Maintenance of the Pledged Item and Benefits
Effective management of security begins with a precise allocation of the parties' rights and duties. Under the relevant norm of the Civil Code, in a registered pledge the pledgor or the pledgee, and in a possessory pledge the pledgee or a third person designated by him, bears the duty to maintain the pledged item properly. Each party has the right to inspect the condition of the item held by the other — including its size, weight and storage conditions. Where the item is in the pledgor's possession, he may take benefits from it; the pledgee may do so only if this is provided by agreement, although he is presumed entitled to receive fruits where this follows from the nature of the item. Benefits received by the pledgee are credited to the secured claim, and at the pledgor's request the pledgee must render an account of them. The pledgee may demand reimbursement of necessary expenses incurred on the item, while other expenses are reimbursed according to the rules on management of affairs without mandate.
Shares, Participating Interests and Insurance
Where the pledged item is a share or participating interest in an enterprise, the pledgor must, when taking decisions or entering transactions involving the enterprise, act in good faith and consider the interests of the pledgee as well as his own — the pledgee holds a secured claim, and any reduction in the value of the item directly affects him. The pledgor is obliged to insure the pledged item only where this is provided by law or by agreement of the parties; the scope of insurance protection should therefore be defined clearly in the contract.
Restrictions on Alienation and the Ranking of Pledges
The parties may agree that the pledgor will not alienate or re-pledge the item until the pledge right terminates; upon breach of this undertaking the pledgee has the right to immediate satisfaction of his claim, which protects the creditor against alienation risk. The same property may be pledged several times, and the ranking of pledge rights is determined according to the time of their submission for registration. Where future property is pledged, a pledge arising during the previous owner's time takes priority over one arising under the new owner, regardless of the dates of creation. In specific cases defined by the Code, the pledgee has the right to priority satisfaction from the pledged item over all other pledgees, correcting the general rule of ranking.
Transfer of the Item to the Creditor and Termination
A pledged item may pass into the ownership of the creditor (pledgee) only in the case of a registered pledge and only where this is expressly stated in the contract — automatic transfer of the item to the creditor without agreement is excluded by law. The pledge right terminates by waiver: a registered pledge terminates when the pledgee waives the pledge by means of registration, and a possessory pledge when possession is returned to the pledgor or the pledgee waives the pledge right. The form of waiver therefore differs according to the type of pledge, and its correct execution is decisive at the closing stage of security management.
Three further rules complete the picture of collateral management. The same property may be pledged several times, and the priority of pledge rights is determined according to the time of their submission for registration; with future property, a pledge arising under the previous owner outranks one arising under the new owner, regardless of the dates of origin. A pledged item passes into the creditor's (pledgee's) ownership only in the case of a registered pledge and only where this is directly indicated in the agreement — no other form of such transfer works. Finally, a registered pledge right terminates where the pledgee renounces the pledge by registration; a possessory pledge — where the item is returned to the pledgor or the pledgee renounces the right. Collateral management is thus a dynamic process: each phase — priority, transfer and termination — must be documented properly.
Frequently Asked Questions on Collateral Management
Below are brief answers, based on the Code, to the questions most frequently raised in the management of security.
Who must maintain the pledged item?
In a registered pledge — the pledgor or pledgee; in a possessory pledge — the pledgee or a third person designated by him; each party may inspect the item.
Who keeps the benefits from the item?
Benefits received by the pledgee are credited to the secured claim; the pledgor freely takes benefits while the item is in his possession.
Can pledged property be pledged again?
Yes, the same property may be pledged several times; ranking follows the time of submission for registration.
When does the item pass into the pledgee's ownership?
Only in a registered pledge and only where this is expressly stated in the contract.
How is a pledge terminated by waiver?
A registered pledge by waiver formalised through registration; a possessory pledge by return of possession or the pledgee's waiver.
How We Help on Legal.ge
The lawyers of Legal.ge will help you draft and review pledge agreements, define maintenance and benefit rules, assess ranking risks and properly terminate pledges. Contact us — we will plan the management of your security so that the creditor's interest is maximally protected.