Bank finance and regulation. Multi-jurisdictional survey. Belarus. Enforcement of security interests in banking transactions

Transcription

1 Bank finance and regulation Multi-jurisdictional survey Belarus Enforcement of security interests in banking transactions Anna Rusetskaya and Natallia Kaliuta Magisters, Minsk Part II types of security 1. What are the most common types of security in banking transactions in your jurisdiction (eg, standard security package)? Please provide a brief characteristic of each type of security. According to the Banking Code of the Republic of Belarus, the following types of security may be used to secure banking transactions: pledge, mortgage, suretyship, guaranteed deposit of monetary funds; transfer of legal title to the property (including property rights); other types of security provided by the law or stipulated by the agreement of the parties. According to the Civil Code of the Republic of Belarus, such other types of security provided by the law include penalties (all credit agreements include penalty clauses as a security) and retention, the latter being inapplicable to banking transactions. The standard security package depends on the type and amount of the respective banking transaction and includes, as a rule, real estate mortgage or pledge with respect to the borrower s movable assets (rights), suretyship, and transfer of title to the property. These four types of security shall be reviewed in detail in the present report. is one of the most common collaterals applied by Belarusian banks, largely due to it being free and relatively easy way of securing an obligation. Practically, all kinds of property shall be subject to pledge. Exceptions shall extend to the property which has restricted commercial restricted use (eg, weapons, drugs, etc). The pledged object may either remain in the debtor s possession or shall be transferred to the creditor. does not immediately result in the title transfer for the pledged object to the pledgee. entitles the creditor to enforce its claims from the object of pledge. Generally, the creditor which obligations are secured shall have priority before other creditors of the owner of the pledged object, with some exceptions for the state, employees and certain individuals under their social security and alimony claims. is considered to be an accessory to the secured obligation which means that it follows the secured obligation, ie, even if the title to the pledged assets was subject to subsequent changes, security of the respective obligation shall not terminate and shall pass to the new titleholder. shall be executed in writing and may be subject to additional registration or certification depending on the pledge object (eg, real estate, intellectual property rights, 1

2 company shares, etc.). of property or rights to the property securing obligations under a contract subject to public notary certification, shall also be subject to notary certification (which is not common for banking transactions but takes place if prescribed by the law). Only banks disposing of the respective license may act as pledgees of land plot lease rights. Mortgage Mortgage is the most commonly used security with respect to the real estate. In the same manner as with the pledge, mortgage shall not lead to transfer of legal title to the real estate from the debtor to the creditor. Rather, mortgage entitles the creditor to enforce its claims from the real estate notwithstanding change of the title to the real estate, in priority order as compared with the remaining creditors (with a few exceptions to be specified in Part II). Mortgage becomes effective upon its registration with the National Cadastre Agency of the Republic of Belarus. Subject to mortgage shall be: real estate objects, property which according to the laws is equated to immovable property, including has not been yet established. Neither subsoil, water objects, nor woods shall be subject to mortgage; the same goes for property which may not be seized under the law. Mortgage regulations have peculiarities depending on the mortgage object (eg, commercial real estate, residential real estate, or land plots); on the private or public ownership of the mortgage object; on the type of secured transaction; and on whether the debtor is a legal entity or an individual. Formalities associated with entering into mortgage may include the requirement of its notary certification, registration, consent of certain public authorities or the debtor s family members; etc. More detailed description of mortgage formalities is provided below. Depending on the mortgage type, its entering into may involve certain costs, such as notary and registration fees 1. Mortgage registration in the register of real estate, rights to it and deals with it may take up to 14 business days. Suretyship 2 Suretyship is one of the most common securities in Belarus. Under suretyship agreement, the surety undertakes to be liable to the creditor of another person (debtor) for the performance by the latter of its obligations in full or in part, including obligations that shall arise in the future. Suretyship agreement shall be entered into in writing otherwise, it shall be invalid. In case of failure to perform or improper performance by the debtor of an obligation secured by the suretyship, the surety and the debtor shall be jointly and severally liable to the creditor, unless otherwise provided by the law or by the suretyship. The surety shall be liable to the creditor in the same amount as the debtor, including interest payments, compensation for court costs relating to recovery of the debt, and other losses of the creditor caused by failure to perform or improper performance of the debtor s obligation, unless otherwise provided by the suretyship. If a lawsuit is filed against the surety, the latter is obliged to involve the debtor in the case. Otherwise, the debtor shall be entitled to address the objections which it has against the creditor, to the surety. The surety who fulfilled an obligation, obtains the creditor s rights as well as the right to require from the debtor interest payments for the amount paid to the 1 Collectively estimated 50 EUR. 2 Although this type of security interest is commonly used to secure various types of obligations, due to absence of special provisions and requirements, it shall not be described in detail below. 2

