Similarities in legal systems of Serbia and Montenegro as well as common legal market can on many occasions befog some key differences between certain legal terms. One of such differences is the time limitation of a registered pledge on movable assets.
Both Serbia and Montenegro have a statutory framework for registered pledges on movable assets; Serbia has its Act on Registered Pledge on Movable Assets (Zakon o založnom pravu na pokretnim stvarima upisanim u registar, “Official Gazette RS”, nos. 57/2003, 61/2005, 64/2006 and 99/2011 – other laws, “Serbian Pledge Act”) and Montenegro its Act on Pledge as a Security for Receivables (Zakon o zalozi kao sredstvu obezbjeđenja potraživanja, Official Gazette MNE nos. 38/2002, 1/2014 – other act and 14/2014 – other act, “Montenegrin Pledge Act”). Both acts regulate the pledge on movable assets registered in the public registry (a type of pledge which is not constituted by possession, like traditional pledge, but through registration in a public registry, similarly to a mortgage on immovable assets).
One of the key differences between the two systems is that, unlike in Serbia, the Montenegrin legislator limited the period of pledge registration.
Under Serbian law, a pledge is registered for an unlimited time period and its validity does not change over time. It is also explicitly provided that the pledgee has the right to enforce the pledge even if the underlying claim is time barred. The pledge can only cease to exist if (i) the underlying receivable also ceases to exist (by satisfaction or otherwise, however, not in case of expiration of the statute of limitations period), (ii) the pledged asset is destroyed, or (iii) the pledged asset is sold in foreclosure proceedings.
The Montenegrin Pledge Act has similar grounds for pledge cessation. A registered pledge shall cease to exist if (i) the pledgor and the pledgee agree to terminate the pledge, (ii) the pertinent receivable ceases to exist (by satisfaction or otherwise), (iii) a third party assumes ownership on the pledged asset without encumbrances (i.e. if the pledgor sells the pledged asset to a third party in the ordinary course of business, if all pledgees approved the sale of the pledged asset without encumbrances, or if the pledged asset is a share or security listed on the stock exchange or cash), and (iv) the pledged asset is sold in foreclosure proceedings. The Montenegrin Contracts and Torts Act also provides that a pledge can be realized in case the pledgor is in possession of the pledged assets or in case the pledge is registered in a competent public registry even if the secured receivable is time barred.
However, the Montenegrin Pledge Act provides that registration of the pledge is valid for 3 years starting from the day of registration of the pledge in the pledge registry. Pledge registration can be extended if the pledgee applies for extension 3 months prior to the expiration of pledge registration. In case of expiration of the pledge registration, and provided that the pledgee failed to request the extension of pledge registration three months prior to the expiration, or the pledged asset was not in the possession of the pledgee, the pledge shall become non-perfectuated (neperfektuirana zaloga). This means that such pledge would be ranked behind other perfectuated registered pledges. Even perfectuated pledges which were registered later would gain priority over an earlier non-perfectuated pledge. A pledgee can seek only one extension of the pledge registration, meaning that a pledge registration can last for a maximum of 6 years from the first registration of the pledge before it becomes non-perfectuated.
The consequence of a pledge becoming non-perfectuated is not so clear at first glance. Namely, the Montenegrin Pledge Act stipulates that a non-perfectuated pledge loses its priority over other perfectuated pledges that were registered later. On the other hand, only a perfectuated pledge is enforceable before a court. The Appellate Court of Montenegro also confirmed that a pledgee cannot seek enforcement of a registered pledge in case it became non-perfectuated.
This leaves a ground for interpretation that, according to the Montenegrin Pledge Act, a registered pledge as a property (absolute) right on movable assets can become time barred. Such legislative provisions are contrary to common principles of civil law in Montenegro that only contractual/tort rights can be time barred, unlike property rights.
In such case, there are only three options that the pledgee has at its disposal: (i) before a registered pledge becomes non-perfectuated, to extend the pledge registration (only one extension is possible); (ii) before a registered pledge becomes non-perfectuated, to enforce the pledge and to gain possession over the pledged assets, provided that the secured receivable became due for payment; or (iii) after a registered pledge becomes non-perfectuated, to conclude a new pledge agreement with the pledgor related to the same movable assets and to register a new pledge. This, however, is related to the risk that the new pledge will be lower ranked than pledges of other creditors who have registered their pledges in the meantime.
We can conclude that a registered pledge is a viable way to secure a receivable in Serbia, while in Montenegro, a registered pledge loses its enforceability (and ranking) over time. Therefore, companies investing in Montenegro should have in mind this limited effect of a registered pledge on movable assets when entering into transactions.