2.2. The creation of a pledge

Draft article 334.3 deals with the grounds for a pledge to arise. It very appropriately refers to a pledge agreement. However, again it fails to draw a clear distinction between the pledge as a property right (which is the real security in the case of default and insolvency) and the contractual obligations between the pledgor and the pledge under the pledge agreement (which, where there is default and insolvency, are not worth much or anything). In addition, it fails to deal with a number of important issues (e.g., the required content of the pledge agreement). This matter is addressed, again out of context, in a subsequent article 339 on the pledge agreement, its form and registration (see below). Moreover, article 334.3 deals with a scope issue that should have been addressed in draft article 334.1, that is, that the pledge provisions apply also to statutory pledges. In this article, it would have been enough to state that a pledge is created by agreement between the pledgor and the pledgee, or by law.

Draft article 335 on the pledgor appropriately provides that: (a) the pledgor may be the debtor of the secured obligation or a third party; (b) the pledgor must be the owner or have a right of economic management, which means that the pledgor has the right to encumber the asset without the consent of the owner; (c) if the pledged asset is a right, the pledgor may be only the right-holder and a pledgor that is not the right-holder may encumber it only with the consent of the right-holder or of the person that has the economic management of the right.

There is no provision on who may be a pledgee. In particular there is no provision on whether on the fundamental question whether any person, legal or natural (including consumers), may be a pledgor or a pledgee.

Draft article 336 on the object of the pledge appropriately provides that any type of movable asset, tangible or intangible, may be the object of a pledge, except assets that are by law non transferable or subject to execution (e.g., personal claims and life insurance benefits).

Draft article 337 on the secured claim (secured obligation in the terminology of the Guide) appropriately provides that a pledge secures the amount owed at the time of actual payment, including interest, compensation for loss or damage and expenses for the maintenance of the pledged asset. It could also clarify more fully that future, determinable, conditional and fluctuating obligations may be secured, but otherwise appropriately in describing the secured obligation.

Draft article 338.1, which deals with pledges with and without a transfer of the pledged asset, is generally appropriate in clarifying that non-possessory pledges are covered and that only a non-possessory pledge may be created in inventory. Only this is a scope issue that should have been clarified earlier in the text and the question whether written form is required only in the case of a non-possessory pledge should be dealt with in draft article 334. Some lack of clarity is introduced by draft article 338.2 to the pledged asset being left with the pledgor "under lock and seal of the pledgeholder" or "subject to signs evidencing the pledge". These requirements may be met with respect to equipment in the premises of the pledgor (with undesirable adverse effects on the pledgor's reputation) but certainly not with respect to inventory regularly sold and replenished. Draft article 338.3 usefully clarifies that the pledgor may retain possession actual possession or through a third party. Draft article 338.4 is also useful in clarifying that, in the case of a pledge in assets covered by a negotiable document, a transfer of possession of the document amounts to a transfer of possession of the assets.

Draft article 339 also presents a number of problems. First, draft article 339.1, enumerating the minimum content of the pledge agreement, fails to mention important requirements (e.g., the intent of the parties to create a pledge and general or specific description of pledged assets), while it includes requirements that are not relevant to the pledge as a property right (e.g., the time period during which the secured obligation is to be performed). Second, draft article 339.2: (a) appropriately refers to written form as long but only if is no transfer of possession (an oral agreement and transfers of possession should also be enough), but fails to clarify whether written form includes electronic records; (b) deals, out of context, with another issue that has nothing to do with the creation but only with the enforcement of a pledge (that is, an agreement of the parties with regard to extra-judicial enforcement and registration); (c) refers to notarial form that may be required with respect to obligations arising by a contract that is subject to notarial form by other law and introduces a separate regime in an non-transparent way. Third, draft article 339.3 deals with mortgages and pledges, as it the same regime applied to both. The pledge provisions should be separated from the mortgage provisions.

In addition, draft article 339.4 provides that non-observance of the written form results in the invalidity of the pledge agreement. Although the appropriate term for the property effects of the pledge agreement is "ineffective" (not "invalid" which refers to the personal obligations of the parties), this means that the requirements in draft article 339 refer to both the creation and third-party effectiveness of the pledge. It would seem that this would apply to the requirement of registration under draft article 339.5, which refers to registration of pledge agreements and pledges on the basis of another statute (see below), presumably with respect to pledges in all types of asset. But this is not the case, as registration in that other law is analyzed as a way of determining priority. This is the appropriate approach as registration as a requirement of creation would undermine the efficiency of the whole regime since registration for creation purposes cannot be simple, quick and inexpensive, but it should be stated more clearly. In other words, there should be better coordination between the pledge provisions of the Civil Code and the new law on the registration of pledges.

Draft article 340 on the assets to which the pledge extends appropriately provides that: (a) the pledge extends to accessories, natural and civil fruits, and proceeds; (b) an enterprise mortgage extends to all movable and immovable assets of an enterprise, present and after-acquired. However, it would seem that these matters should be systematically dealt with in draft article 336 (object of a pledge) or right after draft article 336. In addition, mixing provisions on pledge of movable assets with provisions on mortgage of immovable property creates the mistaken impression that movable assets and immovable property are the same and be subject to the same rules.

