The Constitutional Court of the Republic of Armenia addressed the issue of compliance of Article 249 of the Civil Code of the Republic of Armenia with the Constitution of the Republic of Armenia in its decision SDO-1294 dated July 19, 2016. The contested Article 249 of the Code, in its current version, was established on 04.10.2005, which is the legal basis through which banks in Armenia take possession of property belonging to citizens and pledged as collateral without going through judicial processes.
Since this process inherently contains numerous risks and the possibility of arbitrary actions by the commercial bank, a provision was established that allows a citizen to contest the legality of the seizure of their property that is the subject of the pledge in court, in which case the court may suspend the process of seizing the pledged property. However, this opportunity was simultaneously conditioned on a provision that completely devalued the real legal possibility for the owner to prevent the realization of the pledged property, specifically, under the established norm, the court could suspend the process of seizing the pledged property if the pawnbroker provides collateral equivalent to the value of the pledged property to compensate for the possible damages of the pledgor.
This means that an obligation was established for the pawnbroker or the owner to provide collateral proportional to the value of the pledged property under the threat of seizure; this collateral could be in monetary form or in the form of other values. However, it is a fact that today, the majority of citizens applying for loans mainly either have one valuable property as their own or do not even have that and are pledging the property of a third party. Well, if they had equivalent monetary means, they probably would not need to pledge their property to obtain a loan.
It is no secret that the interests of banks in Armenia are predominantly protected, and numerous such norms can be cited as evidence, where the lending bank has almost unlimited opportunities and rights. However, since often these protective mechanisms and measures are beyond any bounds of reason, such legal regulatory norms sooner or later face the issue of compliance with the Constitution of the Republic of Armenia and, as in this case, are recognized as unconstitutional.
The cited norm also established an obligation for the bank to send a notice of seizure only to the debtor. However, it often happens that the pawnbroker and the borrower or debtor do not coincide. For example, a citizen applies to a bank for a loan, and as a means of securing that loan, they pledge the property of a relative. In this case, the debtor and the pawnbroker do not coincide, but the bank has an obligation to send a notice only to the debtor. By the decision of the Constitutional Court, the bank's obligation to send a notice has been established equally for both the pawnbroker and the debtor.
The cited civil law norm has been contested in the Constitutional Court on the grounds that it does not comply with the constitutional approaches to the recognition, guarantee, and protection of property rights.
At the same time, the Constitutional Court, addressing the issue of extrajudicial seizure, has avoided directly answering how much it complies with the Constitution, and the arguments presented that the citizen gives their consent to extrajudicial seizure of their property by signing a contract through their active actions are not convincing, as everyone is aware of the reality regarding the process of signing contracts. They are ready-made texts, standard contracts composed in fine print, where the possibility of not signing is simply excluded. Naturally, no bank will enter into negotiations with any pawnbroker to discuss whether it is possible to replace extrajudicial seizure with judicial seizure in the contract... simply, citizens perform this active action without any alternative in order to obtain the loan at any cost.
Nevertheless, even under such a regulatory framework, it is necessary for the de facto possibility for the owner to apply to the court to be accessible and realistic.
Besides the fact that the owner can contest the legality of the seizure in court (not the seizure process but its legality, which is a subject of various interpretations), it also obliges to provide collateral equivalent to the seized property, which the Constitutional Court noted imposes an disproportionate burden on the pawnbroker's ability to suspend the extrajudicial seizure, as it obliges the pawnbroker to provide collateral not for the possible damages of the pledgor but for the value of the pledged item. In several cases, the value of the pledged property may exceed not only the principal obligation secured by the pledge but also the amount of possible damages of the pledgor. In such a legal regulation, it becomes mainly impractical for the pawnbroker to exercise the right provided by law to suspend the process of seizing the pledged property.
Therefore, in the first paragraph of the second part of Article 249 of the Civil Code of the Republic of Armenia, the phrase "if the pawnbroker provides collateral equivalent to the value of the pledged property" has been recognized as contrary to Article 61, Part 1 and Article 78 of the Constitution of the Republic of Armenia and invalid.