special regulation of cash pooling. Therefore, the existing cash pooling products of Russian banks are usually structured using a system of “reciprocal” loan agreements between the pool’s master company and the pool’s member companies.
The new version of paragraph 3 of Article 847 of the Civil Code establishes that the bank executes an order to write off funds when there are not enough funds on an account. This applies if the account is included in a group of bank accounts (which may belong to different persons), and on all the accounts of the group there are sufficient funds to execute such an order. At the same time, writing off is not the same as crediting the account. In fact, such an amendment makes it possible to consider several accounts as a single “pool”, which can be used by banks to structure group cash pooling products. However, in the absence of an explanation by the Central Bank of Russia (eg the definition and procedure for creating a group of accounts are unclear), it is premature to talk about the introduction of full regulation of cash pooling in Russia.
The Law defines the rules for maintaining a new type of bank account: a joint account, which is used for the funds of several individuals. Clients can determine the proportions in which they own the funds held in the account. By default, these funds are owned by the clients in proportion to the amount that each client transferred to the account. Also, the Law does not allow the seizure of funds held on a joint account in an amount exceeding the proportion of funds owned by one of the owners.
The Law introduces significant changes to the provisions of Chapter 43 of the Civil Code, which regulates factoring agreements.
Key changes affect the subject matter of a factoring agreement. Currently, under such an agreement, the financial agent (factor) undertakes to effect at least two operations in respect of the assigned monetary claims (out of the four operations envisaged by the new version) in favour of the client. These operations include the ability:
- to transfer funds to the client for monetary claims, including in the form of a loan or an advance payment;
- to account for the client’s monetary claims against third parties (debtors);
- to exercise the rights under the client’s monetary claims, including presenting debtors with monetary claims for payment, receiving payments from debtors and making settlements related to monetary claims; and
- to exercise rights under contracts to secure the performance of debtors’ obligations.
Now by virtue of this Law:
- the concepts of “factoring”, “factoring agreement” and “factor” are formally introduced;
- the rights of the financial agent (factor) to the amounts received from the debtor are specified, taking into account the purpose of the assignment; and
- the time when existing and future monetary claims pass to the financial agent (factor) is specified.
The new version of paragraph 7 of Article 448 of the Civil Code allows the assignment of monetary claims arising from agreements which can only be concluded through a tender procedure. As a result, there is no longer a question of whether monetary claims under contracts originating from tender proceedings are assignable.
* In Russian