Law on Obligations

Pledge agreement

The provisions of Articles 966–996 of the Law on Obligations govern the concept, object, and conditions for the legal validity of the pledge agreement, the rights and responsibilities of the pledger and the pledgee, and other essential issues.

By a contract of security a debtor or a third party (pledger) shall assume the obligation to a creditor (pledgee) to deliver to him a movable object in relation to which there exists the right of ownership, so that he can, before other creditors, effect collection out of its value, should his claim not be paid when due, while the creditor shall assume the obligation to keep the accepted object and return it to the pledger undamaged after the termination of his claim.

To conclude a valid pledge agreement, it will be necessary for the pledger to be able to dispose of the objects he is giving as a pledge.

If the object referred to in the contract is delivered to him, the pledgee acquires the right to pledge.

It is possible to conclude a pledge agreement for an object that has already been granted as a pledge to another party. In such a case, the right of pledge shall occur if the pledger notifies the creditor holding the object of the conclusion of the pledge agreement, another creditor, and if he has ordered him to deliver the object to that creditor after settling his own claim.

One can give a pledge for a future obligation or a conditional obligation. The pledge by which fulfilment of an obligation is secured shall also extend to contractual obligations that would ensue between the pledgee and the pledger after concluding the pledge agreement and that become due for payment prior to settling the claim covered by the pledge.

A clause of a contract of security shall be void by which an object given as security is transferred to the creditor, if his claim is not settled at maturity, or a clause by which the creditor in such a case sells the object given in security at a price fixed in advance, or keeps it for himself. However, should the price of the object given in security be prescribed by law, the contracting parties may agree that the creditor sells the object at a price which is prescribed, or that he keeps it for himself at that price.

Things, claims, and other rights can be the subject of the pledge agreement.

Giving an object as pledge

Obligations of the pedger

The pledger must deliver the object treated by contract to the pledgee, or to a third party designated by mutual consent, or deliver a document entitling its holder to dispose of the object in an undisputable way. The contracting parties may agree to keep the object or document jointly.

Obligations of the Pledgee

The following legal duties belong to the pledgee:

  1. Keeping the Pledged Object – A pledgee shall be obliged to look after the object, applying the care of a good businessman, or good head of household. He shall be obliged to restitute it as soon as the debt has been paid.
  2. Using a Pledge Object – A pledgee shall not be entitled to use the security object or to hand it over to another for use, or give it in security unless permitted to do so by the pledger. A pledgee using the object without the pledger’s permission, or handing it over to another, or handing it over in pledge, shall also be liable for ensuing accidental loss or damage of the object.
  3. Accruals to the Security – Should an object given in pledge produce accruals, and if not provided by contract whom they will belong to after being detached from the object, the creditor may keep them for himself if he so wishes. In such case the net income from the accruals shall be deducted from the expenses the creditor is entitled to, then from the interest due and, finally, from the principal amount. The same shall apply to benefits resulting from the use of the object given in security.

At the pledger’s request, the court shall order that the object given in pledge be taken away from the pledgee and handed over to a third party to be kept by him for the pledgee; if the latter fails to keep the object properly, if he uses it without the pledger’s permission, if he has given it to another to use it, if he fails to use it in conformity with the obtained consent, and, in general, if he treats it contrary to the contract or the law.

Rights of the Pledgee

If an Object Given in Security has a Defect

Should it turn out that the object given as a pledge has a material or legal defect so that it fails to make a sufficient guarantee for settling the claim, the pledgee shall be entitled to demand from the pledger another corresponding pledge.

Selling a Pledge

If the creditor’s claim is not settled when due, the creditor may request a court order that the object be sold at public sale or at the current price if the object has a stock exchange or market price.

Should public sale expenses turn out to be disproportionally high compared to the value of the object, the court may decide that the creditor sells the object at a price determined by an expert’s assessment or that he keeps it for himself at such a price if he so wishes.

Selling an Object Given in Pledge against a Claim from a Commercial Contract

Should a debtor fail to settle a claim originating from a commercial contract, the creditor shall not be obliged to go to court; instead, he shall be entitled to sell the pledge at a public sale after the expiration of an eight-day time limit, counting from the warning to that respect communicated to the debtor and to the pledger, if they are not the same person.

The creditor shall be obliged to notify both persons about the date and place of sale on time.

Should the objects given in pledge have a market or stock exchange price, the creditor may sell them at such price eight days after a warning in that respect communicated to the debtor and the pledger.

