Regulations for loan agreements have changed

Pepeliaev Group advises that, on 1 June 2018, the law “On financial transactions” will come into effect which amends certain regulations concerning loan agreements.

The law on financial transactions[1] (the “Law on Financial Transactions”) has been adopted as part of the ongoing civil law reform in Russia under the Concept of the development of civil legislation[2].

Previously the regulation of loan agreements was focused mostly on everyday relationships between individuals without any regard given to the growing share of legal entities participating in loan transactions and, as is stated in the Concept, this determined the need for the differentiation of the statutory provisions on loans subject to the status of the parties and the aim of the loan transactions. As a result the law has been amended, specifically the provisions on the time at which a loan agreement is entered into, on the subject matter of the loan and its transfer to the borrower, on refusal to perform a loan agreement, and on interest under an agreement, along with other provisions.

The time at which a loan agreement is entered into

The legislature is expanding the possibilities for entering into a loan agreement. Thus, starting from 1 June 2018, a loan agreement will be considered to have been entered into not only from the time when the subject matter of the agreement (loaned property) is transferred to the borrower but also from the time when the lender assumes the obligation to issue the loan.

Loaned property

The law settles the issue of whether it is possible to transfer securities under loan agreements. From now on, loaned property will take the form of monetary funds, items defined by a generic feature, as well as securities.

Refusal to perform an agreement at one's sole discretion

The Law on Financial Transactions outlines the specific features of a refusal (full or partial) to perform a loan agreement at a party’s sole discretion. For example, the lender may refuse to perform an agreement when circumstances exist which evidence that the provided loan will not be returned within the contractual timeframes. However, the legislature does not elaborate on nor does it not provide a list of such circumstances leaving to the court how to resolve this matter.

The right of the borrower to refuse to receive the loan is conditional on giving a lender the corresponding notice. Such notification must be delivered before the onset of the date set by the agreement for the loaned property to be transferred. If the loan agreement does not set such a date the notice should be delivered at any time before the loan is received. Another arrangement may be set by a loan agreement under which a borrower is a person engaged in entrepreneurial activities.

No more reference to minimum monthly wage

Instead of the minimum monthly wage the legislature introduces a new approach to defining the form of the loan agreement and its being free of charge. Now a loan agreement between individuals should be made in writing if the loan amount exceeds RUB 10,000 rather than ten times the minimum monthly wage amount, as was previously the case. For a loan agreement made between individuals (including individual entrepreneurs) to be treated as interest-free, the loan amount should not exceed RUB 100,000 rather than fifty times the minimum monthly wage.

Loan agreement interest

There have been changes to the calculation and the payment of loan interest. Starting from 1 June 2018 the amount of loan interest will be determined by the key interest rate of the Central Bank of Russia in effect during the respective periods unless the parties agree otherwise in the agreement.

Moreover, the Law on Financial Transactions introduces the concept of 'usurious loan interest’ which is an excessive burden for the borrower and, thus, the court may reduce the amount of such interest. The interest set in the agreement will be treated as usurious if:

• the loan interest exceeds by two or more times the interest amount usually charged in similar situations;
• the loan agreement is made (i) between individuals; or (ii) between a legal entity which does not operate as a consumer loans provider and an individual acting as a borrower.

What to think about and what to do

The Law on Financial Transactions has implemented the ideas of the Concept with respect to legal relations under loans. It has drawn an important distinction for the regulation to be applied depending on the legal status of the parties. That being said, there are still unresolved issues which are waiting to be explained by courts, specifically the issues relating to the “circumstances evidencing the possibility that the loan may be not returned” and “the interest usually charged”.

When structuring transactions we advise that you take note of the opportunity provided by the Law to make an agreement using a consensual model and also of the restrictions on usurious loan interest.

Help from your adviser

Pepeliaev Group's lawyers possess extensive experience in structuring financial transactions and will readily provide the necessary legal support on all issues relating to loan agreements.