Each creditor, providing property, including money, to the debtor, wants to receive guarantees that this property will be returned to it, and he will receive remuneration for such provision of property.
At the moment, the Russian legislation provides for the use of such interim measures as a penalty, pledge, retention of property of the debtor, guarantee, Bank guarantee, Deposit. In addition, the parties to the contract may provide other ways to secure their obligations, except if such security would be contrary to Russian law.
The main ways to ensure the performance of contractual obligations
1. Pledge
One of the most popular methods of security is bail (art. 334 et seq. GK1). In Russia it is allowed to pledge both property and property rights. Both movable and immovable property may be pledged. However, the pledge of real estate, which is also called a mortgage, must be registered with the state authorities, otherwise it will be invalid. All pledge agreements are concluded in writing.
The mortgagor may be either the debtor or any third party, which extends the debtor’s ability to obtain financing from the creditor, especially if it does not have the property or property rights that it can pledge. Pledged movable property may remain with the pledgor or be transferred to the pledgee.
The pledged property may be pledged several times, with each new pledge being referred to as “subsequent pledge”.
The pledge provides one of the important advantages: the claims secured by the pledge in case of bankruptcy have the priority satisfaction. None of the other methods of security provides such an opportunity.
However, the pledge has several important shortcomings.
1. Mortgaged property or property rights in case of failure to meet the requirements of the main obligation must be sold at public auction.
2. The pledge agreement has many conditions that need to be fixed in the contract, otherwise it may entail the invalidity of the pledge agreement.
3. The pledge depends on the validity of the principal obligation, for example, a loan agreement, and therefore if the loan agreement is invalid, the pledge agreement will also be invalid.
2. Guarantees and sureties
The next type of security is guarantees and sureties. Guarantee, issued by any natural or legal person with the exception of credit and insurance organizations, referred to as surety (article 361 et seq. GK). Guarantees issued by credit and insurance organizations, referred to as Bank guarantees (articles 368 et seq. GK). Both types of guarantees obligate the persons who issued such guarantees to pay off the creditor’s claim if the debtor has not fulfilled the principal obligation.
The Bank guarantee additionally has one feature that other types of security do not have, namely, the validity of the Bank guarantee does not depend on the validity of the principal obligation. A Bank guarantee or guarantee must be in writing.
While meeting the guarantor of the creditor under the guarantee, the guarantor acquires the right of a creditor to require the debtor to pay the debt of the latter.
3. Deposit
The Deposit is a way of collateral, in which one party transfers to another party a certain amount of money in the account due from it under the basic contract payments (a. 380 FF. GK). The Deposit agreement must be in writing.
In case of failure to fulfill the main contract due to the fault of the debtor, the creditor leaves a Deposit. If the creditor is responsible for non-performance of the main contract, he is obliged to pay to the debtor a double amount of the Deposit.
4. Forfeit
Penalty – the possibility of providing in the contract a certain amount, to be paid by the debtor to the creditor in case of default by the debtor of the principal obligation (article 330 et seq. GK). In this case, the lender should not prove the damage caused to him. However, this does not mean that the creditor can receive any amount as a penalty. The court may reduce the amount of the penalty if the penalty established in the contract is clearly disproportionate to the consequences of the debtor’s breach of obligation. The penalty agreement must be made in writing.
5. Hold
Hold property, one of the types of interim measures is possible only in relation to things and impossible in relation to property rights (article 359 et seq. GK). Retention allows a creditor to hold the thing of the debtor in its possession until the debtor pays its obligations.
The disadvantage of retention is that, as in the case of collateral, the creditor is not allowed to satisfy its claims from the value of the property held. The retained item must be sold by the creditor through public auction.
“Non-traditional” ways of ensuring the performance of contractual obligations
Recently, companies operating in the Russian market are increasingly faced with the fact that the main ways to ensure the performance of contractual obligations are not always possible, convenient and cheap. Therefore, on the Russian market there is a tendency to the emergence and use of additional ways to ensure the fulfillment of obligations, most of the designs of which were borrowed from Western countries.
1. Repo (repurchase)
Becoming very popular repo transaction – purchase and sale/concession with a condition of repurchase/concessions. At the same time, courts still rarely recognize this new method of enforcement, despite the fact that the concept of this agreement is introduced in the Russian Tax code, and try to qualify this type of transaction as a pledge, satisfaction of the creditor’s requirements in which it is possible only through public auction.
2. Direct debit
Another security method is direct debit. Direct debit-is the right to write off the funds in the company’s account in case of default without the consent of the company. This possibility for the lender and the obligation for the Bank should be specified in the contracts. Direct debiting is possible both from one account and from all accounts opened in a particular Bank.
3. Conditional sale
Conditional sale is another way of securing the performance of obligations. The parties enter into a sale and purchase transaction under a condition of suspense. A condition of suspense is the failure of the debtor to fulfill its obligations under the main contract. If the debtor fulfils its obligations, the contract of sale does not enter into force. If the debtor does not fulfill its obligations under the main contract, the property under the contract of sale is transferred to the creditor, and the obligation to pay it is offset against the repayment of the debt under the main contract.
4. Credit
The letter of credit is also used as a security method. The letter of credit opened by the Bank at the request of the debtor, who undertakes to make payment to the lender upon the occurrence of an event of default of the underlying obligation and the provision of the creditor documents, as specified in the letter of credit.
5. Factoring
As part of factoring, the assignment of a monetary claim to a third party may be for the purpose of securing the performance of the debtor’s obligation to the creditor. In this case, the lender provides the financing, and the debtor is losing its right of claim to a third party resulting from the provision by the debtor of goods, performance of works and rendering of services to a third party. When factoring a third can only cash requirement. Only a Bank, credit institutions and other commercial organizations that have permission to carry out factoring activities in Russia can be a factoring creditor.
6. Trust transfer
A trust transfer by the debtor of ownership of its property to the creditor, similar to the institution of security assignment (Sicherungs?bereignung, German), is also sometimes used in practice in Russia. Such transfer is most often made out by the contract of purchase and sale of property. In case of proper performance of the debtor’s obligations, the parties terminate the concluded contracts, and in case of non-performance the property remains in the property of the creditor.
7. Reservation of ownership
The creditor has the right in the contract with the debtor to stipulate the condition under which the ownership of a certain thing is transferred to the debtor from the moment of execution of its obligations to pay for it. This right is granted to the creditor on the basis of clause 1 of article 223 of the civil code, on the basis of which the right of ownership passes at the time of its transfer, unless otherwise provided by the contract and the law, as well as article 491 of the civil code which directly establishes that if the contract of sale provides for a reservation of ownership, the buyer before payment of the goods is not entitled to alienate the goods or dispose of them otherwise.
from Andrey Nikishenko, 2018