The Law on the Pledge of Movable Property and Intangible Assets (2015) (Pledge Law) has recently taken effect in Mongolia. The Pledge Law is likely to assist those who wish to secure the performance of an obligation by way of a pledge over movable property or intangible assets in Mongolia.
Important changes under the Pledge Law include:
- the creation of an electronic registration system which allows for registration of certain new and existing pledges of movable property and intangible assets;
- the ability for third parties to search the electronic registration system for the existence of registered pledges of movable property and intangible assets;
- priority being given to qualifying pledges which are perfected through electronic registration or other certain prescribed means under the Pledge Law; and
- increased certainty of available rights to pledgees (those to whom qualifying property or assets have been pledged) for enforcement in the event of a default under a pledge arrangement.
The effective date of the Pledge Law is 1 March 2017 (Effective Date) and the electronic registration system envisaged by the Pledge Law is now available for use.
What has changed
Prior to the introduction of the Pledge Law, pledges of movable property and intangible assets were primarily governed by the Civil Code of Mongolia (2002) (Civil Code), which some considered gave insufficient support to potential or actual pledgees of movable property and intangible assets because:
- there was no ability (or requirement) to register a pledge over movable property or intangible assets or to ascertain the status of the same;
- in the absence of a public registry, a third party could not ascertain if certain movable property or intangible assets were otherwise pledged; and
- enforcement of a pledge of movable property or intangible assets required the cooperation of the pledgor in certain circumstances upon the occurrence of an event of default under the pledge arrangement.
These issues have been largely improved for pledgees with the introduction of the Pledge Law.
What can be pledged
Subject to the exclusions stated below, movable property which is tradable and which physically exists (now or in the future) can be pledged under the Pledge Law.
Click here to view table.
Pledges in relation to mining licences are separately regulated under the Minerals Law of Mongolia (2006).
Order of priority
The date of the perfection of a pledge is important as it will determine the order of priority where a default situation exists. Perfection can generally occur either by transferring the pledged property or asset into the possession of a pledgee or electronically registering the pledge.
As a general principle under the Pledge Law:
- pledges which are perfected will rank above other pledges which have not been perfected in relation to the same property or asset; and
- where no pledges in relation to the same property or asset have been perfected, those pledges will rank in order of the date of the pledge arrangement.
- A pledge in relation to a savings account will be perfected when a pledgee takes control over the savings account.
- A pledge recognising a security right over property or assets purchased specifically under a dedicated loan arrangement will rank above other types of secured pledges (even where perfected) where a pledge is registered on the electronic register within 10 days of that pledge being given.
- Certain secured pledgees and other entities who are entitled to seize property or assets (i.e. under a mechanics lien etc) will take priority over other perfected pledges involving the same property and which do not give the same entitlement.
Electronic Registration System
Registration is conducted online through the governments website at www.mpr.gov.mn. No information or documents (such as pledge arrangements) are required to be lodged in paper form.
In order to perfect a pledge by way of registration under the Pledge Law, the pledgee must register a pledge notification with the electronic registration system including:
- Details of the pledgee & pledgor (including full name, address and registration number).
- Description and quantity of the pledged item.
- Deadline to perform the secured obligation.
In order to register a pledge notification, the pledgee must request a login account by filling out the relevant template available on the website. The State Registration Office will provide an account name and password upon receiving this request.
Where the pledgee is a company, it is possible for multiple users from the company to access the website provided that such users are registered in relation to the company's account. The company may request that administrative rights are given to a single user where multiple users are registered.
The pledgee will be able to register a pledge notification and make further changes to that notification once a login name and password have been provided and sufficient credit to pay the relevant stamp duty fees for registration have been given by the pledgee. Credit and debit cards are able to be used for this purpose.
The cost of registration is:
- MNT 20,000 for a new registration;
- MNT 10,000 for the amendment or extension of an existing registration; and
- MNT 5,000 for a reference letter.
The regulations governing the operation of the electronic system, together with explanatory guidance on how to register a pledge notice, are available on the website.
Status of existing pledges
These general rules may affect the date of perfection of a qualifying pledge by way of registration under the Pledge Law:
- If a pledge in existence before the Effective Date is registered within six months of the Effective Date, the perfected date will be the effective date of the pledge arrangement.
- If a pledge in existence before the Effective Date is registered later than six months after the Effective Date, the perfected date will be the date of registration of the pledge on the electronic system (unless the pledged item is transferred to the possession of the pledgee).
These rules do not apply to pledges of movable or intangible property that are perfected through means other than registration (i.e. a pledgee taking control of a savings account).
Upon an event of default occurring under a movable pledge, a pledgee will be able in certain circumstances to take possession of the pledged movable property or intangible asset. Should such efforts fail, the Pledge Law provides a mechanism for a pledgee to lodge a request with the courts to issue an order of possession in relation to the property or assets in question.
Please note the following in relation to the enforcement of specific pledges:
- Pledges over receivables will be enforced by way of a pledgee taking receivables equal to its demand, subject to any notice requirements under the Pledge Law.
- Pledges over a saving account will be enforced by way of a pledgee taking deposits equal to its demand, subject to any notice requirements under the Pledge Law.
In the case of bankruptcy of a pledgor, a secured creditor's demand under a qualifying pledge will be satisfied from the pledged property in accordance with their registered ranking in priority to other creditors.