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Consideration of the potential implications of amendments to Serbia’s Pledge Law

June 2019 – It has been just over a month since amendments to the main legislation in Serbia governing pledges entered into force (i.e., on 7 May 2019). In addition to changing the legislation’s name—from the “Law on Pledges on Movable Assets Registered in the Pledge Register” to the “Law on Pledges on Movable Assets and Rights Registered in the Pledge Register” (the “Pledge Law”)—the amendments introduce changes to nearly half of the provisions of the previous law.

Our understanding is that, to a large extent, these amendments were adopted as a result of recommendations from the World Bank in relation to the parameters set out in the “Getting Credit” chapter of its Doing Business report. They are intended to introduce a broader scope of security instruments and to resolve long-standing practical difficulties with the registration of pledge rights over certain types of movables, primarily over bank accounts and groups of movables. However, it seems that the Pledge Law addresses these recommendations only in part, and some provisions may be interpreted as imposing even more obstacles to the efficient registration of pledge rights.

Below is a detailed overview of some of the main changes introduced by the Pledge Law and related issues.

Improvements to the previous solutions contained in the Pledge Law

  • Possibility to register a possessory pledge and retention of ownership. As of 1 January 2021, it will be possible to register a right to a possessory pledge and a retention of ownership right based on an agreement on the sale of movables that is aimed at securing the rights of the seller until the payment of the purchase price in total. Such a retention of ownership rights may have an impact on creditors of the purchaser, but only if the retention of ownership right is registered in the Pledge Register prior to the purchaser’s insolvency or seizure of its property.

Although the aforementioned concepts have been regulated by Serbia’s “Law on Contracts and Torts” for decades, it has previously been impossible to register such rights in a public register. It remains to be seen whether the possibility to register such rights will now make their use more appealing to market participants, as based on our experience these concepts have not been frequently utilised in practice to date.

  • Extension of the right of pledge over newly acquired assets that form part of a pledged group of movable assets by the operation of law. The Pledge Law introduces a more elaborate provision with respect to the possibility of pledging a group of assets and inventory. Namely, the Pledge Law now explicitly provides that a group of movable assets (including inventory) that is situated at a specific place and consists of movables that are intended for sale or lease, as well as raw materials and materials used to carry out a business activity, may be subject to a pledge. If certain movables become part of the group of movable assets following the registration of the pledge, the pledge shall extend to such newly acquired movables by operation of law, provided that such movables are owned by the pledger.

This amendment seems to bring the concept of a group of movable assets and inventory closer to the “floating charge” concept of common law (primarily in terms of the widening of the scope of assets it may encompass). However, the positive impact of such amendments would not be realised if the Pledge Register continues to strictly adhere to the principle that the assets need to be sufficiently determined in order to be pledged and would require the filing of the list of newly acquired movable assets in order to formally include them as part of the existing pledge.

  • Extra-judicial enforcement commences within 30 days from the date of publication of the enforcement notice by the Pledge Register. In order to increase the efficiency of the extra-judicial enforcement over a pledged asset, the Pledge Law sets out that extra-judicial enforcement commences within 30 days from the date of publication of the enforcement notice by the Pledge Register on its website. This is a substantial improvement to the previous rule, which provided that extra-judicial enforcement commences following the delivery of the notice of enforcement to the debtor and pledger, which resulted in various abuses and delays in practice.

Provisions of the Pledge Law that may potentially raise concern

  • Potentially more cumbersome appointment of the security agent. The concept of “security agent”, i.e., a third party appointed by creditors to protect and enforce a pledge on their behalf, was introduced into Serbia’s legal system back in 2003 and is widely used in practice. The benefits of this concept are especially visible in syndicated lending. Having a security agent appointed as part of a loan facility or an inter-creditor agreement in place enables syndicate members to transfer their receivables under the facility agreement during the term of the loan without the obligation to register new creditors in the Pledge Register. In addition, the practice of the Pledge Register has evolved gradually to allow the security agent to be registered in the Pledge Register—at least until the entry into force of the new Pledge Law—on the basis of the pledge agreement concluded between the pledger and the security agent as the pledgee, where the pledge agreement contains a reference to the document pursuant to which the creditors have appointed the security agent (e.g., the facility agreement).

It appears that this amendment to the Pledge Law may be interpreted so as to require that creditors appoint a security agent solely on the basis of a pledge agreement or a separate Power of Attorney. This would mean that the pledge agreement would need to be signed by all members of the syndicate or, alternatively, that each member issue a Power of Attorney that should be notarised and potentially apostilled. If the Pledge Register would interpret the relevant provisions in this way, it would degrade the existing practice and introduce a number of practical obstacles both at the time of registration of the pledge and at the time of changes to the creditors’ pool.

  • Unclear proceedings for pledging the funds on bank accounts. One of the notoriously conservative standpoints of the Pledge Register has been its requirement that the subject of a pledge over bank accounts are the actual funds on such bank accounts at the time the pledge is established. This standpoint is based on the opinion of the Serbian Ministry of Finance dating back to 2011, which in practice has resulted in the need to come up with various creative solutions in order for the pledger to pledge the highest amount of funds on its bank accounts as possible.

It seems that the regulator has acknowledged the practical obstacles of such an approach and intended to remove them by introducing a separate provision into the Pledge Law titled “Pledge of funds on bank accounts”. This provision sets out that the subject of such a pledge are the receivables of the pledger that are, in accordance with the agreements from which they arise, paid to a separate bank account of the pledger. In such case, the subject of the pledge are the receivables of the pledger from the aforementioned agreements, and the information to be registered in the Pledge Register should also include information on the separate bank account of the pledger to which such receivables are paid.

It seems that this provision contains inherent contradictions, as it is not clear whether the subject of the pledge in this case are the funds on the bank account or the receivables arising out of the relevant agreements and owed to the debtor. If the latter interpretation prevails, it seems obsolete to regulate the pledge over the bank accounts separately, as the pledge over the receivables, both current and future, is already regulated by the Pledge Law.

In order to avoid different interpretations and actually realise the intended benefit of the pledge of bank accounts for creditors, the only solution seems to be that the Pledge Register interprets the relevant framework in the manner that it is interpreted in comparative practice, i.e., that the subject of the pledge is the claim of the pledgee to the balance of the bank account that is held with the account bank. The Pledge Register should proceed with the registration of such a pledge upon being provided with details of the number of the pledged bank account, details of the bank where the account is held and the name of the pledger. However, it appears that such an outcome, although preferred from the creditor’s point of view, would be difficult to achieve in practice, in light of the specific legislative provisions contained in the Pledge Law and the Pledge Register’s practice to date.

For further information please contact Branislav Marić, Partner, at

e-mail

, Partner, and Tijana Arsenijević, Senior Associate, at .