Reforms on Pledge of Movable Properties – New Benefits for Creditors

The Law on Pledge of Movable Property in Commercial Transactions (the “New Law”), as well as the related secondary legislation, have come into force on 1 January 2017. Abolishing the Law on Commercial Enterprise Pledge, the New Law introduces a new system and provides for a more flexible and secure means for the pledge of movable property.  

Among the novelties introduced by the New Law, the following are noteworthy:

• No physical delivery: It is possible to pledge movable property without physical delivery of the pledged property. Pledge is established through registry with the Pledged Movable Property Registry.
• Wide scope of assets that may be pledged: Assets under an enterprise, such as machinery, trademarks, trade names, products as well as existing or future receivables and licences may be pledged.
• Partial pledge of commercial enterprise: Instead of the pledge of a commercial enterprise in its entirety, parties may individually pledge any properties under the enterprise, as sufficient to cover to amount of debt.
• Cushion for debt coverage: The New Law provides that the total value of pledged properties may exceed the amount of the secured debt by 20%, which shall constitute a cushion for any devaluation.
• Alternate default rights: In the event of default, in addition to recourse to general collection proceedings, the creditor may demand the transfer of ownership of the pledged property (i.e. lex commisoria does not apply), transfer its rights to an asset management company or use any license or lease rights that are not subject to physical possession.
• Tax exemption: The execution of the pledge agreement and the registration of the pledge are exempt from any tax and duties.  

Commercial enterprise pledges established before 1 January 2017 will continue to be subject to the Law on Commercial Enterprise Pledge and thereby the New Law does not apply to previously established pledges. Nevertheless, banks and financial institutions which seek to revisit their loan and security agreements in light of the current financial environment, may choose to renew their securities.  By amending any existing movable pledges or commercial enterprise pledges and establishing new movable property pledges under the New Law, it would be possible to benefit from the beneficial terms under the New Law explained above.