3 creditor and compensation of other losses incurred in connection with performance for the debtor. Suretyship terminates upon expiration of the period for which it was provided as specified in the suretyship agreement. If such period has not been established, it shall terminate upon expiration of one year after the secured performance becomes due if the creditor does not file a lawsuit against the surety. If the period for performance of the secured obligation cannot be determined, suretyship shall terminate if the creditor has not files a suit against the surety within two years from the date the suretyship agreement is entered into. Suretyship also terminates if the creditor refuses to accept due performance by the surety or the debtor; if the secured obligation is assigned without the surety s approval and in case of significant change of circumstances increasing the surety s liability, unless the surety s prior approval consent was obtained. Public bodies and commercial companies acting according to the decisions of public bodies shall not act as sureties under bank loans. Under the Banking Code of Belarus, transfer of legal right to property may be used only to secure obligations under loan agreements. This is a type of collateral that provides for security transfer of title to specific assets from debtor to the bank. Initially, only the borrower s title could have been transferred to the bank. According to the 2006 amendments to the Banking Code of Belarus, third persons titles to property can also be transferred to the bank to secure the borrower s obligations under a loan agreement. Transfer of the title to property does not imply transfer of the property, unless otherwise stipulated by the contract. If the borrower fails to repay the credit within the time period established by the credit contract, the bank obtains the right to the property without the need to recourse to judicial proceedings. If the value of the property specified in the contract on transfer of the legal title to property exceeds the amount of claims of the lender under the credit contract, the lender is obliged to pay the difference within the time period established by such contract. The contract on the transfer of the legal title to property shall stipulate the right of the borrower to repurchase the property transferred to the lender by repaying the credit (right of redemption) within the time period for repayment (reimbursement) of the credit determined in the loan agreement. The lender may not to alienate the property before the expiration of the time period for the exercise of the redemption right. Relationships between the borrower and the lender under the contract on transfer of the legal title to property, which are not regulated by the Banking Code of Belarus, are regulated by the respective provisions on sales contracts. In cases stipulated by law, contracts providing for transfer of legal title to property, are subject to state registration in the manner prescribed by sales contracts. 2. In relation to the following types of assets, please provide the types of security that can be created or granted in your jurisdiction and give details of any registrations required: (a) Real estate; Mortgage Establishment of a mortgage requires entry into the State register of real estate, right to it and deals with it. The following formalities apply with regard to mortgage of certain types of property: 3

4 Land plots Only privately owned land plots can be subject to mortgage. Land plot mortgage may be used to secure a loan agreement only by banks licensed to allocate the borrowed finances. The land plot remains in the property and use of the pledgor. Privately owned land plots allotted for construction, can be subject to mortgage only in conjunction with mortgage for the respective objects of construction. By contrast, mortgage of buildings and other objects of construction do not lead to the mortgage of the land plot these premises are located on. The cost of a land plot subject to mortgage cannot be determined below its cadastral cost. Residential real estate Upon execution of a mortgage agreement with regard to residential real estate (house, flat), consent of all adult members of the family of the owner is required. Mortgage of a housing where minors, impaired or incapable persons reside is allowed only in order to secure performance of obligations under loan agreements aimed at improvement of housing conditions, and under the written permission of the public authority of trusteeship and guardianship. The authority of trusteeship and guardianship may refuse to provide the permit if the minors residing in the dwelling are considered to be endangered. There is no common method to define the cost of housing (premises) for the purposes of the mortgage agreement. According to the law, the cost of the property subject to mortgage is determined according to the agreement of the parties. The cost of capital structure located on a land plot shall not be lower its market value. Commercial real estate Establishment of commercial real estate mortgage requires entry into the State register of real estate, right to it and deals with it. to the property to a lender Agreement on transfer of legal title to real estate to lender is subject to state registration. Legal provisions of sale and purchase agreement apply to relations of the pledgor and pledgee entering into an agreement on transfer of legal title to property. (b) Charging assets (inventory, stocks etc); Establishing a pledge requires a written agreement between the pledgee and pledgor (the owner of the pledged assets). agreement on charging assets shall define the type of pledged assets, other generic features, the total cost of objects of pledge, the place of location as well as types of goods which may replace the object of pledge. to the property to a lender Agreement on transfer of legal title to charging assets to the lender shall be executed in writing. Legal provisions on sales agreements are applied to the relations of the pledgor and pledgee within the agreement on transfer of legal title to the property. (c) Movables; Please see comments on charging assets. to the property to a lender 4

