On 26 July 2017, the President signed Federal Law No. 212-FZ "On Amendments to Part One and Part Two of the Civil Code and Certain Laws of the Russian Federation."
The amendments aim to streamline the legal framework for finance transactions and cover assignments, loans, bank accounts and deposits, payment settlements (including with letters of credit), escrow and factoring. Some changes are novel, whereas others reflect the existing practices or existing laws and regulations. Below we provide a summary of the key changes.
The amendments entered into force on 1 June 2018.
Limitations on objections of the debtor against a new creditor's claims. According to the Civil Code, the debtor can raise objections against the claims of a new creditor which could be presented against the initial creditor, provided that the grounds for such objections arose before the debtor was notified of the assignment. The amendments also provide that, within a reasonable time after being notified of the assignment, the debtor must inform the new creditor of the occurrence of the grounds for the objections known to it (otherwise, the debtor will not be able to refer to those grounds later).
Limitation of the assignor's liability. Parties to an assignment agreement are allowed to agree that the assignor will not be liable for invalidity of the assigned claims. Such limitation of the assignor's liability is possible, provided that: 1) the agreement underlying the assigned claims relates to business activities of its parties, and 2) the invalidity of the assigned claims is caused by circumstances which the assignor was not or could not be aware of or by circumstances of which the assignor has informed the assignee. This possibility can become the basis for structuring assignments on a non-recourse basis.
Conclusion of a contract through a tender as required by law
Assignment of monetary claims. Previously, the Civil Code prohibited the assignment of claims under contracts concluded by virtue of law through a tender (according to the position of the Ministry of Finance, the ban applied, in particular, to the assignment of monetary claims under such contracts).1
The amendments now allow the assignment of monetary claims under such contracts (previously this possibility was confirmed by the court practice).
Amendments to a contract. Previously, the Civil Code allowed changing a contract concluded by virtue of law through a tender only: 1) if the change did not affect the contract terms that were essential for the determination of the price in the tender and 2) in other cases provided by law. The amendments introduced an additional basis for changes by expressly providing that the parties can change the interest rate under a loan (credit) agreement concluded by virtue of law through a tender in case of changes in a key rate established by the Central Bank, pro rata to such changes.
Consensual loan. It is now possible to agree that the creditor will undertake to provide a loan to the borrower (unless the borrower is an individual). Therefore, as opposed to the previous model of a "real loan," whereby a loan agreement was deemed concluded only when the loan is actually provided by the creditor to the borrower, the parties can agree on a "consensual loan," which is similar to a credit.
Similar to the regulations on credit agreements, the amendments provide that:
- the creditor can refuse to perform an agreement if there are grounds which clearly show that the loan will not be repaid on time;
- the creditor can refuse to continue performing the agreement if the loan is not used for its designated purpose,2 and
- a borrower engaged in entrepreneurial activities, in turn, can refuse to utilize a loan by notifying the creditor accordingly before the agreed date on which the loan is to be made, unless the law or agreement provides otherwise.
Lending of securities. The amendments expressly allow securities to be lent, irrespective of whether they are certified or uncertified securities. Previously, the possibility to lend uncertified securities was confirmed by the court practice in the context of marginal transactions made by brokers under the Securities Market Law.
Providing loans to third parties. The amendments envisage that a loan provided to a third party specified by the borrower will be deemed to have been provided to the borrower. Previously, the possibility of providing a loan to a third party was generally confirmed by the court practice.
Interest. The amendments envisage that an interest rate can be fixed or floating (i.e., can change depending on the agreed circumstances, including depending on changes in an agreed variable value). This was not expressly provided for in the Civil Code before; however, it was not prohibited either and was expressly provided for in the Law on Consumer Loans.
Loan agreements between individuals. A loan agreement between individuals must be concluded in writing if its amount exceeds RUB 10,000.
By default, a loan agreement between individuals (including entrepreneurs) is deemed interest-free if its amount does not exceed RUB 100,000.
Usury. The amendments limit interest rates agreed in loan agreements between individuals and between individuals and companies that are not professionally engaged in consumer lending (i.e., other than banks, microfinance organizations, etc.). If the agreed interest rate is at least twice the rate that is normally charged in similar cases and, as a result, it is extremely burdensome for the borrower, it can be decreased by the court to the interest rate that is normally charged in similar circumstances.
There is an exemption for loan agreements between individuals and companies that are professionally engaged in consumer lending because the relevant limits with respect to the "full cost" of consumer loans are already envisaged by the Law on Consumer Loans.
