Parliament ratifies Law on Pledge of Movable and Intangible Property

On July 2, 2015, Parliament of Mongolia ratified the Law on Pledge of Movable and Intangible Property (hereinafter “Movables Pledge Law”). The purpose of the law is to regulate the rights and legal interests of the parties to a transaction involving the pledge of movable and intangible properties. In addition, the law aims to increase economic efficiency and to ease access to new financial resources. We understand that the drafters of the Movables Pledge Law consulted and studied the European Bank for Reconstruction and Development’s 10 core principles of pledge agreements and the International Financial Corporation’s comparative study of 35 different countries’ pledge laws.

Prior to the enactment of this Movables Pledge Law , the Mongolian Civil Code was the main reference point and a principal governing law for transactions involving the pledge of movable and intangible property. The Civil Code defines movable property as any property that is not land nor is a permanent fixture to land. However, the Civil Code in itself was not sufficient to regulate the vast array of pledge and secured transactions of today’s market economy. Due to the lack of detailed guidance and regulation regarding the pledging of movable and tangible properties, the most common pledge security became immovable property; thus, shutting out a vast whole array of properties from the economy.

Now, under the Movables Pledge Law any movable and intangible property can be pledged as long as the property can be validly used in civil transactions, is physically present or is not yet readily available; such properties include, but are not limited to, all types of shares and securities, receivables, intellectual property rights, and other intangible properties. Security interests will only be enforceable and valid if there is a valid written pledge contract between the pledgee and pledgor.

The pledging and securitization of exploration and mining licenses will not be regulated under this law but rather by the Minerals Law as before.

Some of the key provisions of the Movables Pledge Law include:

  • Security interest will be created under a written contract.
  • Pledged property may either be transferred to the pledgee’s possession or may be retained by the pledgor.
  • Pledge or security interests are perfected upon control of the property or through the filing of the pledge interest with the relevant electronic registration site run by the state registration authority.
  • Perfected security interests will have priority over non-perfected security interests irrespective of the date the security interest was first created.
  • Merchants who sell equipment or vehicles on a loan basis will have priority over any other perfected security interests on the sold equipment or vehicle if the merchant perfects its security interest within 10 days of the sale.
  • If bankruptcy proceedings are initiated against the pledgor, the pledgee with the perfected security interest is entitled to payment from the proceeds of the perfected security interest on a first priority basis. The left over from the proceeds will be placed into the debtors general pool of funds.
  • If bankruptcy proceedings are initiated against the pledgor and the perfected security interest’s proceeds do not satisfy the payments entitled by the pledgee, the remaining amount due must be claimed through the bankruptcy procedure under the applicable bankruptcy legislations.
  • The General Authority for State Registration will be responsible for implementing the electronic filing system of pledges on movable and intangible property.
  • Any filing of pledges will be effective when it becomes viewable by the general public.
  • A filing will be valid for three years unless extended.
  • If the pledgor defaults on its obligations under the pledge agreement, the pledgee must first notify the pledgor or any other obligor regarding its intent to enforce the pledge, and unless otherwise stated in the pledge agreement, the pledgee must wait 14 days for the pledgor to remedy the default.
  • The pledgee must use cost efficient, fair and reasonable methods in enforcing its pledge interest.
  • Pledgor has the right to repurchase the pledged property or fulfill its obligations under the pledge agreement at any given time except for the final sale of the property by the pledgee.
  • The purchaser of the pledged property will become an owner free of any encumbrances.

The Movables Pledge Law will enter into force on September 1, 2016. The lengthy period for entry into force is due to the need to establish the new filing system at the General Authority for State Registration. Specific regulations and procedures by the Ministry of Justice are expected within the framework of this legislation. We will notify you regarding any new updates on a timely manner.