5 Please see comments on charging assets. (d) Shares; There are two types of shares in the charter capital of legal entities: shares not being security instruments and shares recognised as securities. Shares in equity ownership also have specific regulation. Non-securities shares These are the shares in the charter capital of such legal entities as limited liability company, companies with supplementary liability, etc. Establishing a pledge on shares requires a written agreement between the pledgee and pledgor (the shareholder). Notarial certification of pledge may be mandatory if the constituent documents require notarisation of pledge of shares or if the constituent documents have been notarised, unless otherwise agreed by the parties. No registration of pledge is required, unless otherwise agreed by the parties. However, constituent documents of a legal entity may contain restrictions on transfer of shares in the charter capital (including pledge). In order to pledge a share of a limited liability company, companies with supplementary liability, consent of the General Shareholders Meeting is required. Such resolution shall be passed by the majority of votes of all other shareholders of the legal entity without the votes of the pledgor, unless more votes are required by the constituent documents. As for the other corporate forms (production cooperative, partnerships, etc.), Belarusian legislation is silent on the issue of pledge of their shares. Respective regulation or restrictions may be determined by their constituent documents. of shares belonging to the Republic of Belarus requires resolution of the President of the Republic of Belarus. to shares is not specifically stipulated by Belarusian legislation. Legal provisions regulating sale and purchase transactions are in addition applied to such transfers. to shares requires a written agreement between the transferee and the transferor. No registration or notary certification is required, unless otherwise stipulated by the constituent documents. Constituent documents may contain restrictions on transfer of legal title to shares in the charter capital or require preliminary consent of the other shareholders or the General Shareholders Meeting. Shares (stocks) which are securities These are shares issued by joint stock companies. Establishing pledge requires a written agreement between the pledgee and pledgor (the shareholder) and registration of the pledge agreement by professional participant of equity market (depositary). Information on pledge of shares shall be included in the central system of registration of rights to securities. The depositary shall freeze the pledged securities on the account depot of the pledgor. 5

6 Under general rule, the consent of the General Shareholders Meeting for pledge of shares is not required. of shares does not entail transfer to the pledgee of the rights certified by such securities. A shareholder of the bank-lender may not pledge its shares in the bank-lender as security for fulfillment of obligations under the credit agreement with the bank-lender. of shares belonging to the Republic of Belarus requires resolution of the President of the Republic of Belarus. to shares is not specifically stipulated by Belarusian legislation. Legal provisions regulating sale and purchase transactions are applied to such transfers in addition. to shares requires a written agreement between the transferee and transferor and registration of the pledge agreement by professional participant of equity market (depositary). The Charter of a closed joint-stock company may require preliminary consent of the company (all of its shareholders) for pledge of the company s shares. Implementation of this type of security may be problematic in practice as the procedure of its registration by depositaries is not stipulated by Belarusian legislation and it is likely that a depositary may refuse to register the relevant agreement. Shares in equity ownership Establishing a pledge requires a written agreement between the pledgee and pledgor (the shareholder) without any registration of the pledge, except for cases when object of equity ownership is property deals with which shall be registered (eg, real estate, securities). to shares is not specially stipulated by Belarusian legislation. Legal provisions regulating sale and purchase transactions are applied to such transfers in addition. to shares requires a written agreement between the transferee and transferor. Registration is not required, except for cases when the law requires that deals with the object of equity ownership are registered or notarised (eg, real estate, securities). (e) Rights under contracts (receivables); Rights to receive money for supplied goods, fulfilled works, rendered services as well as rights to receive prepaid goods, rights under lease agreements may be subject to pledge. Establishing a pledge requires a written agreement between the pledgee and pledgor (being owner of the pledged receivables). No registration is required, except for cases when the right under the contract arises out of or in connection with the property, deals with which are subject to registration (eg, real estate, securities). The agreement on pledge of rights may be executed by pledging the document which certifies the pledged right. A fixed-term right may be subject to pledge only within the term of its validity. 6

