Interests in : To Take in Pledge or Not to Take in Pledge?

Dr. Rustem Karimullin

Corporate lawyers might remember 2009 as the year significant amendments entered into force with regard to the Federal Law “On Limited Liability Companies” (LLC Law) of 08.02.1998 and provisions on pledges contained in various federal laws. Considering these amendments, is it now possible to count on a quick acquisition of participation interest in an as a result of realizing a pledge? Can this type of pledge compete with a common pledge of stocks?

The innovations in the laws on pledges have substantially expanded the list of methods of realizing pledged property without a court decision. Pledged property may be realized through public tenders, inter alia, by holding a closed auction. Parties may also agree on realizing moveable pledged property by way of sale under a commission agreement. Finally, legal entities and entrepreneurs can agree that pledged property shall transfer to the ownership of the pledge or that the pledgee shall sell the pledged property to a third party without conducting tenders.

Prior to the aforesaid amendments, the advancement of pledges of participation interest in s was hindered by the lack of a precise procedure for fixing pledge rights. It was possible to enter into a written pledge agreement, but it was unclear how the pledgee could effectively protect his pledge right. Registration authorities refused to register pledges of participation interest in s. The use of a pledge book, to be maintained by the pledger, for these purposes gave rise to questions rather than provided answers. Furthermore, since a mandatory condition for an OOO to enter into a pledge agreement was, and is, the consent of the other participants of the , then if the pledged participation interest was less than 100 percent, the pledged participation interest could be foreclosed only on the basis of a court decision, regardless of who owns the participation interest. As a result, previously this was a means of securing that claims did not spread in practice.

Currently, a pledge agreement for participation interest in an must be notarized. A notary verifies, particularly, whether the OOO’s charter prohibits pledging participation interest. After notarizing the agreement, the notary submits an application to the tax inspectorate for recording the pledge in the Unified State Register of Legal Entities (USRLE), stating, in particular, the term of the pledge. Within three days after receiving the application the tax inspectorate enters information on the pledge into the register.

Thus, formal clarity has been introduced into the issue of how a pledge right may be registered. This also provides for effectively preventing possible abuses of debtors, for example in connection with mala fide alienation of participation interest.

In addition, the new version of the LLC Law establishes that a record in the USRLE on pledge of participation interest in an shall be discharged on the basis of a joint application from the pledger and the pledgee, or on the basis of a court decision that has entered into force. No other alternatives (e.g., on the basis of the executive endorsement of a notary) are provided for.

At the same time, pursuant to the amendments to the RF Civil Code in the context of a pledge of participation interest in an , for foreclosing on the pledged property, a court decision is now required only if the consent of another entity or body was needed for entering into a pledge agreement for property of an individual (but not a legal entity). Thus, in the course of being applied the LLC Law may in fact exclude the opportunity for a creditor to independently realize pledged participation interest extrajudicially.

In general, a pledge of stocks appears to be more preferable than a pledge of participation interest in an . The procedure for pledging stocks is more clearly developed in bylaws, which regulate the procedure for pledging them and expressly allow extrajudicial realization of the subject of pledge (although at present not by all foregoing methods). Recording a pledge of stocks in a stockholders register is linked with significantly less time and administrative expenditures. Finally, determining the market value of pledged stocks for the purposes of realizing them is also much more simple.