Selling a Pledge before Time because of Perishing or Losing Value, and its Replacement

If the object given in pledge begins to perish or otherwise loses its value, so that there is a danger of its becoming inadequate to cover the creditor’s claim, the court may decide, at the request of the pledgee or the pledger, and after hearing the other party, to permit the sale of the object at a public sale, at stock exchange, or at a market price, if any, and further decide that the price or a sufficient part of the price be deposited with the court in order to secure the pledgee’s claim.

The court shall decline the pledgee’s request if the pledger offers to deliver to the pledgee, instead of the security, another object of the same value, whose keeping does not require more effort and care than keeping the previous pledge.

At the request of the pledger, the court shall also permit the substitution of the pledge if the pledgee fails to request its sale.

Selling the Object Given in Pledge before Time at Pledger’s Request

At the request of the pledger, the court may permit the pledged object to be sold to a specific person at the specified price if it finds that the price is satisfactory and that the justified interests of the pledgee shall thus be preserved.

The court shall determine the price obtained, or a sufficient part thereof, which shall substitute the pledge and be deposited with the court to secure collection of the creditor’s claim.

Right to Priority Payment

A pledgee shall be entitled to collect his claim prior to other creditors from the price obtained by selling the pledge, together with interest due, the amount of expenses incurred in keeping the pledge, and the amount of expenses relating to the process of collection.

The Order of the Rights of the Pledge

Should one object be given as a pledge to several creditors, the order of paying their claims from the value of the pledged object shall be determined according to the date of origination of their respective rights as a pledge.

Termination of the Right to the Pledge

Termination of the Right of Security after Losing Possession

A creditor’s right to priority collection from the value of the pledge shall cease on termination of his possession thereof. That right shall be re-established if the creditor repossesses the object.

Termination of the Right of Pledge upon Termination of the Claim

If the claim whose fulfilment was guaranteed by the pledge ceases, the creditor shall be obliged to restitute the pledge to the pledger.

Expiration due to the Statute of Limitations on Mutual Claims

Claims of a pledger against a pledgee for damages due to deterioration of the pledge, as well as claims of the pledgee against the pledger for reimbursing expenses incurred in improving the security, shall expire due to the statute of limitations one year after the day the object is resituted.

Pledging Claims and Other Rights

Pledging Claims

Notifying a Debtor and Handing Over a Certificate

In order to acquire the right to pledge over a claim, the debtor must be notified in writing of the conclusion of the pledge agreement. The pledger shall be bound to hand over to the pledgee the certificate indicating the pledged claim.

Claim Based on Securities

A creditor shall acquire the right of pledge over a claim inscribed on the face of securities made out to the bearer if such securities are handed to him.

Endorsements shall be used to indicate that a claim on the ground of securities made out to order is given in security.

Duty of Keeping the Claim Safe

The pledgee must take necessary measures to preserve the pledged claim.

Collecting a Bill and Including Interest in the Bill

Should a pledged claim entitle the pledgee to interest or other periodical dues, the pledgee shall be bound to collect them. The amounts collected in such a way shall be cleared against the expenses recognised to the pledgee, then against the interest owed to him, and, finally, against the principal amount.

Collecting the Pledged Claim

After the pledged claim becomes due for payment, the pledgee shall incur the obligation to collect it.

By fulfilling the pledged claim, the right of pledge shall pass to the object by which the claim is fulfilled.

Should the subject of the pledged claim be money, the pledgee shall be obliged, at the pledger’s request, to deposit the amount collected at court, but should the subject of his claim also be money, and if such claim has become due for payment, the pledgee may keep for himself the amount owed while being obliged to hand over the rest to the pledger.

Objections of the Debtor to the Secured Claim

A debtor of the pledged claim may lodge objections against a pledgee, which otherwise may be lodged in the case of the assignment of the claim by the debtor of the claim against the recipient.

Giving the Rights as Pledge

Manner of Giving Security

In addition to claims, other rights may also be given in pledge. Giving such rights as a pledge shall be effected in the way otherwise provided for their transfer to another, unless otherwise prescribed by law for a specific case.

Application of Provisions on Giving Objects as Pledge

The provisions on giving objects as pledges shall also apply to giving claims and other rights as pledges, unless otherwise provided by law for such cases.

Read more:
Contract of security according to Law on right of security upon movable objects and rights filed in register »
Subject matter of the right of security »

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