How to register a pledge on movable property and rights and why is it useful?
A pledge on movable assets and rights represents the type of property law on someone else’s assets or a right based on which the creditor secures the payment of his claim from the value of the pledged assets before other creditors, in case that the debtor does not fulfill his obligation by due date.
The Institute of Pledge Law is a very old institute that combines the obligation and real aspects of law, which importance is as visible and represented today as it was at the time when the institute itself was recognized and established. The importance of the institute is a consequence of the fact that, along with the priority collection from the pledged asset, i.e. rights, in case of non-fulfillment of obligations by due date, at the very beginning and conclusion of the initial business, it also affects the existence of a sense of security and legal protection among subjects who enter into a legal business that is secured by a pledge.
- What can be secured with the pledge?
Pledge law is by its nature a subsidiary right, and due to that it depends on the claim it secures – therefore it cannot exist without the claim it secures, which was created by another legal transaction.
The pledge can only secure a monetary claim, expressed in domestic or foreign currency. Non-monetary claims cannot be secured by a pledge. However, the aforementioned circumstance does not completely exclude non-monetary obligations from the potential provided by this institute, and how the origin and the amount of damages or contractual penalties in case of non-fulfillment of a non-monetary obligation can be defined relatively precisely and simply. As both the damage and the contractual penalty are essentially monetary amounts, they are part of the Pledge law, and it is possible to establish a lien on them as well, especially bearing in mind that the legislator expressly allows the establishment of pledge on future and conditional claims, under which the contractual damage or penalty. Therefore, this institute is applicable in the construction industry.
- Character of the pledge according to the Law on pledge of movable assets and rights registered in the pledge register
The Pledge on movable property is regulated by the Law on pledge of movable assets and rights registered in the pledge register where the Law itself ” governs pledge, without transfer of possession, of movable assets and rights for the purpose of securing the secured creditor’s receivables; the pledge agreement; the rights and liabilities of the contractual parties; pledge right registration; settlement of payment obligations to the secured creditor and pledge termination.”, as well as that “pledge of movable assets and rights shall arise at the moment of their registration in the Pledge Register established in accordance with this Law.”. By defining the Law on Pledge and its origin, the legislator achieved two very important goals: 1. stateless pledge was defined by law and 2. the system and principle of “public books” and reliance on them was fully implemented.
The pledge defined by this law is exclusively stateless, so the law does not deal with manual pledge. The manual pledge itself still exists as an institute in Serbian law, but its importance has been completely marginalized. The above is significant primarily due to the very fact that the person that is the owner of the pledged thing still remains in possession of it and can use it in full capacity. For many subjects, the pledged object is necessary for the performance of economic activity, and its substraction could lead to difficulty or complete impossibility of further performance of economic activity.
However, in the case of a stateless pledge, the creditor certainly has a significantly higher risk, as he loses the opportunity to directly “keep” the asset that is the subject of the pledge. However, due to the fact that the pledge was entered in the public books, in respect of which the principle of trust applies, the risk in question has been completely eliminated. In addition, at the moment of registration, the additional effect of this institute arises, which is reflected in the characteristic of this right to “follow the pledged asset”, not the owner. Therefore, even in the case of a change of ownership, the right of pledge remains in its full extent until the settlement of the claim, or occurrence of another reason for the termination of the right of pledge.
Precisely for the above reasons, the manual pledge has been practically a relic category for a long time, while the “registered pledge” provides full security and does not hinder economic flows. What’s more, the importance of the pledge as an institution can be seen in the fact that its constitution is also found in other laws, and the Law on Enforcement and Security Interest provides constitution of Pledge on listed movables during the procedure, which is an important circumstance, especially if the debtor is a legal entity that can at a later stage, go bankrupt. Factoring, by the nature of the institute itself, also consumes a pledge, usually on a specific type of right – on receivables, and it can be said that an entire part of the industry as an integral part of its modus operandi uses the right of pledge due to the specificity of the protection it provides, and as a consequence of its legal nature.