Prepayment. Loan prepayment at the initiative of the borrower, as a rule, requires the creditor's consent. The amendments specify that such consent can be included directly in a loan agreement.
Fees. According to the amendments, the borrower under a credit agreement undertakes to pay to the creditor not only interest, but also make other payments envisaged in the agreement, including those related to payments is subject to the Law on Consumer Loans.
The possibility of setting contractual fees is generally provided by the Law on Banks. However, the issue of whether certain fees can be charged has often arisen in practice. The previous court practice suggested that banks were entitled to charge a fee only if: 1) the fee was for rendering a standalone service which provides the borrower with some additional benefit or other positive effect, or 2) the fee could be considered as payment for the use of the credit. It remains unclear at this stage whether the amendments will change this approach.
Refinancing. Where a credit is provided to discharge another credit provided by the same creditor and it is agreed that the credit proceeds will not be credited to the borrower's account, the credit is deemed to have been provided when the borrower is notified by the creditor of the discharge.
Acceleration. Under the amendments, when a credit is granted to a company or an entrepreneur, it can be accelerated not only on the grounds envisaged by law, but also on the grounds envisaged by the agreement. This should allow the parties to be more confident when setting out contractual grounds for the acceleration of a credit.
Definition of a factoring agreement. The amendments introduce a new definition of a factoring agreement: one party (a client) undertakes to assign monetary claims against a third party (a debtor) to another party (a financial agent/factor) and pay for the services of the latter, and the financial agent undertakes to perform at least two of the following functions in relation to the assigned claims:
1) finance the client on account of the claims (including with a loan or an advance);
2) maintain accounts relating to the claims;
3) exercise rights relating to the claims (in particular, collect payments from the debtors);
4) exercise rights under the agreements securing the performance of obligations by the debtors.
This definition is quite close to the definition envisaged by the UNIDROIT Convention on International Factoring, which is effective in Russia as of 1 March 2015.
It is expected that the amendments will contribute to the development of not only factoring arrangements, but also securitization instruments.
Liability of a client to a financial agent. According to the amendments, unless agreed otherwise, the client will be liable to the financial agent if the assigned claim is invalid. At the same time, the definition of a valid claim previously provided in the Civil Code was abolished (it suggested that, at the time of the assignment, the client was not aware of the circumstances allowing the debtor not to satisfy the claim). Thus, based on the amendments, the risk of the debtor's latent objections lies with the client.
Debtor recovery of a sum paid to the financial agent. Previously, if a client was in breach of its obligations under an assigned contract, the debtor was entitled, in certain circumstances, to recover the paid sum from the financial agent. According to the amendments, the debtor will not be entitled to recover the paid sum from the financial agent, but will still be entitled to recover that sum from the client (i.e., from its direct counterparty). Thus, the financial agent will not be involved in disagreements between the client and its debtor arising from the client's non-performance under the assigned contract.
Irrevocable deposits. Previously, banks were obliged to return deposits to individual depositors on demand and individual depositors could not waive their right to receive a deposit on demand. The amendments allow banks to accept irrevocable deposits that will be certified by a savings certificate, which is a registered security and clearly states that an individual depositor is not entitled to receive a deposit early on demand.
With respect to irrevocable deposits of companies, the amendments specify that: 1) the dates and the procedure for the return of a deposit to the company are to be defined by the deposit agreement and 2) if the deposit is certified by a deposit certificate, the certificate can contain a ban on early demand of the deposit.
Savings and deposit certificates. The amendments specify that savings and deposit certificates can only be registered securities (previously they could also be bearer securities). Savings certificates can only be held by individuals, including entrepreneurs, whereas deposit certificates can only be held by companies.3
Entitlement to funds in an account. According to the amendments, funds in a bank account are deemed not to belong to the client within a certain term (not exceeding 10 days) if the payee and/or its servicing bank have confirmation that the client's debiting instruction can be executed. After that term, funds that still remain in the client's account are deemed to belong to the client again.
Joint accounts. The amendments introduce the possibility of opening joint bank accounts. This option is available for individuals only. Rights to funds in a joint account belong to the relevant individuals pro rata to the amounts contributed by each of them or by third parties in their favor (unless a bank account agreement provides otherwise). If a joint account is opened by spouses, they are deemed to have joint rights to the funds in the account (unless otherwise envisaged by a marriage contract, of which the bank was notified).
Funds in a joint account may not be attached to discharge the debts of one of the account holders in an amount exceeding his/her share. If the account is held by spouses, the attachment would be subject to the family law rules.