7 Before establishing a pledge examination is needed whether disposal of receivables requires any consent of third party or is totally restricted. If such consent is required the pledgor shall obtain it in writing. of the right to lease may be established upon consent of the lessor, unless otherwise stipulated by the lease agreement. The lease right to land plot may be subject to pledge if the right to execute such lease agreement is paid for. Only authorised banks can be pledgeеs of the lease right to land plots. requires a written agreement between the transferee and transferor. No registration is required, except for cases when the respective right arises out or is connected with property, deals with which are subject to registration (eg, real estate, securities). Verification is needed whether disposal of receivables requires consent of a third party or is totally restricted. If such consent is required, the pledgor must obtain it in written form. (f) Bank accounts; Under Belarusian law, bank accounts are not an object of security. However, the banks may execute uncontested recovery of the accountholder s obligations before the bank from the funds on the debtor s accounts. (g) Financial instruments (eg, securities); Establishing pledge for non-documentary securities requires a written agreement between the pledgee and pledgor and registration of the pledge agreement by professional organisation of the equity market (depositary). Information on pledge of shares shall be included into the central system of registration of rights to securities. of documentary securities is established upon written agreement between the pledgee and pledgor by handing these securities over to the pledgee or their transfer to deposit of a notary or bank. of securities may be fulfilled with or without transfer to pledgee of the rights certified by such securities. Depositary shall freeze the pledged securities on the account depot of the pledgee or pledgor according to the pledge agreement. The rights under a mortgage certificate can be pledged. Transfer of the mortgage certificate to the pledgee is not required. Mortgage certificates can be issued in documentary and nondocumentary forms, which are accounted in depositary system. of mortgage certificate must be executed in writing and is subject to registration by the National Cadastre Agency of the Republic of Belarus. to securities is not specifically regulated by Belarusian legislation. Legal provisions regulating sale and purchase transactions are applied in addition to such transfers. to securities requires a written agreement between the transferee and transferor and registration of the pledge agreement by professional organisation of the equity market (depositary). Implementation of this type of security may be problematic in practice as the procedure of its registration by depositaries is not stipulated by Belarusian legislation and it is likely that a depositary may refuse to register the respective agreement. Intellectual property 7

8 Security interests to intellectual property rights are not commonly used in Belarus. Due to close connection in its nature with the author s identity, disposal of certain intellectual property rights may be limited either by law (for example, such non-property rights as the right to authorship, the right to the name, etc) or by license agreements entered into by the author. The author would more commonly pledge its right to remuneration for the object of intellectual property. Establishment of a pledge requires a written agreement between the pledgee and pledgor. Agreements of pledge of the property rights for inventions, useful models, industrial samples, kinds of plants, and topologies of integrated microcircuits protected in Belarus are subject to registration in the State register of licence agreements, cession agreements, agreements of pledge of the rights for the objects of industrial property of Belarus. Failure to register such pledge agreements makes them voidable. The parties of a trade mark pledge agreement are obliged to notify the patent authority about entering into, amendment and cancellation of such agreement. There is no requirement for registration of this agreement. to the property to a lender Theoretically, transfer of legal title to intellectual property rights to a lender is possible in Belarus. At the same time, registration of such agreements is not stipulated directly in the legislation. (h) Plant and machinery; Mortgage A plant as a property complex used for conducting business may be subject to mortgage. The plant structure as a property complex includes all kinds of property intended for its activity, including land plots, buildings, constructions, equipment, stock, raw materials, production, requirement rights, debts as well as rights to means of individualisation of the plant, its production, works and services (company name, trade marks), and other exclusive rights. The enterprise as a whole is equated to real estate object and can be mortgage object after state registration of a plant as a real estate object. The mortgage shall be subject to subsequent state registration in the order established for the real estate objects. Please see comments for Real estate. Parts of a plant including separate movable property: equipment, stock, raw materials, production, etc., as well as machinery may be subject to pledge. Please see comments made on charging assets. to the property to a lender Please see comments made on real estate and charging assets. (i) Other assets. Please see comments on charging assets. Transfer of title to property 8

