Prior to the adoption of the Liens Act, pledges were governed solely by the Obligations and Contracts Act [1], which stipulates that for a pledge to be properly established, possession of the property had to be surrendered to the creditor. This imperative requirement restricted entities in conducting business transactions.

The adoption of the LA enabled pledgees to use the property pledged for the purpose of conducting business, respectively to service the loans granted to them while creditors have a security in the event of default. Thus, in addition to conventional securities (such as mortgages, debt assumption and guarantees), the possibility of creating a liens over claims, including future claims, was introduced.

According to applicable legislation, the proper creation of a lien in respect of a claim does not require claim individualisation. Such individualisation is not even possible where the object of the pledge is a future claim which does not have individualizing features at the time of granting the security. It should be strongly emphasized that the absence of an expressly specified amount and grounds for enforcing the future claim in respect of which a pledge was created does not preclude the creation of a lien in favour of the creditor nor does it jeopardize the creditor’s ability to fully rely on it in the event of default by the debtor.

Despite this, in view of practice and to the extent possible, it is advisable that the future claim be specified in the pledge agreement between the parties, along with the grounds for enforcement, estimated amount and any security granted in respect of the pledged claim. This would ensure expedient and certain claim satisfaction process. Difficulties may otherwise arise in enforcement proceedings as the claim may be modified in the meantime and the pledgor may dispute the existence of the pledge on the grounds of the claim being indeterminable.

In view of the above, when structuring a future loan and the attending securities, consideration should also be given to the possibility of creating a specific pledge over the debtor’s business undertaking. The creditor will thus generally have more options for claim satisfaction in a manner that they consider appropriate from all of the debtor’s claims and assets. Furthermore, the debtor’s ability to challenge the existence of the lien on the grounds of the claim being indeterminable in nature – or not sufficiently individualised – with respect to the transactions of the undertaking and its claims will be significantly reduced.

On the other hand, complications in satisfying the creditor may also arise when the debtor under the pledged claim disputes its existence. In such cases, the pledgee, acting as a procedural substitute of the pledgor, may bring an action to obtain a writ ordering a third-party obligor to pay the claim against the pledgor. In this case, it is imperative that direct legal action be brought to ensure that the pledgee debtor is constituted as a party to the proceedings. Such difficulties may, of course, be avoided provided that there is a final judgment on the pledged claim, in which case the pledgee may proceed to recovery under the general enforcement procedure.

In addition, according to the 2016 amendments to the Pledge Act, the pledgee has additional leverage because it may, even without a writ of execution, on the basis of an extract from the Central Register of Pledges of a registered enforcement proceeding in respect of the pledged claim, initiate enforcement proceedings before a bailiff within the framework of which it may take all enforcement measures to ensure the recovery of its claim. The introduction of these additional rights of the pledgee in the execution of the pledged property also has a disciplinary effect on the debtor in the servicing of the loan granted to him.

Thanks to the flexible regulation of pledges and the introduction of the possibility of direct enforcement, there is a great impact on the promotion of good practices among traders.