Article: Pledge of subsoil use right in a new view

Pledge of subsoil use right in a new view

Tair Buyrakulov

We have faced the theme of bank financing of subsoil users in our practice for many years. As a rule, the main way to ensure the fulfillment of their liabilities to the creditor was the pledge of subsoil use rights.

Despite the fact that the very mechanism of such a pledge was not sufficiently regulated by the legislation, the need to borrow required the conclusion of treaties on the pledge of subsoil use rights even in the presence of gaps and difficulties with the interpretation of the law.

With the adoption of the new Code of the Republic of Kazakhstan "On Subsoil and Subsoil Use" (hereinafter – the Code), the situation in the sphere of such pledge has significantly changed (more precisely, it will change after the introduction of the Code into effect). Below we will discuss the main positions on which the changes have occurred. It seems that this article will be useful, first of all, to second-tier banks, lending on the security of subsoil use rights, as well as the subsoil users themselves, who are planning to receive financing secured by their assets.

• Use of loans secured by subsoil use rights

So, in our opinion, the most important change the Code introduces into the very concept of pledge is the right of subsoil use. Earlier, the Law of the Republic of Kazakhstan "On Subsoil and Subsoil Use" of June 24, 2010 (hereinafter – the Law) determined that the loan secured by subsoil use rights should be used for the purpose of subsoil use or organization of subsequent redistribution on the territory of the Republic of Kazakhstan, provided by the subsoil use contracts. That is, regardless of the category of minerals, the ability to dispose the subsoil use right through the pledge was limited to the purpose of the loan.

On the one hand, this rule was important for the subsoil use right not to turn into a bargaining chip to provide it as a collateral for any liabilities, both for the subsoil user himself and any third parties. Such a significant asset as the subsoil use right, due to its strategic value (at the local or national level), should be present at the workplace for subsoil operations, rather than being used as a normal free-flowing commodity.

On the other hand, thanks to our extensive practice in banking, we can confidently say that such a restriction strongly limited subsoil users in the development of their business, and precisely in carrying out the same exploration or production at the field. For example, the owner of a quarry needed to purchase dump trucks for the export of rock to the surface. At the same time, the development program did not include these expenses, in contrast, for example, from the purchase of fuels for the same dump trucks. As a result, the subsoil user could not obtain a loan from the bank on the security of his main asset for this purpose, and he had to look for other sources of financing, which were not always reliable and professional.

The Code, unlike the Law, permits such a restriction only for hydrocarbons. Accordingly, for other types of minerals, the right to subsoil use as collateral for loans directed to other purposes is entirely permissible. Of course, subsoil users should not abuse this opportunity and put their asset at risk of loss due to violations of liabilities on loans that are not related to their core business. We believe that market participants will find reasonable compromises in this area.

• Permission to pledge subsoil use rights

The second important phenomenon is the abolition of the need to obtain a separate permit for the pledge of subsoil use rights. A number of practical examples is connected with this rule, when the elementary discrepancy in the interpretation of the Law from not only subsoil users, but also registration authorities, led to improper transfer of subsoil use rights as a collateral. Moreover, not only creditors suffered from this, but borrowers themselves – subsoil users, who were exposed to fines and requirements for providing additional security.

What was the difficulty? Two separate legal facts – obtaining a permit for a pledge and registering a pledge – were linked together and presented in such a way that if the pledge is registered, it is no longer necessary to obtain a separate permit for it. Logically, this conclusion, in our opinion, is fully justified. At the same time, the Law in Article 36 explicitly established that transactions made without permission are null and void. Thus, despite the practical fidelity to the position of the registers themselves (!), who were not issuing a separate permit, according to the letter of the law, such contracts could not create collateral relations.

The Code withdraws the need to obtain the permission to pledge subsoil use rights. At the same time, indirectly, this necessity does not arise from the norms of the Code as well, because nor the actual pledge, nor the other transactions similar to it by legal consequences are not included in the list of facts requiring the permission of the competent authority. Thus, to ensure the attainment of a pledge relationship under the Code, a successful state registration of the pledge in the competent authority is sufficient. We believe that such a mechanism will remove a lot of technical issues for the pawnbrokers.

• State registration of the pledge of subsoil use rights

The Law provided a separate procedure for state registration of a pledge of subsoil use rights – for example, the pledge of subsoil use rights for transactions with common mineral resources was registered at the local executive body, that is, where the right to subsoil use was granted. This created various difficulties in practice, due to the fact that each local executive body had its own idea of the procedure for registration. As a result, the interests of creditors (usually, second-tier banks) suffered, because they could not create a single ordered structure of pledges of subsoil use rights minimizing their risks on a countrywide scale.

The Code directly establishes that the pledge of subsoil use rights is subject to registration with the competent authority. This implies that, by analogy, for example, with the Ministry of Justice of the Republic of Kazakhstan registering rights to immovable property, a unified system will be created, giving confidence to the parties of the pledge relationship that state registration will be conducted in a certain, unified order, and therefore, the expected result will be obtained. Under contracts concluded before the introduction of the Code, the registration mechanism remains the same, but the general trend is encouraging.

In general, we note that the Code, in addition to innovations, brings much more details in regulating subsoil use relations than the Law. There are moments that still have not been touched, despite the fact that they have long been a problem zone. This, for example, is the question of whether a bank can own the subsoil use right as a non-core asset in the event of its withdrawal into its property on problematic loans, given the specific nature of such an entity, which clearly does not allow it to conduct subsoil operations. At the same time, the desire of the legislator to cover as much as possible the variations of the relations that may arise in the sphere of subsoil use allows us to count on the fact that in the future those moments that are now left outside the zone of changes will also be finalized.
 

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