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Regulation of pledges to impact on credit institutions

18.02.2003

Parliament (the Riigikogu) recently adopted an act amending the Law of Property Act. The new act will enter into force on July 1 2003. The amendments concerning pledges will affect the workings of banks and other credit institutions.

Registered pledges will no longer be linked to secured liabilities, but will secure any claims that might arise in the future. Another important amendment allows the enforcement of pledged assets only by compulsory execution (ie, by sale at public auction, as arranged by a bailiff).

Previously, pledges of contractual rights (eg, accounts receivable, insurance proceeds and bank deposits) were not regulated, but were common practice. They were enforceable only by selling the claim to a third party (eg, by auction) and gaining satisfaction from the proceeds. Following the change, pledges over claims can be enforced by assignment or pledged claim to the pledgee.

The amended legislation also changes the law relating to mortgages. The sum of a mortgage (ie, the limit to which a mortgagee can satisfy his or her claim) will no longer be divided into principal amounts, interest and sums of collateral claims. Instead, a single amount will constitute a cap and mortgagees need not be concerned about the correct division of secured liabilities.

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