- Object of the Pledge
The object of the Pledge can be an individually determined item that the mortgagor can freely dispose of, as well as a collection of movables located in a certain place. Also, movable items specified by type can be pledged, but even then, it is necessary that the amount or number is determined by the Pledge Agreement itself, as well as the manner in which the items specified by type can be distinguished from other items of the same type.
In addition to the previously mentioned individually determined movables, their sum, or movables determined by type, the subject of the Pledge could also be: 1. the pledger’s claims that are paid to the pledger’s separate bank account; 2. the claim that the mortgagor has towards his debtors; 3. shares; 4. things or rights that the pledgor will acquire in the future, where the pledge arises only when the pledgor acquires the right of ownership to the things, i.e. claim or other property right.
The concept of pledging claims and future claims that the pledgor has towards his debtors has been very interesting in economic flows for a long time, and how this type of pledge creates a kind of assignment effect due to its specificities. Namely, from the moment of establishment of the pledge, more precisely from the date of delivery of the notice of the existence of the pledge, the debtor of the pledged claim can fulfill the debt only to the pledge creditor, and not to the mortgagor. Of course, it is possible to provide otherwise in the contract, but this is not a frequent situation. In this way, a kind of assignment effect is achieved, because it opens up the possibility of repayment of claims both by regular direct repayment of the debtor of the main business, and through payments received from the debtor of the mortgagor. Sometimes it is even possible to agree internally that this is the main type of repayment of claims, and the dynamic of the repayment can also be resembled to the debtors. This fully satisfies the financial aspect of the legal work, and significantly facilitates business and borrowing models.
As a novelty in Serbian trends in the future period, we certainly expect that pledges on digital assets will come to life in practice, and as digital assets themselves are becoming more regulated and more presented in Serbia. The law on digital assets envisages a pledge on digital assets as a possibility, but the formation of an adequate register that would keep their records is still pending. Unlike the register of pledges on movable property, which is maintained by the Register of Pledges at the Agency for Business Registers, the register of pledges on digital assets can be kept by a legal entity that has received permission from the supervisory authority to provide the service of maintaining the register of pledges on digital assets, as well as for storage and administration of digital assets for the user’s account and related services.
- Pledge agreement and its specifics
The first step towards establishing Pledge on movable property is certainly the conclusion of the Pledge Agreement. Pursuant to the Law ” The pledge agreement obliges the pledger to secure the secured creditor’s receivables by registering the secured creditor’s right to the pledger’s assets in the Register of Pledges”. ” The pledge agreement shall contain, specifically: the date of stipulation, the first and last name, the corporate or firm name, fixed domicile or residence, or registered office of the creditor, pledger, and debtor, if the debtor and pledger are not one and the same person, description ofthe pledged asset, and data on the secured claim”.
Therefore, although the pledge is a subsidiary, which usually precedes the written main legal contract, our legislation reasonably requires the written form of this contract, as well as the essential elements that the contract must contain. This solution eliminates future potential problems when identifying the agreement itself, and what is secured and when the claim is due, but also what is secured (object identification). Therefore, the very absence of essential elements of the contract results in the impossibility of registering the pledge in the Register of pledges. Even if the registrar approves the registration by mistake, which is almost impossible, the absence of essential elements leads to the impossibility of collecting claims later.
The written form of the Pledge Agreement is widely accepted in practice and modern security law. One of the roles of form in modern law is to draw the attention of the parties themselves to the importance of the legal work they are undertaking, taking into account that with the pledge agreement, the pledgor assumes obligations that significantly affect his property. Due to the elements that the contract contains, the parties are clearly aware of the consequences of not fulfilling the obligation within the deadline and the rights that the creditor has. Moreover, certain creditors rights are provided by law only as an option, e.i. they can be exercised only if they are provided in the contract. Therefore, the possibility is reserved for economic entities that the pledge agreement predicts that the pledge creditor has the right to sell the subject of the pledge at an out-of-court public sale if his claim is not settled due date, which will not be the case if this provision is not expressly defined in the agreement. The situation is the same as the option of keeping the item of pledge in case it has a market price or the option of selling the item of pledge at that price.
