On 2 May 2017, the President of the Republic of Azerbaijan signed a decree approving the Law on Encumbrance of Movable Property (the Law).

The Law is the first legal act regulating secured transactions and providing for the legal regime of encumbrance of movable property (the Encumbrance) related to the performance of obligations, secured parties' rights, levy of execution on movable property, state registration of the Encumbrance and other issues regarding the use of the registry.

The following property may be subject to the encumbrance:

  • any movable property (excluding securities and movable property subject to state registration)
  • rights and claims (ie, intangibles)
  • any movable property owned by the encumbrancer in the future

According to the Law, the same movable property may be subject to more than one encumbrance. Unless otherwise provided by the law or contract, the Encumbrance shall extend to the following:

  • accessories of the subject of the Encumbrance
  • benefits derived from the use of the object of the Encumbrance
  • object of the Encumbrance that must be changed, replaced or restored
  • income derived from the alienation of the object of the Encumbrance, if it is possible to identify it
  • insurance compensation, if any
  • compensation amount to be paid to the debtor as a result of levy of execution, nationalization or requisition of the object of the Encumbrance

Unless the law or nature of the obligation does not require otherwise, a third party that performs the debtor's obligations acquires the encumbrancer's rights secured by the Encumbrance. The Law determines state, municipal and private forms of encumbrance and provides the forms of these encumbrances accordingly.

Importantly, the Law determines the disclosure of encumbrance to third parties and forms of disclosure, which qualify as perfection of a security interest. Thus, it is voluntary for an encumbrancer to disclose private encumbrance, while such disclosure is mandatory for state and municipal encumbrance. The disclosure plays a significant role in determining the order of priority of the encumbrancers' claims, among other things.

The Law also regulates the payment of claims of encumbrancers ranking in the same order of priority and preferential rights in connection with the accessories of immovable property (ie, movable property), a set of movable property and future property.

Under the new Law, except for some cases, change of ownership of the object of the Encumbrance and its use by or lease to third parties does not affect the encumbrance or the encumbrancer's preferential right.

The Law also regulates the characteristics of recovery of the subject of encumbrance, as well as the encumbrancer's operations with regard to the subject of encumbrance.

The Law introduces rules on state registration and state registry of the Encumbrance. The registry is operated electronically and continuously for upload and search of information. In addition, except for certain data, the information entered in the registry is open to all persons searching in the online registry.

The encumbrance notifications entered in the registry should provide for detailed information on the Encumbrance and its validity period. The notification is submitted by the encumbrancer and the written consent of debtor is required, provided that the Encumbrance was not established before the Law entered into force. The written consent should be included in the agreement or issued as a separate document. Within five business days upon the debtor's fulfillment of the secured obligations, the encumbrancer should submit a notification on termination of the Encumbrance in the registry.

Most importantly, the Law introduces revolutionary simplified methods of enforcing security interests in relation to movable pledges, including intangibles. For example, subject to certain limitations, a secured party may take possession or control over collateral and sell it independently through a public auction or private sale. This will enable financial institutions to lend more funds to small and medium enterprises secured by their movable assets and intangibles, such as accounts receivable.

Finally, the obligations related to the encumbrance created before the Law came into force are also to be regulated by the Law.