Pool of bank accounts. The amendments allow banks to execute a debiting instruction even if there are no funds in an account, provided that the account is included in a pool of accounts (including those held by different entities) and the total amount in those accounts is sufficient to execute the debiting instruction. Potentially, these amendments will contribute to the development of cash pooling services helping to optimize cash flows within a group of companies. However, the relevant secondary laws or clarifications would be needed in relation to the procedure for debiting and the procedure for pooling accounts.
The possibility of imposing contractual restrictions. The amendments eliminate the uncertainty as to whether an agreement can impose restrictions on operations in a bank account. It is envisaged that: 1) unless the law provides otherwise, a bank account agreement can specify cases when a bank must refuse to credit/debit the client's account, and 2) the law or an agreement can restrict the disposal of funds in the account. These clarifications are positive, in particular, for direct debiting agreements, which are often used in practice as a form of quasi-security.
Closing inactive accounts. The amendments aim to simplify the procedure for banks closing inactive accounts. Previously, a bank could refuse to perform a bank account agreement if there were no funds and operations in an account for two years (subject to a two-month notice to the client). After the amendments' entry into force, these rules remain in effect for the accounts opened to individuals who are not entrepreneurs. However, the rules changed with respect to the accounts opened for companies and entrepreneurs. First, banks are entitled to refuse to perform a bank account agreement if there are no operations in the account, rather than both "funds and operations" in the account as before (i.e., even if there are funds in the account), and, second, a bank account agreement can specify a different period for considering an account inactive, i.e., other than two years (but in any case no less than six months).
In addition, according to the amendments, a prior notice to the client can be sent not only in writing, but also in another way specified in the agreement.
A bank account agreement can also contain the bank's waiver of its right to close an inactive account.
Public deposit account
General comment. The amendments combine the deposit accounts that already exist in practice, i.e., deposit accounts of notaries, court bailiffs and other authorities, into a single category of "public deposit accounts" and introduce detailed regulations for such accounts. Public deposit accounts can be opened only by banks whose capital is no less than RUB 20 billion.
Accounts/deposits in precious metals
General comment. The amendments introduce in the Civil Code concepts of bank accounts and bank deposits in precious metals. This is not completely new as it is already possible to open "metal accounts" (as envisaged by Central Bank Regulation No. 50 "On Credit Organizations' Operations with Precious Metals […]" of 1 November 1996).
Notably, bank operations on opening and maintaining bank accounts in precious metals and on making transfers through such accounts are now considered as standalone operations (i.e., they are indicated in the Law on Banks separately, in addition to the operations on accepting precious metals in deposits and their placement envisaged before).
Entitlement to funds in an escrow account. The amendments specify that before the date when the grounds for releasing funds to the beneficiary arise, the funds are deemed to belong to the depositor, and after that date to the beneficiary.
Immunity of an escrow account. The amendments expressly prohibit the suspension of operations in an escrow account, the attachment of funds in an escrow account and its debiting to discharge debts of the depositor or the beneficiary.
Crediting funds to an escrow account. The amendments exclude the possibility of crediting an escrow account with the depositor's funds other than those to be deposited in accordance with the escrow account agreement.
Regulation. Unless the special rules on escrow account agreements provide otherwise, the relationship of the parties will also be subject to the rules on escrow agreements (please see below).
Definition of an escrow agreement. In addition to the escrow account agreement envisaged by the Civil Code before, the amendments introduce a new instrument – the escrow agreement. It differs from escrow account agreements by the range of persons that can act as escrow agents and the assets that can be deposited in escrow, and is generally regulated in more detail.
Under an escrow agreement, a depositor undertakes to deposit certain property with the escrow agent in order to perform its obligation to transfer that property to a third party (the beneficiary of the escrow) and the escrow agent undertakes to secure that property and transfer it to the beneficiary once the agreed circumstances arise.
It is expected that this instrument could be used, for example, in agreements for the sale and purchase of securities.