Although the legislator requires only a written form, we often see in practice that, in addition to the written form, contracts are certified in the form of notarized signatures. Sometimes this is a consequence of the fact that the parties feel more legally secure when the contract is certified, but more often we are talking about a situation where the law in certain situations indirectly requires, in addition to the written form, the certification of signatures.
The pledge agreement does not have to, according to the law, contain a statement on the permission to enter the pledge right in the register (clausulu intabulandi), but due to efficiency, it is included in the contracts in a large number of transactions. However, special attention should be paid here to the fact that if the pledgor is a natural person and the registration application is submitted by the creditor, the contract does not have to be certified, but the clausula intabulandi must be certified by a notary public – otherwise, the registration application will be rejected and the pledge will not be constituted. Therefore, if we opt for clausula intabulandi to be an integral part of the contract, it must be certified by a notary public in order to produce legal effect in its full capacity, therefore, it could be the iustus titulus for acquiring the pledge.
The establishment of the pledge is an act of constitutive legal transaction and as such is based on a set of certain legal facts. A pledge agreement represents the legal basis for establishing a pledge, and therefore, in addition to its form and essential elements, the agreement must also meet the conditions concerning the contracting parties themselves, i.e. their ability to validly establish a pledge on a specific object.
The pledge creditor will always and exclusively be the creditor from the obligation that the pledge secures, while on the other hand, the debtor from the obligation, as well as a third party, who provides security for another’s debt, can appear as the pledgor. The pledgor is a person authorized to dispose of the pledged object, which implies that the pledgor has the appropriate legal capacity, in order to be able to influence the creation of the pledge with an expression of will, but it is also expected that the pledgor is the owner of the subject of the pledge, so that the Pledge can be constituted.
- Registration of Pledge on movable property and rights in the Register of Pledges
The management of the Register of Pledge on movable property and rights is entrusted to the Agency for Business Registers, which was established by the Law on the Agency for Business Registers. The Pledge register is a unique centralized electronic database in which information about Pledge, changes and additions concerning the pledged rights, the fact that the settlement procedure has begun, note of existence of the lawsuit (to initiate the litigation for erasing the pledge from the Register of Pledges, as well as disputes concerning the subject of the pledge or the contract relation between the subjects in this legal transactions).
The register of Pledges is a record of pledged rights that are registered in it, at the request of the parties, in accordance with the Law on pledge of movable assets and rights registered in the pledge register, and as such is a public register, i.e. a public ledger. Therefore, the mere fact that the pledge entered in the register is proof of the existence of the pledge and, the extract from it, is a document suitable for initiating proceedings. Also, as the register represents a public ledger, the rule applies that at the moment of registration of the pledge and publication, all other persons are aware of the existence of this right.
However, unlike a mortgage, where the register is much more transparent, which is a consequence of the fact that public books are kept on the real estate itself, the register of pledged rights is not entirely transparent. The Agency for Business Registers, does not guarantee that there are no other pledges on movable property and rights in addition to those registered, and the entry of data in the Register is not proof of the existence of ownership or other rights of the mortgagor on the pledged movable property, nor that the claim or pledge is validly secured. All of the above is a consequence of the objective impossibility of keeping a register of all movable property or claims or shares, other rights… However, although there is no chance to search a specific movable property with absolute certainty, because it may be defined differently in different contracts, but a search according to the mortgagor is possible, and that circumstance to a certain extent restores the degree of legal certainty. However, due to this objective impossibility, a pledge on movable property and rights is in this aspect inferior to a pledge on immovable property, i.e. a mortgage. The pledge register itself, in the form it exists today, started operating on August 15, 2005, and all pledges are recorded in it starting from that moment, which, despite the mentioned imperfection, and bearing in mind that the register is completely public, still ensures ability to check important information.
