Secure Grain. Secured by Grain

Авторы публикации детально рассматривают вопросы, связанные с обеспечением обязательств при помощи залога товаров, в частности, зерна, хранящихся на складе. Особенное внимание уделяется риск-менеджменту, способам мониторинга таких товаров, титулу товара (зерна), хранящегося на складе, ответственности товарного склада, в особенности при выдаче товара без индоссамента.

This is almost a philosophi­cal one. How does grain from one field differ from the crop from another field, when both are in the same silo? Pragmatically, the fi­nancier needs to identify its collat­eral under the pledge agreement if the borrower does not pay.

One of the types of inventory financing is a credit limit to the grain trader (through the short-term loan or revolving facility); the trader pays with these funds to smaller sellers, while using the proceeds from the buyer to repay the loan. The larger trader re­peats the financing structure un­til the grain reaches the process­ing company or consumer — this is warehouse financing in short. The statutory basis for ware­house financing in Ukraine was created by the On the Grain Act of Ukraine 2002 (the Grain Act). The commodity-financed and similar reserves are an obvious choice for secured transaction-financial institutions create a lien. The good risk management requires that the lien, should the need arise, survives a chain of transformations in ownership and possession of the commodi­ties purchased. The collateral is (i) a potential crop, then (ii) har­vest in fields; then (iii) the raw commodity in lorries and tem­porary storage, if necessary, then it becomes commodity (iv) in the warehouse. Then the grain may be shipped for export and, be­fore leaving Ukraine, can be kept (v) in rail cars, (vi) in ships. Lien can survive even upon the grain commodity’s leaving the terri­tory of Ukraine.

With the growth of commod­ity trading, particularly export in agriculture, the stakes reach the heights for the financers of the trading in grain, or, more gen­erally, in the agricultural com­modity. Some say this could be another bubble in the unfortu­nate marketing year if the risks are not managed well. But on an optimistic note, only after the shortterm risks are mitigated a long-awaited long-term com­mitment from the banks may be forthcoming.

In this article, we will con­centrate on the secured transac­tions with the goods held in the warehouses. The warehouse can be certified or uncertified, af­filiated or not affiliated with the borrower. Either option brings economic and legal choices by the lender. In each case, the bank would need to monitor the col­lateral: lien created, the quantity and quality of the commodities stored. In our practice, the moni­toring functions are too complex to in-source by the sophisticated lender (except where the trader itself finances smaller sellers); thus, the outsourcing market offers two types of services: (i) monitoring of the security doc­umentation for the transaction, under which the attorney reviews and advises on execution, regis­tration and termination of lien instruments, and (ii) collateral monitoring — technical expertise in quality and quantity measure­ment of the grain commodities.

How long the lien lives

The 2001 Pledge Act provides a general framework for the es­tablishment of the lien over the grain, which is an equally re­placeable commodity based on few objective criteria — in terms of Ukrainian commercial law, ge­neric chattels (odnoridni rechi). While there are several types of pledge, the basic dichotomy for the commodities as collateral is the goods in circulation (turno­ver) or the permanent (regular) pledge.

The Act is harsh: the sale of the goods in circulation termi­nates the lien; with the regular pledge the change of the owner does not end the lien, moreover, even the sale can be undone. How grave is the financiers’ risk? On the one hand, the Act looks at the goods in circulation as (i) any type of chattels that (ii) stored on the warehouse and (iii) the seller undertakes to keep the stock at certain level at all times. These vague criteria puts the secured party at risk that any chattels pledged while in the warehouse will be declared “goods in circula­tion” and the borrower can avoid foreclosure by selling them with­out moving out of the warehouse.

On the other hand, the Act does not limit the pledge to the individually defined chat­tels only, while requiring that the collateral under the agree­ment is “sufficiently identifiable”. The reasonable standard can be assumed here and hence, two practical issues should be resolved by the secured lender to avoid un­wanted termination of the lien: (i) whether undertakings and cov­enants of the pledgor (e.g. obliga­tion to keep the value intact and replace commodity as necessary) can be interpreted as maintain­ing a certain quantity minimum, and (ii) how the commodity can be sufficiently identified to avoid being a “generic good”. While the first issue requires cautious draft­ing and educated judges, the sec­ond calls for relevant market in­frastructure and technologies to track the crop. The old-fashioned grain storage agreement pro­vided for a warehouse certificate (kvytantsiia) that evidenced the fact of the storage but not the fact of redemption. The pawn of the receipts to the lender did not solve the problem: (i) the holder of the receipt could request the grain; moreover, (ii) the pledgor could pretend the loss of the originals and ask the storage facility to is­sue duplicates. As if the preceding risks were not enough, the storage contract, as a matter of law, pro­vided for a transfer of title to the warehouse, whereas the pledgor retained the unsecured claim to the certain quantity of the goods. Consequently, warehouses often issued more receipts than the commodities they could tender.

