2.9. Insolvency

The Guide finally includes a set of recommendations that deal with the enforcement of a security right in the case of the insolvency of the grantor. The Guide recognizes that this is a matter of insolvency law and simply implements the recommendations of the UN CITRAL Legislative Guide on Insolvency Law. The reason is that a security right cannot fulfill its role of providing security unless it is recognized when it is needed most, that is, when the grantor can no longer pay all its creditors.

The principles of the insolvency chapter of the Guide may be summarized as follows. First, encumbered assets are part of the grantor's insolvency estate, but the secured creditor may request relief (the assets are released, that their value is secured or payments against the secured obligation continue). Second, the pre-commencement effectiveness of a security right is recognized, subject to avoidance actions (relating to fraudulent or preferential transfers which is an issue of no concern to a legitimate lender). Third, the pre-commencement priority of a security right is also recognized, subject to any preferential claims. In this regard, the Guide recommends that preferential claims should be limited both in number and in amount and, to the extent some are retained, they should be set out clearly in the law. Fourth, existing secured creditors may be bound against their will in the case of reorganization proceedings, but only subject to a decision of the insolvency court that this is necessary and appropriate protection of the value of the security right. Fifth, post-commencement finance does not have priority over existing security rights, unless the insolvency court decides otherwise because this is necessary for the success of the reorganization proceedings and the value of existing security rights is protected <1>.

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<1> Guide, chapter XII.

3. Rules on the registration of pledges

3.1. Scope of application

The registration of pledges is addressed in a new law that introduces changes to the Russian law on notary acts and other laws <1>. The law deals with registration of various types of act, including testaments, powers of attorney, marital contracts and notices of pledges <2>. In addition, registration seems to be applicable for pledges in all of movable asset. But the relationship of the scope of this law with the scope of the draft provisions of the Civil Code is not clear. Moreover, even if all pledges are covered in the new law, not all transactions fulfilling security purposes are covered.

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<1> Federal Law of October 2. 2012. N 166-FZ.

<2> Article 34.2.

The Guide recommends that notice registration be dealt within the secured transactions law. For reasons of completeness of the secured transactions law, but also for reasons of certainty and transparency in the law, registration should be dealt with in the secured transactions law. In the case of Russia, this could possibly be done by including the provisions for the registration of pledges in the part of the Civil Code that deals with pledges. This could be done even if the pledge registration is initially dealt with in a separate law which is later integrated in the Civil Code (as many States did with the United Nations Convention on Contract for the International Sale of Goods and the UN CITRAL Model Law on Cross-Border Insolvency). This is important because certainty and transparency of secured transactions law can have an impact on the availability and the cost of credit. Addressing registration of pledges in a law on notarial acts from testaments to marital contracts is not the best way to ensure certainty and transparency. Alternatively, the two sets of provisions should be closely coordinated.

In addition, the Guide recommends that the scope of the registry (that is, the kinds of transactions that may be registered) be the same as the scope of the secured transactions law, which is broad. The reason is that only a comprehensive law can achieve the certainty necessary for lenders to lend at affordable terms. The multiplicity of laws (and uncoordinated registries) that creates gaps and inconsistencies is the main problem of the secured transactions laws of even developed countries <1>. Moreover, the Guide recommends notice registration as the main (but not the exclusive) method of making a security right effective against third parties <2>. The reason is that the order of registration is not the best basis of priority for assets such as, for example, bank accounts, letters of credit, negotiable instruments or negotiable documents (see below).

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<1> For a critical discussion of, for example, English secured transactions law, see: Roy Goode, Commercial Law (edited and fully revised by Ewan McKendrick), 4th ed., Penguin Books, London, 2010. P. 718.

<2> Recommendations 32 - 34.