When we talk about the entry in the register itself, Article 4, paragraph 1 of the Law on pledge of movable assets and rights registered in the pledge register prescribes that the pledge right is acquired by entry in the Pledge Register, unless otherwise specified by law. Also, in accordance with the provisions of Article 30 of the aforementioned Law, the order of payment of the creditor’s claim from the value of the pledged object is determined according to the time (day, hour and minute) of the receipt of the request for registration of the lien at the Agency.
The procedure for registering a lien is strictly formal, and on this occasion pre-defined forms are filled out which are prescribed by the Agency. The registration application itself consists of a “general” and a “special part”. When submitting a registration application for the registration of a pledge, the general part of the application must be submitted, as well as the corresponding attachment for the objects of the pledge, depending on the type of object on which the pledge is established. Other included attachments in registration application, are submitted only if there is a large number of pledged subjects or a large number of secured claims, i.e. if there is a large number of pledge items.
Because of strict formality and great possibility for mistakes, it is recommended that application should be submitted by a professional. For example, attachments V1-V10 and G1 – data that describe the subject of the pledge more detailed are filled out and attached depending on the type of movable object that is the subject of the pledge. If several movable objects or rights are pledged, for each movable object or right that is the subject of the pledge, it is necessary to submit a neatly completed corresponding attachment, which practically means that if four objects or rights are pledged, it is necessary to fill out four forms. For a layman, this part of the registration application can create certain doubts and insecurities about filling it out, and in this part, first of all, it is necessary to correctly determine which attachment is used, and how certain types of pledge items are very similar to each other, and then correctly enter the content with technical and legal data.
When registering a pledge, it is necessary to pay a fee for the registration application. The amount of the fee for registration of the pledge is prescribed by the Decision on fees for registration and other services provided by the Agency for Business Registers. For the registration of the pledge, a fee is paid according to the amount of the main claim secured by the pledge. The compensation is calculated using the middle exchange rate of the National Bank of Serbia, on the day of submitting the application, namely:
– For a claim up to EUR 10,000.00, the fee is 2,200.00 dinars, and if the application is submitted electronically, it is 2,000.00 dinars;
– For claims over EUR 10,000.00 to EUR 200,000.00, the fee is RSD 5,500.00, and if the application is submitted electronically, it is RSD 5,000.00;
– For claims over EUR 200,000.00, the fee is 11,000.00 dinars, and if the application is submitted electronically, it is 10,000.00 dinars.
If a single application requests the registration for a large number of movable objects or rights, for each movable object or right, the amount of the determined fee is increased by 220.00 dinars if the application is submitted in paper form, with the fact that if the application is submitted electronically, the fee amount is increased by 200.00 dinars. Also, in addition to the above fees and increases, if the registration application is submitted late, the additional fee is 3,000.00 dinars.
- Settlement from the subject of pledge and the importance of securing claims with a pledge on movable property
As a rule, the creditor feels best when things are going according to the plan, when the debtor successfully settles his obligations within the agreed period. The reality, however, deviates greatly from the expectations in the agreed term. There are a large number of risks that accompany any legal business. The debtor is often unwilling or unable to meet his obligations, because he may not have succeeded in marketing his products or services on time, or he has succeeded, but his debtors are late in fulfilling their obligations. It can happen that a company that at one point in time is doing excellent business, but the next year does not generate enough income to pay back the loan. Consequently, in order to ensure the settlement of their claims, often as a condition for entering into some legal business with the debtor, creditors require the debtor to provide certain security, all with the aim of collecting their claim, if the debtor himself becomes insolvent and unable to return and pay his debts. Certainly, a pledge on movable property or rights is one type and method of securing claims, which creditors often apply in practice.
