The choice of law for security documents usually depends on the location of the secured assets (e.g. intangible assets), or the governing law of the assets (e.g. contractual rights).
In Russia, the principal form of security is a pledge, which normally is entered into in connection with identified assets (subject to the discussion further below). In the case of competing pledges, the first in time by creation generally has priority. However, it is possible to change the priority of pledges by entering into an agreement between the pledgees, or between the pledgees and the respective pledgor. Russian law explicitly allows one pledge to secure different obligations of a borrower owed to different pledgees (lenders). The pledgees in this situation will be ranked equally unless they agree otherwise. In relation to the pledge of movable property (including rights), the priority may depend on the registration date in the register of notices of pledge over movable property (the “Movables Pledge Register”) as described below in more detail.
Under Russian law, a universal security instrument (such as an English law debenture), which might secure all assets of a company, is also available. However, it is virtually unregulated and it has not been tested in practice. Given that under Russian law pledging immovable property and pledging a participatory interest both require state registration, the pledge of all of a company’s assets is rarely used in practice. There is also a security instrument called a mortgage of an enterprise under Russian law, which may provide as security real estate, movable property, inventory, etc. However, because of practical difficulties in putting the security in place, it is also rarely used.
Pledges over particular types of assets (e.g. real estate, participatory interests and registered intellectual property rights) are recorded on specific public registers. The pledge of goods in circulation must be recorded in a “pledge book”, which is maintained by the company (pledgor) and which the pledgee may inspect.
A pledgee and a pledgor may register a pledge of movable property in the Movables Pledge Register through a notary. Although registration is not obligatory for the parties, if they do so, they will be afforded with some benefits. The pledgee whose pledge is registered in the first place will enjoy enforcement priority rights. If a subsequent pledge is registered before an initial unregistered pledge, the subsequent pledgee will have the first ranking security of the pledged asset.
A pledgor needs to have title to the secured assets and although the pledge can be “possessory” or “non-possessory”, the secured party need not take possession of the secured assets. A pledge needs to be in writing and needs to accurately identify the pledged assets, the secured obligations and their term.
The following points are worth noting, in relation to certain types of assets.
Shares or participatory interests
A pledge of shares held directly in a joint-stock company must be registered in the joint-stock company’s register (which must be held by an independent licensed company). If shares in a joint-stock company are held by a depository, then its involvement is required, and the pledge is registered with the depository. In this case, the shares may not be disposed of without the pledgee’s consent.
For participatory interests in limited liability companies, pledges must be notarised and registered in the public Unified State Register of Legal Entities. The pledge of participatory interests becomes effective from the date of its registration on such register.
Contractual and intellectual property rights
Pledges over rights will require notice to be given to the relevant counterparties, and in some cases the consent of counterparties obtained.
If intellectual property rights are registered, the pledge will require registration with the relevant intellectual property register. Pledges over contractual rights may be registered in the Movables Pledge Register.