Pledge Regulations on Moveable Assets Amended
Contributed by Gárdos, Füredi, Mosonyi, Tomori
February 13 2009
In order better to serve the needs of credit providers and their clients in relation to car financing, a new law has been submitted to Parliament that aims to relax the administrative requirements on establishing pledge agreements over cars.
A pledge or mortgage may be established over either real property or moveable assets. In the case of real property, in order for the pledge to be valid it must be registered in the land registry. This is also the case for aeroplanes and ships which are moveable assets but are registered in an official comprehensive registry. However, for other moveable assets the requirement is twofold: the pledge agreement must be in the form of a notarial deed and must be registered in the pledge registry kept by the Chamber of Notaries. Cars belong to the second of these groups because, although they are registered, their registry does not have the same legal status as a real property, aeroplane or ship registry.
In practice this strict requirement causes problems in personal car financing. For credit provided for purchasing a car, the most typical collateral is the car itself. Thus, the most suitable security would be a pledge over the car. However, this form of security is rarely used since the requirement to incorporate the pledge agreement into a notarial deed is too large an administrative burden; not only is it expensive, but the parties must go to the notary's office in person in order to execute the agreement. As a consequence, the most commonly used security is a right to purchase the car (ie, a form of call option) which can be exercised by the credit provider if the client fails to repay the credit. However, as a form of security interest, such options have several drawbacks, as:
- they may be granted for a maximum of five years;
- if the owner sells the car, the option right is extinguished;
- in the case of liquidation, they may not be exercised by way of set-off and therefore lose their security function; and
- their recognition by the courts is uncertain.
The aim of the proposed amendment to the pledge regulations is to create an environment in which pledge agreements can be used as security in secured car financing transactions. The new regulation aims to make pledge agreements less administratively burdensome by allowing registration without requiring that such agreements be incorporated into a notarial deed. The new law would also provide that the pledge may not be extinguished by selling the car, since the purchaser may not claim to have been a good-faith buyer(1) unless it has checked the pledge registry.
Future plans include the abolition of the notarial deed requirement for all moveable assets and the provision of free online access to the pledge registry. These changes are to be integrated into the new civil code that is now under parliamentary discussion. The new code is intended to be adopted in 2009 and will enter into force in 2010.
For further information on this topic please contact Zsuzsa Elek at Gárdos, Füredi, Mosonyi, Tomori by telephone (+36 1 327 7560) or by fax (+36 1 327 7561) or by email (elek.zsuzsa@gfmt.hu).
Endnotes
(1) As a general rule in relation to moveable assets, a pledge is extinguished if a pledged asset is sold to a good-faith purchaser who is unaware of the existence of the pledge.
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