9 Please see comments on charging assets. 3 Can a trustee or security agent be used in your jurisdiction, or must security be granted in favour of all lenders? Is the parallel debt clause concept recognised in your jurisdiction? The notion of a security agent is not regulated under Belarus law. Neither is the concept of parallel debt. Hence, we are concerned of enforceability of the parallel debt in Belarus. The parallel debt structure resembles a conditional cession agreement, according to which the bank (the lender) transfers its right to claim return of the loan from the borrower to the third person ( security agent ) on condition that the borrower does not fulfil its obligations under the loan agreement. As a consideration for such assignment the security agent shall pay to the lender the sum equal to the sum under the loan agreement. The risks associated with the described transaction would arise if the security agent receives a premium (commission) for such agency. If this is the case, the transaction may be found to be a factoring transaction, with the security agent being the factor. The major problem following such qualification is the local requirement for licensing factoring by the National Bank of Belarus. As the result, the cession transaction may be found to violate the law and therefore be invalidated. Further, problems could arise with granting security in favour of a third party. First of all, such security shall be transferred without consideration under the underlying agreement. Besides, since under the law pledge is an accessory to the principal agreement, it is supposed to follow the principal agreement. Therefore, it should not be separated from the creditor under the principal agreement. In other words, only the creditor under an agreement may be a pledge. If a parallel debt clause is included into an agreement governed by foreign law (if allowed by such foreign law) it would normally be recognised in Belarus, unless it is found to violate the imperative local regulations. A foreign arbitral award or a foreign judicial decision shall be recognised and enforced by the competent Belarusian court, unless enforcement of such decision violates public policy of the Republic of Belarus. The most likely situation for applying the public policy clause is involvement of real estate object in Belarus into the transaction. In this case local courts would have exclusive jurisdiction to consider the case and would revert to Belarusian law to the relationship under consideration. 4. Please explain the latest amendments to the law governing secured transactions in your jurisdiction. Are there any amendments which will be introduced in the near future (within one to two years) which might have an impact on the legal framework of secured transactions? Please also explain recent practical developments regarding secured transactions in your jurisdiction. The most significant recent amendments in the field of secured transactions were introduced by the Decree of the President of the Republic of Belarus On Certain Issues of No. 3 of 1 March The Decree liberalised pledge enforcement procedures. In particular, the non-judicial enforcement procedures were detalised. Besides, the procedure of satisfaction of creditors claims upon liquidation of the debtor was changed. After the Decree comes into effect (May 2010) creditors secured claims shall be satisfied in the third turn, whereas before they were to be satisfied in the fourth turn. Among the most significant purported amendment should be noted passing of a separate Law on Mortgages. Besides, some security-related limitations have been loosened, eg, the list of banks authorised to act as pledgors of land plots approved by the President of Belarus was nullified. Instead, any bank which obtains the necessary license may operate with the land plot mortgages. 9

10 Certain amendments regarding pledge shall be introduced into the Civil Code of the Republic of Belarus in order to unify all pledge-related provisions in one act so that the Law on could cease to exist; this is aimed to simplify implementation of pledge. It is also intended to develop regulations allowing debt collection activity to be performed without the need for obtaining the banking license. Depending on the contents of these provisions the parallel debt clause may well become enforceable in the future. Part II enforcement of security 1. Please explain briefly general rules of enforcement of security indicated in answer to the Question 1 in Part I above (excluding rules in a bankruptcy or insolvency proceeding see Question 3 below). In your answer please explain whether specific security may be enforced only through judicial proceedings or whether extra-judicial methods are also available. Furthermore, please provide estimate of costs (if they create significant obstacle in enforcement, including applicable taxes and any other duties/ costs) and timing for enforcing such security. Please also explain degree of difficulty (eg, burdensome formalities, whether enforcement requires actions of a state body) in enforcing security. Also please explain whether taking security by an entity from other jurisdiction influences possibility of establishing security and its enforcement. Security interests may be enforced through judicial enforcement proceedings and in certain cases also through non-judicial methods of enforcement. The type of enforcement proceedings available for the creditor depends on the type of security; on the secured assets; on whether the security agreement was notarised; whether the claim is uncontested; and whether the creditor seeks collection of monetary assets from the debtor s banking account or execution upon property. If the security agreement is notarised, the creditor may apply to the court for a writ of execution within a simplified judicial procedure. The filing fee for such application depends on the amount of debt and the court applied. If the claim is filed with the court of general jurisdiction (courts of general jurisdiction hear disputes involving natural persons and not connected with entrepreneurial activity), the filing fee shall be 5 per cent of the amount in dispute. If application is made to a commercial court (both the debtor and the creditor are legal entities and the dispute arises out of commercial activity), the filing fee shall range between 25 and 45 Euro depending on the amount in dispute. No hearing is held and the parties are not summoned to appear in court. The writ of execution is issued within 20 days after the application, unless the court finds that there is a dispute between the parties with regard to the assets sought for recovery. If that is the case, the creditor shall have to file a suit on general grounds. If the security agreement is notarised, the creditor can apply to the public notary for an execution certificate. This certificate may be submitted to the debtor s bank for collection of the monetary funds from the debtor s account. This type of enforcement is, however, inapplicable to claims for property execution. If the security agreement is not notarised, the creditor shall have to apply to the competent court within the general procedure. The parties shall be summoned to court and the hearings shall be held with decision to be rendered within one month subject to prolongation up to two months (in courts of general jurisdiction within two months). Cases involving foreign persons shall be considered within seven months after application subject to prolongation till one year (in courts of general jurisdiction within one year). The general filing fee would be five per cent of the amount in dispute regardless of the court applied. It is difficult to estimate the costs of enforcement of security interests upfront, since they depend on the type and liquidity of the secured interest, the number of secured objects, the methods used for evaluation and complications of evaluation. 10