Legal infrastructure

The 2003 Civil Code (effective as of 2004) introduced limitations on the transfer of title for the commodities to the warehouse. Adoption in 2004 of the On Certi­fied Warehouses and Ordinary and Double Warehouse Receipts Act of Ukraine was aimed at improving the situation specifically on the grain storage market; in 2004 and 2005, a number of regulations followed to implement the Grain Act. It introduced licensing terms for the grain warehouses as well as ordinary and double ware­house receipts (svidotstvo) for confirmation of title. An ordinary receipt is a security in the paper form that serves as a contractual tender for the grain stored (simi­larly to the warehouse certificate) but it can be pledged through the endorsement; warehouse issues a copy of the receipt to be retained by the pledgee, if required. Dou­ble warehouse receipts consist of two parts. In case of pledge, part A and part B of the receipt should be separated, with part B being endorsed in favour of the pledgee and part A retained by the pledgor. The release of the pledge requires reverse endorse­ment for any type of receipt. The warehouses are liable for the damages to the pledge (pledgor) if the commodities were released prior to reverse endorsement. Endorsements must be made at the location of the warehouse, and information entered into the log simultaneously. The enforce­ment procedure is straightfor­ward; if the loan is not repaid by the maturity date, the ware­house should sell the goods and pay the lender. The pledgee can claim the collateral or proceeds from its sale from the warehouse. The pledgor can only take the grain after she/he/it proved that the loan was repaid or she/he/it deposited the amount of the loan with the warehouse.

Even though the idea is taken from mature markets, we did not feel the template statutory sche­me has been working in Ukraine: it was difficult to follow the pat­tern outlined in the regulations. Banks keep insisting on elaborate lending and security documenta­tion; they also want to assure fore­closure not only through reliance on the warehouse to sell the grain (and the warehouse might be or become the affiliate of the bor­rower) but also the option to get the title to the grain (or supervise the sale). The borrowers, on the other hand, need to ship the com­modities free of any liens as soon as there is a purchaser; requiring, thus, quick and simple procedure for release of the pledge. If the secured real estate (mortgage) fi­nancing is used as a benchmark, the situation with the warehouse financing is far down.

The personal presence of the lender’s representative at the warehouse is inconvenient — large corporate business of the banks are located in large cities and abroad; the silos — in the fields and port terminals. The lo­cal log of the warehouse receipts (WHR) is administered by the warehouse itself, the Ministry of Agricultural Policy of Ukraine keeps the track of the WHR elec­tronically while the private liens are registered in the Single Reg­ister of Liens administered by the Ministry of Justice. No ware­house has an online access to the Single Register of Liens; WHR is a security but the securities regu­lator has no influence on its issue or circulation. Issue of electronic WHRs, introduction and adminis-

WE will CONCENTRATE on the SECURED TRANSAC­TIONS with the GOODS HELD IN the WAREHOUSES

tration of their register similarly to the centralised stock securities (shares) depositary is an idea un­der consideration; the role of the warehouse as a key party in the financing is to be increased, not hindered.

For reality resisted to the straightforward utilisation of the statutory scheme, the WHR fi­nancing went through additional structures that were contractu­ally developed and tested by the market. Depending on the prefer­ences of the lenders, certain flex­ibility remains.

Paperwork

With cumbersome endorse­ment procedures the banks are willing to rely on provision of copies of the warehouse receipts, which is in direct contravention of the law. However, based on exist­ing court practice and despite the direct wording of the statute, it ap­pears to affect the priority rather than validity of the pledge. Some banks, concerned with the pros­pects of enforcement, obtain origi­nals of both parts of the receipt, with or without endorsement.

The exchange of documents is less clear when the pledge of the ordinary warehouse receipt is con­cerned. Whereas the law requires endorsement and issue of addi­tional copy to the pledgee, some of the regulations require that the receipt should be redeemed and replaced with a double ware­house receipt; it seems impossible to please both mechanisms.

The WAREHOUSES are LIABLE for the DAMAGES to the PLEDGE if the COMMO­DITIES were RELEASED prior to REVERSE ENDORSEMENT

As opposed to receipts (svi-dotstvo), a warehouse certificate (kvytantsiia) is not a title docu­ment but a mere confirmation that the warehouse accepted the commodities into storage. The warehouse may claim a title to the grain based on law (lawful possession) and the contract (stor­age of the commodity / generic chattels), accordingly, the ware­house will be liable in damages to the pledgor and pledgee but the grain, by the time of enforcement, may be gone. A trilateral agree­ment is, therefore, a highly rec­ommended form of the security document; while the draft pledge agreement should clearly stipu­late whether collateral under the warehouse certificates (kvytantsi­ia) is the claim (rights to demand grain) or the title to the com­modities (where they are stored in separate identifiable premises). In either case, reference to ware­house certificates (kvytantsiia), even if made in the pledge agree­ment, is mainly for reference pur­poses. And the issue of the pledge of goods in circulation (floating charge) arises again.

Авторы:

Oleg P. ZAGNITKO, Zoya S.MYLOVANOVA

Источник:

Ukrainian Journal of Business Law. – 2013. – № 9. – С. 30 – 32.

Читайте также