Concept of Pledge
A pledge is the encumbrance of movable property or proprietary rights to secure the performance of an existing or future debt obligation, where the pledged asset is delivered to the creditor, a third party, or remains with the pledgor. A pledged asset left with the pledgor may be locked, sealed, or marked with signs indicating that it is pledged.
Under a pledge, the creditor (pledgee) has the right, if the debtor fails to perform the obligation secured by the pledge, to satisfy their claim from the value of the pledged asset before other creditors. A pledge may secure the performance of any monetary obligation. A pledge is an accessory obligation to the principal obligation. The rights of the pledgee derive from their rights as a creditor, and the exercise of these rights depends on the fate of the obligation secured by the pledge. Unless otherwise provided by the agreement or by law, the pledge secures the claim as it exists at the time of its satisfaction, including interest, penalties, losses resulting from a delay in performance, as well as necessary enforcement costs, which are covered first.
The subject of a pledge may be movable property and proprietary rights. The subject of a pledge may not include assets which, under applicable law (in Lithuania), are exempt from enforcement, as well as movable assets pledged together with immovable property. Unless otherwise stipulated by law or contract, the pledge of an item covers its appurtenances and unseparated fruits. The subject of a pledge may also include items that will become the property of the pledgor in the future. Enforcement against such items may be initiated only after the pledgor acquires ownership of them. Pledging an item that is jointly owned is only possible with the written consent of all co-owners.
Types of Pledge Objects and Protection Requirements
The object of a pledge may include rights to land, forests, and other property, i.e., the right of use, lease rights, and other proprietary rights, except for rights related to the personality of the owner of the pledged property, as well as rights whose transfer is prohibited by law or contract. In cases provided by law, the object of a pledge may also be proprietary rights that the pledgor will acquire in the future.
A pledgor who has pledged goods in circulation (goods, raw materials, semi-finished products, finished products) has the right to change the composition and form of the pledged goods, provided that their total value does not decrease. When pledged goods are sold in the course of activities specified in the pledgor’s founding documents, the pledge on those goods is extinguished, and newly acquired goods become the object of the pledge at the moment the pledgor acquires ownership.
The right of pledge arises from the moment the pledge agreement is concluded, when the pledged asset is delivered to the creditor. If the pledged asset remains with the pledgor or is delivered to a third party, the right of pledge arises from the moment of its registration in the mortgage.
A person to whom the pledged asset is delivered must store it properly and is responsible for its preservation unless they prove that the asset was lost or damaged through no fault of their own. Such a person has no right to use the pledged asset unless otherwise provided by law or by agreement.
The right of pledge is terminated:
- Upon the expiration of the obligation secured by the pledge;
- If the pledged asset is destroyed;
- If the pledgee acquires ownership of the pledged asset or the pledged rights are transferred to the pledgee;
- Upon the expiration of the validity period of the right that is the object of the pledge;
- If the creditor cannot satisfy their claim from the pledged asset due to the expiry of the limitation period;
- By agreement of the parties or by the creditor waiving the pledge.
When pledged property is sold under enforcement at the request of the creditor to whom the property was pledged, all pledges on the property are extinguished.