As we have mentioned in the past, the Mongolian Law on Pledge of Movable and Intangible Property came into force on March 1, 2017. In order to fully implement this new law, an official Procedure for Online Registry of Pledges of Movable and Intangible Properties was adopted by Minister of Justice and Internal Affairs on March 3, 2017 and a centralized online registry system, www.mpr.gov.mn, has been established to facilitate for the registration of pledges on movable and intangible properties.
All types of movable assets, present or future can be registered in this electronic database as collateral. This includes accounts receivable, construction equipment, agricultural equipment, crops, consumer goods, documents, industrial equipment, intellectual property, office items, inventory, vehicles, domestic animals, wood, furniture, household item, investment security, mineral resources and others.
The registered collateral information in the database will be available to the public and searchable online by the following key terms at www.mpr.gov.mn :
- an initial registration number of notice of pledge;
- creditor’s name and registration number;
- debtor’s name and registration number; and
- serial number for vehicles.
Furthermore, this collateral registry system is accessible online for verification, amendment, extension and cancellation of the details of the registered collateral. This centralized modern collateral registry is a big positive step to protect the non-possessory security rights of creditors against third parties by ensuring transparency.
As we posted previously, the Mongolian Law on Pledge of Movable and Intangible Property was adopted on July 2, 2015. This new legislation was supposed to come into force on September 1, 2016. However, effective date of the law had been postponed until March 1, 2017 due to lack of preparation of the required online database for registration of pledges.
In order to fully implement this new law, the Ministry of Justice and Internal Affairs, the International Finance Corporation, the Intellectual Property Rights and State Registration Office, the Bank of Mongolia, and other organizations have cooperated to establish an online database for the registry of pledges on movable property and information regarding collateral.
According to the law, collateral may be all kinds of stocks, securities, rights to demand, industrial designs, trademarks, all creative works of sciences, arts and other movable properties or intangible assets and present or future movable properties of individuals that are usable and transferable to other’s ownership of individuals that is valid and transferable to other’s ownership. Under the law, a Pledge will be perfected upon registration of a notice of the pledge with online registry, whether collateral is not transferred to the pledgee’s possession or a pledge is created by operation of law.
As for movable and intangible assets which have been pledged prior to the new law coming into effect, these collateral need to be registered with the new online database within six months after the entry into force of the law.
The new online database shows how Mongolia is utilizing new technologies to make its legal and financial systems more efficient, and will benefit Mongolian citizens and foreign investors alike. The implementation of this law provides a new lifeline for the economy and will create new opportunities in the business sector. Furthermore, information in the database will be available to the public, and registered information will become official records of assets and collateral.
Regional Deputy Vice President for Europe, Asia, Pacific and Latin American of Millennium Challenge Corporation’s (MMC) Department of Compact Organizations, Ms. Fatema Z. Sumar has informed the Mongolia Minister of Foreign Affairs Mr. Ts. Munkh- Orgil that MCC’s Board of Directors have decided to include Mongolia in a list of countries eligible to sign the Second Compact Agreement.
Mongolia’s first MCC compact, a five-year, $285 million infusion of targeted development assistance from the United States was concluded on September 17, 2013.
The MMC’s second compact agreement will be focused on creating comprehensive ways to create sustainable and suitable solutions for Mongolia’s long-term development.
The MCC will cooperate with Mongolia to improve sanitation and water supply facilities serving the ger districts of Ulaanbaatar. The Board of directors of MCC believes that maintaining efforts to combat corruption in Mongolia will yield improvements for the economy. The preparations for the signing of the Second compact are underway and it expects to sign in 2017.
This is seen as an important development for Mongolia, as securing clean water and sanitation is a key element to attract Foreign Direct Investment. It is expected that new water and sanitation facilities will help to bring in new investments and help to diversify the Mongolian economy.
As with many developing countries, liquidity is an issue in Mongolia, especially for individuals without significant financial assets to start with. Banks often won’t make loans to those with limited income. Is there an alternative?
Dating from 2011, the Mongolian Law on Credit Unions allows a Credit Union to be established with at least 20 individuals Mongolian citizens as participants. The Credit Union, formed voluntarily by its members is to be governed in a democratic manner with each member having voting rights. The Credit Union is owned collectively by its members. A Mongolian company or other entity may be a part of a Credit Union.
There are some requirements for Credit Union members, each must be resident in the same locality, and there must be some unifying or communal relationship between the members, either in terms of business, industry, or a religious, social or educational commonality.
The Credit Union will be established with a charter approved by a meeting of its members. A management board and Audit Board must be elected to manage and oversee the Credit Unions affairs. Of course when dealing with people’s finances, a license is required. After acquiring the license to operate the Credit Union is able to offer credit and savings services, but these are limited to the Credit Union’s members.
There is no minimum amount of capital the Credit Union must have to be established. The assets of the Credit Union shall consist of the contributions of the members. The Credit Union may charge fees upon membership. Profits may be distributed in accordance with the Credit Union’s Charter. A single member may not contribute more than 10 percent of the Credit Union’s total assets.
As part of the firm’s project finance practice, we do a lot of work with securities, and particularly pledges of movable and immovable property. When advising clients, we often receive pushback and incredulity when we explain Article 54.2 of the Law on Enforcement of Court Decisions which states, “A pledgee shall be responsible for other creditors’ payments.” Clients rightly ask, “what is the value of holding the pledge if after receiving the pledged assets you have to give it all away to other creditors of the pledgor?”
However, a plain reading of Article 54.2 led to the inevitable conclusion that the law was specifically making pledgees a first priority security interest in collateral responsible for payments owed by the pledgor to other creditors, even where the pledgee has not done or agreed to anything whereby it would otherwise assume any of those obligations.
Article 54.2 provided legal justification for Mongolia’s Court Decision Enforcement Agency, which is responsible for the enforcement of valid court decisions, to demand a pledgee take action to recover funds due to other creditors of a pledgor, even by going so far as to require redistribution of proceeds earned via the sale of the collateral and in some cases the pledgee’s own assets! All of this required no additional court decision or ruling against the pledgee. Naturally, once we convince a client of the meaning and implications of the law, the typical reaction would be, “Well, that’s just not fair!”
Luckily, the Mongolian Constitutional Court agrees. The court recently concluded that Article 54.2 resulted in outcomes in violation of Article 16.3 of the Constitution of Mongolia. Article 16.3 protects, “The right to fair acquisition, possession and inheritance of movable and immovable property.” The court ruled that due to violations of that provision of the constitution, enforcement of Article 54.2 shall be stopped.
This is great news for investors and foreign investment in Mongolia. In a country were major mining and infrastructure projects are financed via complex securities transactions with international banks taking pledges over local real estate and other assets, the legal regime provided for by Article 54.2 increased the risk of these international banks and made acquiring funding even more difficult that it would normally be. We consider this a step in the right direction for Mongolia and foreign investment in the country.