The immediate advantage that security brings to the creditor is an increase in the probability that the creditor will settle the claim by forced means if the debtor is unwilling or unable to fulfill his obligation voluntarily. Only the securing of claims, as such, gives the creditor certain benefits, namely:
– Collateral increases the probability that the debtor will fulfill his obligations;
– With security, the creditor acquires the right of priority in settlement in relation to the object of the pledge, which is particularly useful in the case of insolvency of the debtor;
– The security allows the creditor to settle his claim from the subject of the pledge, even when the claim is time-barred;
– Security gives the creditor the opportunity to settle his claim without going to court;
– Security gives the creditor a certain degree of control over the debtor’s assets;
– Security makes it difficult for the debtor to take other loans later;
– Security contributes to a more complete utilization of the value of the debtor’s property;
– Security brings the conflicting interests of creditor and debtor closer together;
In addition to all positive aspects, it is necessary to mention that no security can not represent absolute protection. There are always certain risks that cannot be eliminated by pledging movable property and rights. The principal characteristic of the right of lien is “prior tempore potior iure”. The stated principle means that the right of pledge on the same object that was registered earlier has priority over the right registered later. As stated earlier, the consequence that the register of pledges on movable property and rights will never be able to be perfect as the register of immovable property may lead to the consequences that the creditor establishing the pledge right does not know about the existence of the earlier right. The risk of this phenomenon is small, but it is not possible to eliminate it completely, regardless of all the checks that can be carried out beforehand. Certainly, if adequate checks are carried out, this risk is largely minimized.
When we talk about the types of forced settlement of claims secured by a pledge, creditors have significantly greater settlement options if a pledge has been established compared to creditors who have not established a pledge, regardless of the way it was established. Therefore, creditors who own a pledge, in addition to regular settlement on the debtor’s property, have the right to settlement directly from the object of the pledge, i.e. the value realized by its sale. An additional convenience is certainly the option of a more precise right of the pledge creditor to the state of the subject of the pledge.
In order for the settlement of the pledged subject to be possible, it is necessary to carry out the procedure before the Agency for Business Entities, which marks the beginning of the settlement. It is about entering the start of the settlement in the Register of Pledges, when the time limit from the moment of the settlement has expired, the right to forced enforcement is acquired, and the Extract from the register of pledged rights acquires the status of an executive document. It is possible to achieve settlement by court within the framework of enforcement or bankruptcy proceedings, but also by extrajudicial means with debtors who are not in bankruptcy, with the proviso that this type of settlement must be specifically permitted, i.e. provided for in the Pledge Agreement, which also represents another type of rights permitted by law which must be previously contracted.
Finally, the pledge as an institute is fully recognized in bankruptcy proceedings, but there is one restriction that needs to be kept in mind. Pledges established 60 days before the opening of bankruptcy proceedings against the mortgagor do not produce legal effect in the bankruptcy proceedings, and such creditors cannot be considered separate or pledged, which means that they will not have the right to priority settlement. However, here we cannot talk about the denial of rights by the legislator as an unjustified move. This rule must be seen as a business risk, rather than a risk of the institute itself, and as the financial condition of the pledger can certainly indicate the possibility of bankruptcy, significantly longer than 60 days, and what is the obligation of every creditor to check before constituting a pledge – checking the financial condition of their debtor and the pawnbroker.
Therefore, bearing in mind the length of the existence of this institute as well as very clear regulations and practice, regardless of the shortcomings presented, the prevailing opinion is that the pledge on movable property and rights is a very useful tool for securing claims in the economy. Precise legal regulations and reliable practice instill confidence and encourage participants in legal affairs to decide to constitute a pledge as a means of ensuring the orderly fulfillment of obligations. In addition, the wide range of possibilities that the Law allows in terms of possible objects of pledge is also not negligible. This is especially the case if we consider the details, e.g. pledge on claims that are presented or the potential that can be seen in digital assets and the extension of the pledge to the field of digital assets. What remains to be seen is how quickly the practice will be created in the area of pledges on digital assets, as well as in what way and in which direction it will develop.