Bank Pledge for Legal Entities: Conditions, Risks, and Current Trends in Ukraine 2025

A bank pledge for legal entities is one of the most common forms of securing obligations in modern financial and legal relations. It is important both for creditors — banking institutions — and for the borrowers themselves — enterprises, as it helps reduce the risks of non-repayment of credit and enables access to additional financial resources.

Legal nature of a bank pledge
Pledge as an institution of civil law is regulated by the Civil Code of Ukraine, the Law of Ukraine “On Securing Creditors’ Claims and Registration of Encumbrances,” as well as special banking and commercial regulations. A legal entity applying for a loan is usually required to provide the bank with certain property or proprietary rights as collateral, thus ensuring proper performance of the credit agreement.

By its legal nature, a pledge is a type of proprietary right over another’s property, wherein the creditor obtains a preferential right to satisfy his claims from the value of the pledged asset before any other potential creditors of the debtor. This mechanism prevents the legal entity from unjustifiably evading credit repayment, since, in the event of default, the bank may foreclose on the pledged asset.

Types of pledges in banking practice
Banks and legal entities may employ various types of pledge in their relationships. The most common are:

• Real estate — enterprises, office or warehouse premises, land plots. This is the most attractive form for banks since it offers high stability and can be realized if the borrower defaults.
• Movable property — equipment, vehicles, goods in stock, finished products. In such cases, banks typically require proof of the asset’s liquidity and ease of realization.
• Proprietary rights — claims to receivables, funds in accounts, leasehold or licensing rights. Pledging proprietary rights has recently gained popularity, especially among companies rich in intangible assets.
• Shares and corporate rights — legal entities may pledge participatory interests in the charter capital of subsidiaries or shares of owned companies. This provides the bank with additional leverage over corporate governance in cases of default.

Bank pledge and credit risk
For banks, a pledge is a tool to reduce credit risk. In times of economic instability or war, when corporate finances are highly volatile, collateralized lending allows creditors to avoid significant losses. For legal entities, collateralized loans are, in turn, significantly cheaper than unsecured ones because the bank’s risk is much lower, making it possible for banks to offer better interest rates.

Proper valuation of collateral is crucial. Banks hire independent appraisers to determine the market value of assets and usually discount it to a certain level for extra security. In the case of movable property or inventory, a regular monitoring approach is used: the bank may require inventory checks and ongoing control over the pledged resources.

Legal features of the pledge
Arranging a pledge requires compliance with several critical legal procedures. First, a written pledge agreement is executed, which must specify the subject of the pledge, its value, the debtor’s obligations, and the foreclosure procedure. Second, details about the encumbrance must be registered in the State Register of Movable Property Encumbrances or the appropriate real estate registers.

These legal procedures are crucial because, without state registration, the pledge does not have legal force in relation to third parties. This approach ensures transparency of the asset’s legal status and eliminates the risk of so-called “double pledging,” a common scheme of abuse.

Performance and foreclosure
If the obligation is not fulfilled, foreclosure procedures are activated. According to current legislation, there are two main ways: out-of-court and court procedures. The out-of-court option involves realization of the pledged asset by agreement of the parties or via auction. The court option is longer and more complex but may be necessary in disputes over ownership.

It should be noted that banks prefer out-of-court procedures, as they allow quicker return of funds and reduced court costs. Still, out-of-court conditions must be clearly defined in the pledge agreement.

Risks and challenges for legal entities
Pledge is an effective way for enterprises to attract financing, but it does carry risks. The most obvious is the loss of key assets in case of default. This is especially critical for companies that pledge production facilities or assets vital for ongoing operations. If such assets are seized, business activity may be effectively suspended.

Another risk is asset devaluation. During an economic crisis or market depreciation, the value of pledged property may drop significantly, so it may not cover the debt. In such cases, banks often require additional security — the so-called “top-up pledge.”

Yet another problem is underdeveloped court practice. Even with a formal pledge and encumbrance registration, protecting the rights of the bank or the borrowing enterprise may prove difficult due to procedural delays, appeals, or conflicting regulations.

Current trends in pledge use
The Ukrainian banking services market is gradually aligning with European standards. There is a clear trend toward digitalization of processes: banks are introducing remote pledge verification and valuation services, using electronic databases, and offering online consultations. Pledge agreements are now often signed using digital signatures and qualified electronic seals.

An expanding trend is the use of intellectual property as collateral. Ukrainian IT companies seek loans secured by patents, copyrights or software products, though this mechanism still faces legal challenges and an immature practice of intangible asset valuation.

Conclusions
A bank pledge for legal entities is a fundamental tool of financial and legal regulation, creating a balance between the interests of banks and businesses. It guarantees banks’ return on funds and gives enterprises access to cheaper finance. Yet, a pledge introduces business risks because, in the event of non-performance, key assets may be lost.

For effective further development of pledge-based lending in Ukraine, it is vital to improve court practice, simplify foreclosure procedures, and ensure reliable, transparent asset valuation. Only in such conditions will the pledge become not just an instrument for securing loans but an effective mechanism for supporting economic turnover.

Author: Ihor Yas’ko, Managing Partner at “Winner Law Firm”, PhD in Law.