Supreme Court clarifies application of article 25 of the Law “On Pledge”

Feb 8
3 min read

The Economic Chamber of the Supreme Court, within the framework of case No. 4-1701-2004/1495, clarified practical application of article 25 of the Law “On Pledge” based on the provisions of the Law “On Mortgage” and Civil Code.

Background

A commercial bank extended a loan in the amount of USD 197,000 to LLC “A”. As security, among several assets, a real estate property owned by LLC “B” was pledged and valued at UZS 825,000,000.

Following borrower’s failure to perform its payment obligations under the loan agreement, the bank applied to the court seeking recovery of outstanding debt and enforcement against the real estate property owned by LLC “B”.

Subsequently, LLC “B” (hereinafter – the Claimant), in order to prevent the sale of its real estate property, paid the bank an amount equal to the pledged value of the property and requested the release of the property from the pledge. After the bank refused this request, the Claimant filed a lawsuit seeking to oblige the bank to lift the encumbrance on its property.

As the legal basis for its claim, the Claimant referred to Article 25 of the Law “On Pledge”. Under paragraph one of this article, if the debtor fails to perform its obligation to the creditor, a third party who has provided a pledge to secure the debtor’s obligation (a property guarantor) has the right, in order to prevent enforcement against the pledged property, to perform the obligation within the value of the pledged asset.

Supreme Court's position

Indeed, pursuant to paragraph one of Article 25 of the Law “On Pledge”, where the debtor fails to perform its obligation to the creditor, a third party that has provided a pledge to secure the obligation is entitled to perform the obligation within the value of the pledged property in order to prevent enforcement against such property.
However, paragraph nine of Article 281 of the Civil Code provides that, at any time prior to the sale of the pledged property or the realization of pledged property rights, the secured obligation—or the overdue part thereof—may be performed, thereby terminating enforcement against the pledged property. Notably, this provision of the Civil Code does not limit performance of the obligation to the value of the pledged property.
The Law “On Mortgage” similarly provides that performance of an obligation secured by a mortgage terminates the realization (sale) of the mortgaged property.
Article 6 of the Law “On Pledge” and Article 7 of the Law “On Mortgage” establish that, unless otherwise stipulated in the pledge agreement, pledged property secures the full amount of the secured claim. In the real estate pledge agreement concluded between the bank and the Claimant, there was no provision specifying what portion of the credit obligation was to be covered by the value of the pledged property. Accordingly, payment of the agreed valuation of the pledged property does not result in its release from the pledge.

Decision

The judicial acts were amended, while the judgment of the court of first instance was upheld.

Why is this decision important?

I. Limits of a property guarantor’s rights were clarified

Previously, in practice, many property guarantors (third parties) believed that by paying the pledged value of the property they could automatically obtain the release of the property from the pledge.The Supreme Court made it clear that this approach is incorrect.

II. Article 25 of the Law “On Pledge” was interpreted restrictively

The Court emphasized that this provision should not be applied in isolation, but rather in conjunction with Civil Code and the Law “On Mortgage”. This prevents misuse of the law whereby a party attempts to stop enforcement by paying only part of the debt.

III. Legal certainty for banks and creditors

The decision confirms that banks’ claims secured by pledges must be protected in full where parties does not agree exact amount of pledged obligations, and enforcement cannot be avoided simply by paying the appraised value of the pledged property. This sends an important signal for the stability of the lending system.

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