Key features of an escrow agreement:
- the term of the agreement is no more than five years;
- the agreement is made between the depositor, the beneficiary and the escrow agent;
- the agreement must be notarized, except for cases where cashless funds or uncertified securities are deposited in escrow;
- there are no restrictions on the range of persons that can act as escrow agents;
- the property deposited in escrow can include: 1) movable property (including cash, certified securities and documents), 2) cashless funds and 3) uncertified securities;
- the property in escrow must be segregated from the other property of the escrow agent;
- neither the depositor nor the escrow agent are entitled to dispose of the property in escrow (unless agreed otherwise);
- a reciprocal escrow is also possible, i.e., the placement in escrow of property that is to be mutually transferred by the parties to a bilateral agreement;
- the following grounds, among others, can serve as a basis for releasing the property in escrow to the beneficiary: 1) the performance of the agreed actions by the beneficiary or a third party, or 2) the occurrence of the agreed date or event. The beneficiary may or may not be required to present documents confirming that the agreed grounds have arisen;
- as a rule, the escrow agent has to check the documents presented by the beneficiary (if they were required at all). However, the agreement can require the escrow agent to verify whether the grounds for the transfer of property in escrow have arisen;
- the property in escrow may not be seized to discharge debts of the escrow agent, depositor or beneficiary, but, to discharge the depositor's or the beneficiary's debts, their claims against the escrow agent can be enforced (regarding the return or transfer of the property in escrow).
Bankruptcy of the depositor. The depositor's bankruptcy will not prevent the escrow agent from transferring the property in escrow to the beneficiary to fulfill the depositor's obligations. The property in escrow will be included in the bankruptcy estate of the depositor only if no grounds for its transfer to the beneficiary arise within six months after the receivership procedure has commenced.
Movable property. Before the grounds for the transfer of movable property in escrow to the beneficiary arise, the title to it belongs to the depositor, and after that it passes to the beneficiary (the law can provide otherwise, however). Also, as a rule, the parties' relationship is subject to the Civil Code rules on storage agreements.
Uncertified securities. Based on the amendments, securities are deposited in escrow by way of making a record that the securities are encumbered in the securities' owner's account. The Securities Market Law may specify a different procedure and rules. Due to the lack of specific regulations in the Securities Market Law and the relevant secondary laws, the mechanism for the escrow agent's transfer of securities held in escrow to the beneficiary remains unclear.
Cashless funds. If the escrow agent is not a bank, then funds need to be deposited in a nominal account of the escrow agent.4 The beneficiary of such nominal account before the grounds for the transfer of funds arise is the depositor, and after that date it is the beneficiary under the escrow agreement.
Notably, the Civil Code rules on attachment of funds in nominal accounts and debiting such accounts do not apply to nominal accounts used for depositing funds in escrow.
Letters of credit
General comment. A number of the amendments reflect the existing regulations contained in Central Bank Regulation No. 383-P "On Transfer of Funds Rules" of 19 June 2012. In particular, the following issues are now regulated by the Civil Code: 1) letters of credit are available not only by payment or acceptance of a bill of exchange, but also "in other ways"; 2) letters of credit are by nature separate transactions; 3) the term for the examination of presented documents is specified (five business days), and 4) nominated banks are entitled not to honor an uncovered letter of credit before they receive funds from the issuing bank.
Irrevocable letter of credit. Under the amendments, a letter of credit is deemed to be irrevocable, unless it explicitly states otherwise (which differs from the previous rule).
Banks' liability to the payee. The amendments provide that: 1) confirming banks must honor letters of credit on a joint and several basis with the issuing bank, and 2) the issuing bank and confirming bank have joint and several liability to the payee for failure to properly honor a letter of credit. At the same time, the amendments fail to expressly state that a letter of credit can be made available with a confirming bank.
Transferable letters of credit. The amendments introduce a new category of letters of credit in the Civil Code – a transferable letter of credit, which may be made available to a third party specified by the payee (subject to the consent of a nominated bank). It should be noted that Regulation No. 383-P already permits letters of credit to be made available to third parties.
The Civil Code rules on assignments do not apply to transferable letters of credit.
The assignment of claims by the payee. The payee is not allowed to assign its claims under a letter of credit unless the letter of credit provides otherwise.
Banks' liability to the payer. Issuing banks will continue to be liable to payers. However, the rule allowing a nominated bank to be held liable to the payer in case of incorrect payment under a covered or a confirmed letter of credit has been abolished.
General comment. Overall, the amendments reflect regulations already contained in Central Bank Regulation No. 383-P. In particular, the following issues will now be regulated by the Civil Code: 1) the procedure for the acceptance of a payment order for execution, 2) the terms for notifying the payer of a refusal or the execution of a payment order and 3) the possibility for the payer to revoke a payment order before the transfer becomes irrevocable.
Joint and several liability of banks. According to the amendments, in certain cases a court can hold the intermediary bank or the payee's bank liable to the payer on a joint and several basis. The payer's bank can be held liable if it chose the intermediary bank.