11 Suretyship Relevant regulations permit regular (judicial) and non-judicial methods of enforcement of a pledge. As a general rule, pledge is enforced within judicial proceedings, unless otherwise provided by the agreement between the pledgee and the pledgor. The agreement will be certified by the public notary before or after the grounds for pledge enforcement arise. Such agreement shall include a provision granting the pledgor, the pledgee or a third person authorised by the parties with the right to initiate sales of the pledged property. The agreement, however, may not provide for transfer of legal title to property to the pledgee. In certain cases pledge may be enforced only by court: 1) if pledge requires approval of third parties; 2) if the pledged property has high historical, artistic or other cultural value for the society; 3) if the pledgor is not present and his/her place cannot be determined; 4) if the pledged property is not freely transferable; 5) if the pledged property is an enterprise registered as a property complex. Non-judicial enforcement of pledged obligations may be conducted through: 1) public sales organised by: - the pledgee, the pledgor.or a third person authorised by the parties; - the bank being the pledgee of a land plot or of the right to lease a land plot or of buildings pledged together with a land plot. 2) execution of sales agreements without public sales by the bank under notarised agreement between the bank and the pledgor for non-judicial enforcement of the pledge securing a loan agreement Enforcement of a pledge in judicial proceedings requires prior acquisition of an enforcement title. This would be a court judgement, on the basis of which the pledgor submits for the writ of execution and initiates enforcement proceedings. Enforcement proceedings are conducted by a bailiff and lead to the sale or, in some cases, taking over of title to the pledged assets. The pledgee s claim is satisfied from the proceeds of sale of the pledged property. However, certain claims may have priority over the pledgee s claims (tax, salaries, social security payments, other payments to natural individuals). The bailiff publishes an announcement regarding the sales (property on sale, its owner, sales price, place and time of sales) not later than 10 days before the sales and notifies the pledgor and the pledgee. The value of assets is estimated by court if enforcement is performed within judicial proceedings or at the agreement between the pledgee and pledgor, if non-judicial proceedings are used. The property is sold to the person offering the best price for it. If the first sales fail, the pledgee may, upon agreement with the pledgor, buy the property out and set off the price for the property against its claims towards the pledgor. This buy-out shall be governed by the law on sales agreements. If the second sale fails, the pledgee can take over the title to property at the value of not lower than ten per cent of the initial sales price. 11

12 If the pledgee does not exercise the right to retain the pledged property within one month after the second sales were invalidated, the pledge is terminated. Belarusian banks are concerned with the existing limitation on the number of sales (two) to be held, which in their opinion significantly limits the perspective of sale of property and satisfaction of their claims. Mortgage A mortgage can be enforced without recourse to judicial proceedings and public sale only by virtue of an agreement between the pledge and the pledgor certified by the public notary and executed before or after the grounds for mortgage enforcement arise. As with the pledge, mortgage cannot be enforced in non-judicial proceedings in certain cases, when only judicial enforcement is applicable. In addition to the non-judicial enforcement limitations provided for pledge, a mortgage cannot be enforced under non-judicial proceedings if the property subject to mortgage is in equity ownership, and any of the co-owners does not provide consent for non-judicial enforcement of the mortgaged obligation. The advantage of this type of security is that transfer is enforced by the creditor without recourse to judicial proceedings. With regard to certain security objects such transfer would need registration (real estate, vehicles, securities (including shares of joint-stock companies), intellectual property, etc.). Besides, if the property to which title was transferred had not been handed over to the creditor and the debtor refuses to hand it over to the creditor after the title to property has been transferred, the creditor shall have to apply to court. 2. Please explain briefly specific features (if any) of enforcement of security established over following types of assets: (a) Real estate; Mortgage Mortgage enforcement has the following specifics: persons residing in a mortgaged housing under a tenancy agreement, shall not be evicted from this housing in case of its sale; if the tenancy agreement is not violated by the tenants, the new landlord may not terminate such agreement. The person residing in the housing has the right to live in this dwelling for life regardless of change of ownership. Please see comments on. (b) Charging assets (inventory, stocks etc.); (c) Movables; 12

