On 1 June 2018 comes into force the federal law1 (the “Law 212-FZ”) which allows the parties to execute escrow agreements under Russian law.
The Law 212-FZ introduces the new chapter 47.1 of the Civil Code named “Escrow”, which stipulates general rules for all escrow agreements. The provisions of this chapter will be also applicable to the escrow account agreements (Art. 860.7 of the Civil Code). Before the Law 212-FZ there was no general provisions on escrow agreement. The Civil Code only mentioned one particular form of the escrow agreement — the escrow account agreement, which, however, only allowed to deposit monetary funds and did not allow for deposition of the other property, such as movables and securities. The Law 202-FZ has closed this gap.
What is an escrow agreement?
Under the escrow agreement the deponent undertakes to transfer to the escrow-agent the assets for the purpose of performing the deponent’s obligation vis-à-vis the escrow beneficiary (i.e. deponent’s creditor under an obligation being secured by the escrow agreement), whereas the escrow agent undertakes to secure the safety of the deposited assets and transfer it to the escrow beneficiary upon completion of the agreed conditions. There are 3 parties to an escrow agreement — the deponent, the beneficiary and the escrow agent. An escrow agreement cannot be executed for a period exceeding 5 years. An escrow agreement requires notarization (unless the assets deposited under such agreement are the non-certificated securities and/or non-cash money). The obligation of the deponent vis-à-vis the escrow beneficiary is deemed to be performed upon the date of the deposition of the relevant assets with the escrow agent.
The parties may also execute a reciprocal escrow agreement that allows to secure the mutual obligations of the parties with the same escrow agent.
Are deposited assets safe? Could it be arrested?
The escrow agent is not allowed to dispose of the deposited assets, unless otherwise agreed by the parties. An escrow agreement may provide that before the transfer of the assets to the beneficiary the escrow agent is obliged to make sure that the relevant conditions have been completed (and/or verify that the relevant documents have been obtained).
If under escrow agreement the deponent transfers non-cash money, the escrow agent has to put such money on a nominal bank account, unless the escrow agent is itself a bank institution. Furthermore, it is prohibited to suspend or seize the nominal bank account opened by an escrow agent or to use the funds available on the nominal bank account in order to satisfy the claims that the 3rd parties may put forward against either the escrow agent and/or the beneficiary of the nominal account (i.e. either the deponent or the beneficiary of the escrow agreement). The claims of the 3rd parties may be satisfied only by levying execution upon the deponent’s or the beneficiary’s claims (if any) vis-à-vis the escrow agent concerning the recovery or transfer of the deposited assets in accordance with the escrow agreement. In other words, the legislation prohibits to suspend or satisfy the claims of 3rd parties (as well as state bodies) against the property deposited with the escrow agent.
Who may act as escrow agents?
There are no restrictions regarding who may act as escrow agents. In practice, the role of the escrow agent is usually performed by banks, law firms, brokers, notaries and specialized escrow companies. Russian law does not require a license in order to be an escrow agent.
When choosing an escrow agent, the companies need to pay attention to the reputation and financial standing of the future escrow agent. In this regard, the banks can be considered one of the most reliable escrow agents as they need to comply with the strict financial liquidity requirements.
Escrow agreements can be a convenient way of securing performance of obligations in purchase of securities, real property, intellectual property, M&A transactions and joint ventures.
1 The Federal Law No. 212-FZ dated 26 July 2017 “Concerning amendments to part one and part two of the Civil Code of the Russian Federation and certain legislative acts of the Russian Federation”