This legal update highlights the significant changes in notarial practice as a result of the recent entry into force of a Federal law amending Part I of the Civil Code of the Russian Federation (the Amendment to the Civil Code) and another Federal law amending the procedure for levying execution on a pledged property (the Amendment to Pledge Law).
Changes introduced by the Amendment to the Civil Code
The provisions of the Amendment to the Civil Code provide for the following changes:
- agreements involving the transfer of title to a participatory interest in the charter capital (the Agreement) of a limited liability company (a LLC) save for agreements pointed out directly in the Amendment to the Civil Code, but including the pledge of a participatory interest, should be notarised in order to be valid;
- the title to a participatory interest is deemed passed to the purchaser under the Agreement after the performance of notarial certification;
- within three calendar days from the date of the notary certification of an Agreement or the pledge agreement, the notary is obliged to file the application to amend the relevant record of title to the participatory interest in the Unified State Register of Legal Entities with the Federal Tax Service of the Russian Federation. This application must be signed by the seller or by the pledgor of the participatory interest; and
- within three calendar days from the date of the notary certification of the Agreement or the pledge agreement, the notary is obliged to send a copy of the application to the LLC.
Furthermore, before performing the notary certification the notary is obliged to verify the authenticity of the parties' signatures as well as the seller's or the pledgor's title to the participatory interest.
The Amendment to the Civil Code also amends the Fundamental Principals of the Russian Legislation on Notaries. A notary will be fully liable for losses caused by unlawful notarisation or a refusal to notarise. The minimum professional indemnity insurance coverage for a city practice notary is RUR 1,500,000.00 (approx. USD 46,875.00).
For the transfer of participatory interest, notaries may charge a fee equal to 0.5 per cent of the contract value, but no less than RUR 300.00 (approx. USD 9.37) and no more than RUR 20,000.00 (approx. USD 625). We believe that the new procedure of transfer of title to a participation interest is aimed at protecting LLCs from illegal and hostile takeovers. However, at present it is hard to predict what notaries' practice to the new procedure will be. We can only hope that the procedure will not prove to be a significant obstacle to closing transactions.
Changes introduced by the Amendment to Pledge Law
The Amendment to Pledge Law introduces a procedure for out-of-court enforcement in relation to both pledges of movable and immovable property. New procedure provides for possibility to enforce a pledge in many cases by a notary inscription as an alternative to a court order, allowing the pledgeholder to revert to the bailiff service. However, a notary inscription has the following drawbacks:
- the procedure is new and untested by practice; and
- an interested party may challenge the notary inscription in court.
If a pledge is executed in respect of the movable property of an individual, notarised consent of that individual to out-of-court enforcement of pledge should be obtained either in form of a separate agreement or a clause incorporated in the text of the main agreement. In case of immovables, notarised consent is mandatory regardless of whether the pledgor is an individual or a legal entity. The notary must notify the pledgor of the upcoming notary inscription and grant the pledgor seven calendar days to present objections. In the absence of such objections, the notary shall be entitled to perform the notary inscription.