13 (d) Shares; Non-securities shares Enforcement of pledge to shares is fulfilled through charge to the pledged share in the charter capital of a legal entity upon the decision of court. Other shareholders of the company (limited liability company, companies with supplementary liability) are entitled to pay the actual cost of the share (part of share) to the creditor under unanimous resolution of the General Shareholders Meeting (without votes of pledgor whose share is charged). Upon agreement between creditors and the company (or other shareholders) payment of actual cost of the charged share (part of share) may be changed by transfer of property in-kind. In case of non-payment of actual cost of the charged share (part of share) to creditors within 3 months, the creditors are entitled to request public sale of this share (part of share) within the procedure stipulated by legislation. It is enforced without judicial proceedings by the sale of share that was transferred upon default of secured obligation. The transferee becomes the shareholder of legal entity which requires modifications into the constituent documents of this legal entity and their state registration. Sale of share is fulfilled on condition of compliance with pre-emptive right of other shareholders and Company for purchase of the share to be alienated. Shares (stocks) which are securities Enforcement of pledge to shares of joint stock companies is fulfilled through the decision of court or within the procedure stipulated by the pledge agreement. Sale of shares issued by a closed joint stock company is fulfilled with observation of preemptive rights of other shareholders and the company for purchase of the alienated shares. The pledgee may leave shares of the closed joint-stock company for itself if the company and shareholders refuse their preemptive right. Sale of shares issued by opened joint stock company is conducted through the Belarusian currency-stock exchange. Upon enforcement of pledge to shares of joint-stock companies the depositary transfers the shares according to the judicial decision, writ of execution or pledge agreement. This type of security is enforced without judicial proceedings by sale of share that was transferred upon default of secured obligation. The transferee becomes the shareholder of the company, which requires registration by professional participant of equity market (depositary). Modifications into the constituent documents of joint-stock companies are not required. Sale of shares issued by a closed joint-stock company is fulfilled with observance of preemptive rights of other shareholders and the company for purchase of the alienated shares. Sale of shares issued by opened joint-stock company is fulfilled through the Belarusian currency-stock exchange. Shares in equity ownership 13

14 Enforcement of pledge to shares is fulfilled through charge to the pledged share upon the decision of court, or upon an agreement between pledgee and pledgor executed after the grounds for charge to share occur and certified by notary, or in the order stipulated by the pledge agreement depending on the type of property in equity ownership (real estate, security, movables, etc) and several other conditions. The other shareholders in equity ownership have preemptive right to purchase the charged share. In case of their refusal to buy the share, it shall be sold through public sale. This type of security is enforced without judicial proceedings by sale of share that was transferred upon default of the secured obligation. The transferee becomes the owner of the share in equity ownership that may require state registration in case the object of equity ownership is property subject to registration (eg, real estate, securities). Sale of share is fulfilled with observation of preemptive rights of other shareholders of equity ownership for purchase of the alienated share. (e) Rights under contracts (receivables); According to legislation, when pledged rights under a contract (receivables) are charged, such rights transfer to the pledgee together with the rights inalienable from the pledged right. However, the High Commercial Court of the Republic of Belarus has admitted that the issue of charging pledged rights has not been properly regulated by law. Therefore, in the opinion of the Court, enforcement of pledged rights under contract (receivables) shall be fulfilled within the procedure stipulated by the Code of Commercial Procedure, ie, through public sale. In case of default under the secured contract the right to obtain receivables is transferred to the bank-lender. Notification of the debtor under the respective contract is required in order to ensure proper fulfillment. If the cost of rights, determined in the agreement on transfer of legal title, exceeds the amount of demands under the loan agreement, bank-lenders shall pay the difference to transferor (borrower under the loan agreement) within the timeframes stipulated in the agreement on transfer of legal title. (f) Bank accounts; No security applicable. (g) Financial instruments (eg, securities); Enforcement of pledge for securities is fulfilled through the decision of court or in the order stipulated by the pledge agreement. Upon enforcement of pledge to securities the depositary transfers them according to the decision of the court, the writ of execution, or the respective pledge agreement. Sale of bonds is fulfilled through the Belarusian currency-stock exchange or over-the-counter market with mandatory registration by the professional organisation of equity market (depositaries, brokers). 14

