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Securities at a new light

A law that introduced significant changes to chapter 7 of part I of the Civil Code which contains provisions on securities was adopted in July 2013. In fact this chapter is presented in a new edition. It highlighted three sections; the first contains general provisions, the second contains rules relating to certificated securities, the third is contains non-certificated securities.

In the first place the legislator defines the securities and divides them into two categories - certificated and non-certificated.

Thus, a certificated security is a document corresponding to the requirements stipulated by law and certifying obligatory and other rights, exercise or transfer of which is only possible when presenting such certificates. The essential feature of a certificated security is presence of all legal requisites. Inconsistency of designated form of securities shall entail its invalidity. However, the law provides for a possibility to use such document as evidence in legal proceedings. Essential feature of certified security is inextricably linked with a right expressed in it. As a rule, a security is guaranteed by mandatory right; however, other rights are also provided which for example include a right to information held by the owner of shares.

Non-certificated securities are obligatory and other rights, which are enshrined in resolution to issue or other act of a person who issued securities in accordance with the requirements of law, and exercise and transfer of which shall be possible only in compliance with rules of keeping these rights. Keeping of rights to non-certified securities is carried out by making entries on accounts by a person acting on behalf of the person obligated under a security or by a person acting under a contract with holder or other person, who in accordance with the law shall exercises rights under a security. Keeping records on accounting of such rights shall be carried out by a person holding a license prescribed by law.

In general section the legislator lists types of securities dividing them into

  • bearer (securities, under which a holder of a security is acknowledged to be a person authorized to claim its performance)
  • warrant (securities, under which a holder of a security is acknowledged to be a person authorized to claim its performance, if the securities are issued on his name or acquired from the original holder in a continuous series of endorsements).
  • registered (securities under which one of the following persons is acknowledged to be a person authorized to claim its performance:

1. holder of a security specified as holder of right in accounts kept by the obligated person or acting on his behalf and the person holding an appropriate license. The law may provide for an obligation to transfer such accounting to a person who holds an appropriate license;
2. holder of a security if the security was issued on his name or was transferred to him from the original holder in the manner of a continuous series of concessions (assignments) by making on it registered endorsements or otherwise in accordance with the rules established for the assignment of claim (assignment).

Proper execution by a certificated security under the Civil Code shall be performance of a person who is the holder of a security, i.e. a person who meets the criteria listed in the definition of types of securities. Rightful holder of a security is a person who owns a security until proven otherwise.

The new version of Article 146 of the Civil Code details rules for transfer of rights of certificated securities. It has been legally established that along with transfer of rights to certificated security all its certificated right shall be transferred accordingly. Procedure for transfer of rights depends on the type of a security.

Transfer of rights certified by bearer security shall be carried out by the handing in of such security. An innovation is a possibility of transfer of right to another person regardless of its actual handing in.

Rights evidenced by warrant security may be transferred to a purchaser by handing it in alomg with endorsement on it. Unless otherwise stipulated by the Civil Code or the law transfer of warrant securities shall be regulated by the rules of transfer for bill of exchange and promissory note under applicable legislation. According to clause 11 of Provision on bill of exchange and promissory note every bill of exchange even issued without an express stipulation of the order may be transferred by endorsement on a security.

Rights evidenced by registered documentary security shall be transferred to the acquirer by handing him a security by a person committing its alienation along with it nominal endorsement or otherwise in accordance with the rules established for the assignment of the claim (cession). The law restricts exercise of general procedure for assignment, indicating that it is applicable in case unless otherwise established by the rules of this chapter, other law or follows from the nature of a relevant security.

The legislator secured rights of bona fide acquirer of securities in the event of default on transfer of securities or commit endorsement. Thus, if a security lacks endorsement - the acquirer is entitled to require withdrawal of a security, in case of failure to fulfill obligation on endorsement transfer of rights is carried out on the basis of the court decision.

One of the innovations in the Civil Code is an indication that transfer of rights certified by a registered or warrant securities to another person may be for other reasons stipulated by law. Part 8 of this article lists ways of confirmation for transfer of rights. Thus, the transfer of the in case of inheritance transfer is confirmed by a notary stamp, in case of sale by seeking penalties on them – by the mark of a person authorized to sell the property; in other cases the ground is a decision of court, the mark is made by bailiffs.

Assignment of rights to non-certificated securities to an acquirer is carried out by writing off non-certificated securities from the account of a person who committed their alienation and their transfer to the account of acquirer on the basis of instruction of a person who alienated the securities. Rights under non-certificated security shall transfer to acquirer from the moment when the person performing accounting of rights for non-certificated securities makes respective entry on account of acquirer.

Significant changes were made into the articles regulating recovery of rights on a security. First of all title of the article was changed. Previously it was called “Recovery of a security”; in the new version it is called “Recovery of rights on a security”. This tile more accurately reflects essence of legal norm, as is almost impossible to recover a security itself; rights to a security are often subject to recovery.

Recovery procedure is outlined in more details in comparison with the previous version. First of all it is stated that recovery of rights for the lost bearer security shall be made by the court in the procedure of voiding in accordance with the procedural law against application of a person who lost a security on invalidation and recovery of right on the security. This procedure is established in Chapter 34 of the Civil Procedure Code. Recovery is made by the court under a special procedure for cases on establishment of facts of legal significance against application of a person who lost a security, and other persons in cases stipulated by law.

Recovery of rights to warrant securities is made in the following order: a person who lost a warrant security is entitled right to apply in writing to all persons obligated with it with reasons of loss. If the obligated person, who received application from the person who lost a warrant security, is presented a security by any other person, the obligated person shall suspend execution of a bearer security and inform him about the applicant’s claims as well as inform the applicant about the person presenting the security.

If within three months from the date of application of the person on the loss of warrant security a person who lost a security does not applied to the court with the appropriate claim to a bearer of a security , the obligated person shall make performance to the bearer of a securities. If a dispute between the person who lost a security and the person who presents a security is resolved by the court, execution shall be made to the person in whose favor the court resolved.

If there is no dispute about the right for a warrant security the person who lost it is entitled to require in court execution by the obligated person.

Recovery of rights for the lost nominal certificated security shall be made by court under special procedure in cases for establishment of facts of legal significance in accordance with procedural law against application of a person who lost a security, and other persons in cases provided for by law.

With respect to a non-certificated security it was found that the lost accounts certifying right to non-certificated securities may only be recovered by court.

Securities are one of the instruments of financial market relations used in lending as a means of payment as well as to accumulate free monetary funds. Thus, changes introduced into the Civil Code are aimed to improve and more detailed disclosure of the rules governing securities provisions, which is a positive trend in the development of this institution of law.