Reform of the Russian Civil Code Provisions on Financial Transactions: A Brief Overview
As a part of the ongoing modernization of the Civil Code, Federal Law No 212-FZ “On the Introduction of Amendments to Parts One and Two of the Civil Code and Certain Legislative Acts of the Russian Federation” (the “Law”) was adopted on July 26, 2017.
The proposed amendments will come into force on June 1, 2018.
The Law is focused on reforming rules on financial transactions (in particular, loan agreements, settlement of accounts, conditional deposit (escrow) agreements, bank deposit and bank account agreements, factoring, letters of credit, transferal of rights and some others).
The amendments are introduced to Parts One and Two of the Civil Code, and to the following Federal Laws: “On Banks and Banking Activities,” “On Precious Metals and Precious Stones,” “On Mortgages (Charge of Immovable Property),” “On Insolvency (Bankruptcy),” and “On Enforcement Proceedings.”
The number of amendments is substantial. Below we discuss only some of the most significant of them.
The Law will allow for a loan agreement to be entered into in the form of a consensual agreement and not only in the form of a real contract. This means that it will be possible for a loan agreement to be deemed concluded from the moment the parties reach agreement on all substantial terms and not from the moment of transfer of the loan proceeds. Lifting the formerly rigid requirements on the nature of loan agreements will enable non-credit organizations to structure transactions more easily and efficiently. In particular, it will become possible to register mortgages prior to provision of the monies under a loan agreement.
Where the lender is an individual, the loan may only be entered into as a real contract.
Under the new Law where a loan has “usurious interest” (that is, two or more times higher than the usual rate in similar transactions) interest may be decreased by a court to that amount of interest charged in comparable circumstances. This rule only applies to loans granted by legal entities that are not professional lenders and to loans made by individuals .
Other amendments include the right of the lender and the borrower to repudiate a loan agreement during the period between when the agreement is signed and the monies are disbursed ( the lender in particular shall be entitled to repudiate the agreement where it becomes apparent that the loan will not be paid back on time). The Law gives explicit permission for securities to be the subject of a loan agreement etc.
Creditors shall be entitled to accelerate repayment of a loan in cases provided for by the Civil Code, other laws and where the loan has been granted to a legal entity or individual entrepreneur, as well as cases provided for in a credit agreement. This rule reflects case law that prohibits acceleration of credit agreements where a loan is granted to an individual (not doing entrepreneurial activity) on contractual grounds (in the absence of specific grounds in statutory law).
The proposed amendments bring the Civil Code provisions in line with the 1988 Unidroit Convention on International Factoring .
Pursuant to the Law a factor must have performed at least two of the following actions (the Convention contains similar rules):
– transferring money to the client, including loans and advance payments;
– maintaining records of the client’s monetary claims to third parties (debtors);
– enforcing the client’s monetary claims;
– performing rights under the agreements securing the obligations of the debtors.
According to the Law, the factor’s obligations may include maintenance of accounts and provision to the client of other services related to the account receivables.
The Law makes it clear that the rules of Chapter 24 of the Civil Code (on substitution of persons in an obligation) shall apply to factoring. Depending on the contents of the factor’s obligations, rules on purchase and sale and loans and services may also be applicable.
The right of the factor to re-assign account receivables depends on the purpose of the assignment of receivables by the client to the factor; where receivables are assigned for the purpose of acquisition by the factor, the assignment is allowed; where receivables are assigned as a security interest or for the provision of services related to the receivables, assignment is not allowed. However, these rules are discretionary and parties can contract around them.
Under the current language of the Civil Code, the debtor of the client under certain circumstances may reclaim from the factor sums paid to the factor to which the debtor is entitled. The new Law removes these provisions.
4. Bank Deposits
The Law distinguishes savings certificates from deposit certificates: savings certificates are for consumers whereas deposit certificates are for corporate or partnership entities. Currently, deposit and savings certificates may be either bearer or registered securities. When the Law comes into force in June, both kinds of certificates will have the form of registered securities.
5. Bank Accounts
Among other revisions of banking law, the Law introduces new types of bank accounts: joint account (available for individuals only), precious metals accounts, and public deposit account.
Rights to moneys deposited in a joint account will be deemed to belong to the holders of the account proportional to their contributions unless otherwise is provided by the bank account agreement. When a married couple opens a bank account, rights to the funds in the account shall be held in common, unless otherwise is provided in a marriage contract (which the bank must have notice of).
Public deposit accounts are to be used by notaries, bailiffs, courts and other bodies and persons that may accept moneys on deposit from a debtor or another person specified in the law (so that such funds are credited in favor of a beneficiary). Funds in a public deposit account may not be seized for enforcement of obligations of the holder or beneficiary of the account. Obligations of the beneficiary or deponent may only be enforced against their claims to the holder of public deposit account.
6. Settlement of Accounts
The Law explicitly allows wire transfers without opening bank accounts. Strangely, the Law implies that the settlement of accounts by way of payment orders without opening bank accounts shall only be performed using cash (Article 866.1 of the Civil Code introduced by the Law). This is not in line with the Law “On the National Payment System” that allows for transfers to be made using electronic money and prepaid cards.
The Law amends the rules governing letters of credit. Some of these amendments are designed to bring the rules of the Civil Code in line with the ICC Uniform Customs and Practice for Documentary Credits (UCP 600).
The Law provides for an open list of actions that a bank may perform pursuant to a letter of credit under the instruction of the payer. Under the current version of the Civil Code the list of such actions is a closed one and includes making payments to the beneficiary and the payment, acceptance and discounting of a bill of exchange.
The letter of credit will be irrevocable, unless otherwise provided by its terms. Under the current version of the Civil Code the opposite presumption holds).
The Law explicitly provides for the joint and several liability of the issuing bank and the confirming bank under a letter of credit.
As one of the steps towards bringing the rules of the Civil Code in line with the UCP 600, the Law adds a new article governing transferable letters of credit.
7. Conditional Deposit (Escrow) Agreements
In addition to the escrow account agreement already provided for by the Civil Code, the Law introduces a new type of contract – a “conditional deposit (escrow) agreement” (Chapter 47.1).
Pursuant to a “conditional deposit (escrow) agreement” a party shall deposit property with an escrow agent for the purpose of fulfilling the party’s obligation to transfer such property to the beneficiary, and the escrow agent undertakes to procure for safe keeping such property and to transfer it to the beneficiary when grounds specified in the agreement arise.
The conditional deposit (escrow) agreement shall be concluded by the party, beneficiary or escrow-agent for a term of not more than five years. Escrow agreements shall be notarized unless the deposited property is non-cash money or paperless securities.
The difference between an “escrow account agreement” and an “escrow agreement” is that there is no limitation as to who may be an escrow agent in the latter (whereas under an “escrow account agreement” the escrow agent may only be a credit organization). Also, for an “escrow agreement” the property deposited may be not only non-cash money but also movable things (cash, documentary securities and documents) as well as paperless securities.
The Law provides for protection of escrow agreements in case of a party’s insolvency. Insolvency trustees will not be entitled to dispose of the property deposited in escrow and declaring a party bankrupt does not impede the transfer by an escrow agent of the deposited property to the beneficiary.
Where in a bankruptcy liquidation proceeding such grounds do not arise within six months from the initiation of the proceeding, the deposited property shall be included in the bankruptcy estate.
Lastly, claims against a party, escrow agent or beneficiary may not be enforced against the property deposited in escrow. Property in an escrow account cannot be garnished – claims can only be made personally against the account holder or beneficiary.