15 is enforced without judicial proceedings through sale of securities transferred to the pledgee upon default of the secured obligation. The pledgee becomes the owner of the securities that may require registration by professional organisation of equity market (depositary) or by organisation, authorised to register real estate, rights to it and deals with it (in case of mortgage certificates). Sale of bonds is fulfilled through the Belarusian currency-stock exchange or over-the-counter market with obligatory registration by the professional participants of equity market (depositaries, brokers). (h) Intellectual property; (i) Plant and machinery; (j) Other assets. 3. How does a commencement of bankruptcy or insolvency proceedings influence the rights of the security holder to enforce its rights? In bankruptcy or insolvency proceedings, what are the suspect periods, is claw-back possible, and what other types of rights (tax debts, employees, etc.) have preference over security granted? Please explain briefly specific features (if any) of enforcement of security established over following types of assets in a bankruptcy or insolvency proceeding: Commencement of bankruptcy proceedings affects other judicial proceedings and judicial enforcement proceedings pending before commercial courts and courts of general jurisdiction (except for claims for compensation of harm caused to life or health of individuals, moral harm, collection of wages and other compensation, alimonies), which are suspended. Satisfaction of claims of the founders (shareholders) of the company in bankruptcy proceedings regarding their exit from the company and shares buyout is prohibited. The resolution of the commercial court on commencement of the bankruptcy proceeding is forwarded to the banks where the accounts of the company in bankruptcy are opened. The creditors claims are satisfied in the following order: 1) claims of individuals for compensation of harm to life and health; 15

16 2) claims for payment of salaries, wages, and other remunerations owed to individuals performing works and services as well as creating objects of intellectual property; 3) claims under obligatory payments to the state (taxes, charges, dues); 4) claims of secured creditors; 3 5) claims of other creditors. Before the said claims are satisfied the bankruptcy manager s remuneration as well as enforcement expenses are covered. The amounts of the bankruptcy manager s remuneration and the methods of its calculation are established by the Government of the Republic of Belarus and are charged against the debtors assets. The amount of remuneration depends on the number of debtor s employees, scope of assets and balance-sheet value. In case of insufficiency of debtor s assets, the manager s remuneration is paid by the state. Claims of each group of creditors are satisfied in the established order. Each subsequent turn is satisfied after full settlement of the preceding turn. In case funds are insufficient to satisfy claims of all creditors of a given turn, these funds are distributed in proportion to all creditors of the respective group. The rest of the claims are considered to be discharged. According to the Bankruptcy Law, creditors in bankruptcy can sign an amicable agreement modifying the rules of satisfaction of creditors claims. Such agreement shall become effective only if signed by all secured creditors. If shareholders of the company found to be bankrupt or other persons entitled to give compulsory instructions to the company are found to be liable for the company s bankruptcy, they shall be personally liable for the company s obligations in (a) Real estate; Mortgage The court can find a mortgage invalid, if it was executed before commencement of the bankruptcy proceedings together with occurrence of the debt or immediately after its occurrence and if it was executed: within six months before commencement of bankruptcy proceedings or after commencement; with an interested person within one year before commencement of the bankruptcy proceedings or after their commencement, unless it is proven that the debtor was solvent at the time the mortgage agreement was executed and did not become insolvent in the result of such agreement. (b) Charging assets (inventory, stocks etc); Please see comments made on Mortgage. (c) Fixed charge over movables; Please see comments on general enforcement and bankruptcy regulations. (d) Shares; 3 According to the new enforcement regulations, satisfaction of creditors secured claims in liquidation proceedings is performed in the third turn (together with the claims of the state). These regulations, however, do not apply to bankruptcy proceedings, where secured claims are satisfied in the fourth turn, after all state claims have been satisfied. 16

17 Please see comments on general enforcement and bankruptcy regulations. (e) Rights under contracts (receivables); Please see comments on general enforcement and bankruptcy regulations. (f) Bank accounts; No security applicable. (g) Financial instruments (eg, securities); Please see comments on general enforcement and bankruptcy regulations. (h) Intellectual property; Please see comments on general enforcement and bankruptcy regulations. (i) Plant and machinery; Please see comments on general enforcement and bankruptcy regulations. (j) Other assets. Please see comments on general enforcement and bankruptcy regulations. 5. Are there any specific features or problems of enforcement proceedings if the security is granted to a trustee or security agent or the parallel debt structure is used? If the parallel debt clause structure is formalised by the parties in the way as to be enforceable under the local laws and regulations (please, see Part I Question 3), there should be no specific issues or problems with satisfaction of security agent s claims. 6. Please explain the latest amendments to the law governing secured transaction in your jurisdiction in relation to a bankruptcy or insolvency proceeding. Are there any amendments which will be introduced in the near future (within one to two years) which might have impact on the legal framework of the enforcement of secured transactions in the light of insolvency law? Please also explain recent practical developments regarding secured transactions in your jurisdiction in relation to insolvency law. There have been no significant amendments in the sphere of bankruptcy law regarding secured transactions within the last couple of years. No such amendments are expected in the nearest future. 17