Law on Rights of Security

Contract of security according to Law on right of security upon movable objects and rights filed in register

The Law on Rights of Security upon Movable Objects and Rights Filed in Register regulates the pledge, without delivering in possession, of movable objects and rights for the purpose of securing a claim of a creditor, the contract of security, the rights and obligations of contracting parties, the filing of the right of security in the registry, the settling of a creditor secured by pledge, and the termination of the right of security.

Movable objects and rights shall be pledged by filing in the registry that shall be instituted in conformity with the Law on Rights of Security upon Movable Objects and Rights Filed in Register.

Legal relations that are not regulated by the Law on Rights of Security upon Movable Objects and Rights Filed in Register shall be subject to regulations covering obligations (contract and torts) and property law relations, and to other regulations.

Contract of Security

By a contract of security a pledger shall assume the obligation to a creditor to extend to him a security for his claim in such a way as to have creditor’s right over pledger’s object filed in the security right registry.

A pledger may be a debtor or a third party.

Contents and Form of Contract of Security

Contract of security shall particularly include: the day of conclusion, name and surname, business name or firm, domicile or residence, i.e. creditor’s, pledger’s and debtor’s head office, if debtor and pledger are not the same person, the subject matter of the right of security, description of the subject matter of the security right and data about the claim which is secured.

The contract of security shall be concluded in writing.

Contracting parties

Pledgee

Pledgee, in terms of the Law on Rights of Security upon Movable Objects and Rights Filed in Register, shall be a creditor who has acquired the right of security by filing it in the security right registry.

By a pledge contract or a special power of attorney, the pledgee or several of them may authorize a third party to take legal actions to protect and settle secured claim (hereinafter: an authorized person). The authorized person in relation to the pledger has the rights of the pledgee.

In order to waive the right of security, an authorized person must have a special authorization.

The data on the authorized person are entered in the security right registry, instead of the pledgee. If there are several pledgees, they may by a pledge contract or a special power of attorney designate one of them to act as the authorized person.

Pledger

Pledger, in terms of the Law on Rights of Security upon Movable Objects and Rights Filed in Register, shall be a debtor having the right of ownership upon a movable object or the capacity of a holder of some other freely disposable right.

The pledger may also be a third party extending security for another person’s debt.

Legal effects of the contract of security

Obligations of the pledger

Obligation of Preservation and Maintenance of the Subject of Security Right

Upon concluding a contract of security, a pledger shall be obliged to preserve the subject of the right of security by applying the care of a good master of the house, and/or good businessman and to maintain the subject of security right in running condition and shall make necessary repairs.

Insuring the Subject of the Right of Security

The obligation of a pledger to insure the subject of the right of security may be stipulated by the contract of security.

Rights of the pledger

Possession and Use

Even after filing the right of security in the security right registry, the pledger shall have the right of possession upon the object of the right of security and he shall be entitled to use the object of the right of security in conformity with its usual purpose.

The pledger shall forfeit the right of possession after failing to meet his obligation to the pledgee.

Right to Accruals

Should an object of the right of security produce accruals, the pledger shall be entitled to collect them. The contract of security may provide that, instead of pledger, the pledgee be entitled to collect the accruals produced by the object of the right of security.

Lease

Unless otherwise stipulated by contract, the pledger shall be entitled to lease the object of the right of security and to enter into other contracts by which the object of the right of security is given for use and collection of accruals.

Abalienation of the Object of the Right of Security

A pledger may abalienate the object of the right of security and transfer the right of ownership upon a third party.

The pledger shall be obliged to submit, without delay, a request for entering the right of security into the security right registry at the debit of the new owner. The same obligation shall refer to the new owner as well.

The pledger and the new owner of the object of the right of security shall be jointly and severally liable to the pledgee for damage that may take place due to their failure to enter into the security right registry the right of security at the burden of the new owner.

The acquirer shall acquire the right of ownership under the burden of the filed right of security. Should the pledger sell the object of the right of security within the scope of his regular activity, the buyer shall acquire the right of ownership without burden.

Exclusion of Abalienation

It may be possible to exclude by contract of security the right of a pledger to abalienate the object of the right of security.

Repeated Pledging

Unless otherwise stipulated by contract, the pledger may pledge anew the object of the right of security.

Limitation of the Right of Use

It shall be possible to limit by the contract of security the use of the object of the right of security and to determine the way in which the pledger may use it in the future and specific ways of using the object of the security right may be excluded

Particular contractual provisions on settlement

General Rule

Should a pledger have the capacity of a commercial entity (a person professionally engaged in commercial activity), it may be provided by the contract of security that the pledgee be entitled to sell the object of the right of security at an out-of-court public sale, if his claim be not settled when due.

Where an object of the right of security has a market or a stock-exchange price, it may be possible to provide by the contract of security that the pledgee be entitled to sell it at such price, or to keep it for himself at such price.

The status of a commercial entity shall include a company, a sole trader and other natural person professionally engaged in commercial activity.

The above specified rules shall be also applied to other natural persons in the sphere of private or public law.

Where an object of the right of security has no market or stock-exchange price, the pledgee may sell it in the manner that would be applied by a reasonable and considerate man, and by preserving the interests of the debtor and the pledger, if they are not the same person.

Particular Rules Applicable to Natural Persons

If the pledger is a natural person who concludes a contract of security outside the scope of the business activity, it shall not be possible to provide by contract of security that the pledgee, if his claim is not settled when due, may sell the object of the right of security at the price fixed in advance, or to keep it for himself.

It shall be possible to provide by the contract of security that the object of the right of security shall be transferred to creditor’s possession, should his claim be not settled when due.

At the moment of maturity of the claim, the pledgee and the pledger may come to agreement that the creditor may sell the object of the right of security at a fixed price, or that he keeps it for himself at such price. The pledgee shall be obliged to pay without delay to the pledger the value exceeding the amount of claim.

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