Secured transactions in Eastern Europe

Secured transactions (담보부 거래/擔保附去來) refer to the financial transactions secured by collateral such as mortgage, pledge or any encumbrance on the assets.

Eastern European countries where economic transition from the planned economy to market economy took place since the early 1990 have adopted secured transactions laws in order to induce foreign capital and boost national economy. Poland is regarded as the most successful country which has enacted a law similar to Article 9 of the Uniform Commercial Code (UCC).

In those transition economies in Eastern Europe which traditionally resort to personal properties for collateral, the secured transactios law like the "Act on Security Interests in Movable Properties, Receivables, etc." (동산ㆍ채권 등의 담보에 관한 법률) of Korea seem to be implemented.

Key words
secured transactions, transition economies, legal reform, UCC, EBRD, electronic registration

Polish Registered Pledge Act of 1996
Starting in 1991 from the core principles of UCC Article 9 and other similar acts, Polish professors drafted the statute in their own style, using their own principles and civil law values to adjust and adapt those core principles so as to be acceptable in Poland.

The result was a statute that was accepted by both the Polish Government and its commercial actors, the creditors and debtors. Because Poles specifically drafted the law for Poland, it has been successful, even though it has flaws from the American perspective. At first, it was very successful, achieving a rate of usage greater than that of any other Eastern European country. Later, the flaws became more apparent, and its usage fell. However, even after that decrease in usage due to its flaws, the Polish Law’s current usage is still at least as great as that of similar statutes in other Eastern European countries.

The idea of translating the UCC or the English concept "charges" was raised and dropped almost instantaneously. Those models would have provided statutes that would not have fit into the Polish legal regime. But some of the ideas in the UCC and the English statutes were used, as well as some concepts from Swedish law. In fact, the drafters borrowed ideas from wherever they could, and enacted an new Act. By and large, this was a statute that was created by Poles, for Poles. Further, the drafters borrowed concepts, but they did not borrow language because the resulting statute had to fit into the Polish system.

New Ideas introduced by the Act
First, to satisfy the need for public notice to third parties, it used public notice registration, rather than the change of possession used in the possessory pledge. Second, the first to file would win. Third, this new law allowed the assets to remain in the debtor’s hands. It allowed almost any domestic person or entity to make loans covered by pledges, and to register the pledges that were covering those loans. Therefore, the law terminated any special status of the Polish state banks. Fourth, it allowed a wide range of assets to be pledged, including accounts, intellectual property rights, and future goods. Finally, it did not apply to loans with real estate collateral.

The Act allowed assets to be described generally and allowed coverage of after-acquired property. As a result, the new law allowed a registered pledge to cover a shifting and fluctuating stock of changing assets. It also allowed a pledge to be registered on an entire enterprise, which allowed the creditor to take over the company upon default. And, this law allowed the debt to be defined generally, therefore allowing future debt to be secured. So again, a fluctuating pool of debt could be secured by the registered pledge.

Requirements
One requirement of the Polish Registered Pledge Act was a written pledge agreement. The written agreement could be fairly simple; or, it could be as complicated as the parties wanted it to be.

Another requirement of the Pledge Act was that a pledge had to be registered within thirty days, to prevent any secret liens from being registered at the last minute in a bankruptcy situation. The date that the creditor filed an application for registration became the priority date for the pledge registration. Although processing delays were expected in the application for registration, the delays did not affect the pledge’s priority. Once a pledge was registered, it was protected against subsequent registered pledge creditors. It was also protected against unsecured creditors and buyers, but with the usual exception made for buyers of inventory in the ordinary course of business.

Enforcement
There could be no self-help repossession provision; because it would violate their norms of citizen action. Instead, there was a provision that allowed a creditor to order the bailiff to seize and hold the goods. To obtain proceeds from the collateral, the creditor had several choices:
 * Judicial sale of collateral - not recommended because the creditor could secure a quarter of the value of collateral;
 * Delegation of sale of collateral to a notary or the bailiff within 14 days; or
 * Transfer of title only available when it was stipulated in the pledge agreement and there was a publicly listed price for the goods.

Even if the pledge agreement is enforceable, the pledge creditor is after employees for the last three months of unpaid wages. With respect to tax claims which was once super-priority, the Ministry of Finance takes priority only from the date that it filed a tax lien.

Legal Reform in Eastern Europe
The availability and cost of credit and the efficiency of the market for secured credit are directly influenced by the laws affecting secured transactions and their implementation. The inability to obtain valuable and viable security over the debtor's assets is likely to discourage potential providers of credit.

Against these backdrops, the European Bank for Reconstruction and Development (EBRD) started the secured transactions project in 1992. It encourages countries to modernise their collateral laws and offers assistance at all stages of the reform process.

The primary objective of reform of secured transactions laws is economic. A lender or creditor will take a mortgage or a pledge in order to reduce the risk of losing the money that he is owed. If the law or the way in which it is applied do not give creditors confidence that they can recover real value from mortgaged or pledged assets it will have little economic effect. On the other hand security which effectively reduces the risk of giving credit can increase the availability of credit and improve the terms on which it is available.

A lender who knows that he has legally recognised rights to turn to his debtor's assets in case of non-payment will assess the credit risk quite differently. The availability of such recourse may influence his decision whether to give credit or not. It may also change the terms on which he is prepared to lend, typically by increasing the amount of the loan, by extending the period for which the loan is granted and by lowering the interest rate.

The projects on which the Bank is working aim at identifying what legal reform is needed to achieve an effective legal framework for secured transactions, building a consensus for those reforms and then assisting in the preparation of necessary legislation and the implementation of the law, as explained in the below documents:
 * Ten years of secured transactions reform (Autumn 2000);
 * The EBRD's legal reform work: Contributing to transition (Autumn 2000); and
 * The EBRD Model Law on Secured Transactions.
 * UNCITRAL Legislative Guide on Secured Transactions 2007, adopted by the United Nations General Assembly on December 11, 2008.