Draft article 341 deals with the time a pledge is created. To the extent it refers to assets that exist at the time of the conclusion of the pledge agreement, draft article 341.1, which provides that the time of pledge creation is the time of the conclusion of the pledge agreement, is appropriate. However, draft article 341.1 is not appropriate to the extent it refers to assets acquired by the pledgor after the time of the conclusion of the pledge agreement, draft article 341.1 is not appropriate. The time of creation in this case should be the time the pledgor acquires rights in the pledge assets.

Under the Guide, a security right (pledge) is created by agreement between the grantor (pledgor) and the secured creditor (pledgee or pledgeholder). A security right in assets that the grantor acquires after the conclusion of the security agreement is created when the grantor acquires the assets or the power to encumber them <1>.

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<1> Recommendation 13.

The agreement must at least: (a) reflect the intent of the parties to create a security right; (b) identify the grantor and the secured creditor; (c) describe the secured obligation; (d) describe the encumbered assets in a manner that reasonably allows their identification (this means that in some cases a specific description may be necessary, while in other cases a general description will be sufficient); (e) indicate the maximum amount for which the security right may be enforced (if the enacting State determines that that would be necessary to allow the grantor to save some of the value of its assets to obtain credit from creditors other than the secured creditor) <1>.

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<1> Recommendation 14.

The security agreement need be in writing only if it is not accompanied by transfer of possession of the encumbered asset. Where there is no such transfer, it is sufficient if the written agreement, by itself or in conjunction with the conduct of the parties, indicates the grantor's consent to create a security right in its assets <1>.

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<1> Recommendation 15.

The security right may secure payment or other performance of any obligation, present or future, determined or determinable, conditional or unconditional, fixed or fluctuating <1>. Similarly, a security right may encumber any type of asset, present or future, whole assets or parts of assets and even all the assets of a person, subject to limitations in other law <2>. Moreover, a security right continues in any asset received with respect to the encumbered assets (proceeds and fruits) <3>.

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<1> Recommendation 16.

<2> Recommendations 17 and 18.

<3> Recommendation 19 and term "proceeds" in Introduction, Section B.

A draft article on asset valuation has been appropriately deleted from the current draft. The Guide discusses asset valuation in the context of priority (the priority of a security right in a mass or product) <1>, enforcement (the acquisition of the encumbered asset by the secured creditor) <2>, and insolvency (in view of the need to protect the value of encumbered assets, as they are part of the insolvency estate and may be affected by stays and reorganization plans) <3>. However, the Guide makes no recommendation as to asset valuation. The reason is that valuation is an economic, not a legal issue <4>, and there is no need to freeze the value of an asset to the time of the security agreement or the time of enforcement (as the deleted provision did). If the market value of the encumbered assets goes up, a higher amount of the secured obligation is secured. Otherwise, a lower amount is secured. In any case, the secured creditor cannot be paid more than it is owed. With respect to enforcement, the Guide suggests that obliging the secured creditor to indicate its own valuation is a more efficient and less costly way than an independent appraisal. Of course, the grantor may always request an independent appraisal <5>.

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<1> Guide, chapter V, paras. 121.

<2> Ibid, chapter VIII, para. 70.

<3> Guide, chapter XII, paras. 33, 50 and 52 - 53. The Insolvency Guide discusses the matter further (part two, chapter II, paras. 66 - 68). Recommendations 179 and 242 of the Insolvency Guide also deal with valuation of secured claims.

<4> See also the discussion of valuation of intellectual property assets in the Supplement, paras. 33 and 34.

<5> Supra, fn. 1.

It is important to note that the Guide separates creation from third-party effectiveness. The reason is to meet two of the key objectives of modern secured transactions law, that is: (a) to enable parties to create a security right in a simple and efficient manner, keeping formalities to a minimum; (b) to enhance certainty and transparency by providing for the registration of a notice of a security right in a general security rights registry <1>.

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<1> Recommendation 1, subparas. (c) and (f).

Creation under the Guide means effectiveness between the grantor and the secured creditor and requires only transfer of possession or a written agreement. Third-party effectiveness means what it says, that is, effectiveness against parties other then the grantor and the secured creditor. The main method for achieving third-party effectiveness is registration of a notice in a general security right registry (but there are other methods, such as possession and control) <1>. Registration relates to notices of security rights in movable assets. As already mentioned, registration of mortgages in immovable property raises different issues and is not addressed. However, the Guide discusses at some length the issue of coordination between the general security rights registry and specialized registries (see below) <2>.

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<1> Recommendation 32.

<2> Guide, chapter III, paras. 75 - 82, and chapter IV, para. 117.

A notice need only include the names and addresses of the grantor and the secured creditor or its representative, a description of the encumbered assets that reasonably allows their identification, and, if the enacting State so chooses, the duration of registration and the maximum amount for which the security right may be enforced <1>. Registration may be fully electronic (in which case the registrant, who meets the conditions of the law and the registry regulations, enters directly the information in the public record without any involvement by the registry) or partly paper-based and partly electronic (in which case the registrant has to submit a paper notice, which the registry staff have to enter into the public record <2>. In any case, it is important to keep registry fees, if any, to the minimum, that is, to recover the cost of establishing and operating the registry, and not turn the registry into a profit-producing tool for the State or private interests at the expense of market participants and the economy as a whole <3>.

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<1> Recommendation 57.

<2> Recommendation 54, subpara. (j).

<3> Recommendation 54, subpara. (i).