key legal principles of a modern secured transactions regime jamie bowman, economic legal advisor...
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KEY LEGAL PRINCIPLES OF A MODERN SECURED TRANSACTIONS REGIME
Jamie Bowman,Economic Legal Advisor
Manila, Philippines November, 2015
Goals & Benefits Current Regime in the Philippines International Best Practices Reform Components Key Legal Principles Registry Standards Approach to Legal Reform Questions & Answers
Presentation Overview
Goals:
To increase access to credit for businesses and consumers, by reducing the risk to lenders,
Facilitate the use of movable assets as collateral for loans and credit,
By increasing certainty of repayment and debt satisfaction through realization of movable property collateral.
Some benefits:
Increased available credit, improved loan terms: longer duration, improved loan-to-value ratios and lower interest rates.
Review – Goals & Benefits
Afghanistan
Albania
Australia
Bosnia-Herzegovina
Cambodia
Canada
China (receivables and financial leases)
Ghana
Guatemala
Honduras
India
Lao PDR (coming soon)
Marshall Islands
Mexico
New Zealand
Romania
Sri Lanka
United States
Vanuatu
Vietnam
Who else has reformed…? (short list)
Legal Framework:
Chattels Mortgage Law (1906)
Provisions of the Civil Code
Provisions of the Criminal Code
Supreme Court Rulings
RegistryDeeds Registry
Current Regime in Philippines
“It works….”
Telephones - 1906 Telephones - 2015
Ford “Model T”1906
Google Self-driving car2015
“This is an old law…”Philippine Law – Simplified
“The foregoing discussion has revealed that the framework governing security over personal property in the Philippines is far from a successful story of doctrinal or jurisprudential fusion between Spanish civil law and US common law. ”
Securities Property in the Philippines: A States Common Law Imbroglio
“Its only due to the ingenuity of the local lawyers that the system works as well as it does…”
BizCLIR
Assessments of the Current Regime
UNCITRAL Legislative Guide on Secured Transactions
World Bank Principles on Insolvency and Creditors Rights
IFC Guide on Secured Transactions and Collateral Registries
SOURCES OF INTERNATIONAL BEST PRACTICES
A legal framework that incorporates best practice principles including:
1. Broad Scope (collateral, obligations & interests)2. Simple creation3. Effective publicity4. Priorities5. Effective & inexpensive enforcement mechanisms
An unified, electronic registry that facilitates the access to information, keeps costs low and limits corruption.
Training for banks, lenders, borrowers, judges, attorneys, and other users of the regime.
Reform Components
Principle 1 – Broad Scope
The broader the coverage of the law regarding collateral, interests and obligations, the more credit that will be extended…!
The legal framework should cover:
- all types of movable property as collateral,
- all types of obligations, and,
- all types of security interests.
Broadly define collateral:- All types of movable property - Tangible (all types of equipment, machinery,
goods, crops, timber, livestock, etc.)- Intangible (Receivables, intellectual property
rights)- Both presently owned and acquired in the future
Exclusions (clearly state in the law):Immovable propertyProperty subject to separate regimesShips and wages
Rules regarding Collateral
The Law should allow collateral to be described “generally”.
The terms “all equipment” and “all inventory” should be sufficient.
Benefits: - Allows parties to avoid costly investigation when entering contracts;- Avoids litigation over status of particular assets;- Facilitates lending on inventory and receivables;- Avoids time consuming registration and amendments.
Description of Collateral
Law should cover any type of transaction that creates a right in movable property meant to secure the performance of an obligation:
- Chattels mortgage*- Non-possessory pledges- Financial* and certain operational leases- Trust receipts*- Assignment by way of security (receivables)* - Conditional sales* - Sale-lease backs* - Others…
* Common in the Philippines
“Other” interests (avoid surprise interests):- Tax liens- Court judgments
Types of Interests
Best practice is to allow multiple interests in the same collateral:
- Allows the debtor to use the full value of its assets to maximize available credit- Negative “pledges” should be discouraged
Best practice is to allow the interest to follow the “proceeds” of the collateral.
- Right should extend to whatever type or proceeds are received upon disposition of collateral
- Right to proceeds should be automatic
Multiple Interests & Proceeds
The Law should cover any type of obligation the performance of which is secured by an interest in movable property:
- Present & future- Monetary & Non-monetary - Determinate & determinable- Conditional & unconditional- Fixed & floating
Monetary obligations should include demand loans, term loans and lines of credit
Obligations
Best practice is to simplify and expedite the creation of security interest, imposing no unnecessary burdens on the parties:
- Keeps costs low- Encourages use
Only minimal requirements:- Written agreement signed by the debtor (Writing requirement can be satisfied by electronic
correspondence)- Identifies collateral and the secured obligation- no special terminology- no notarization - no other formalities (ie affidavit of good faith)
Principle 2 – Simple Creation
What - “Perfection” is an additional step taken after the interest is created that makes it effective against the claims of third parties.
Why - Unfair to hold other creditors accountable for interests that are not public.
How - Preferred means of perfection is registration. But perfection may also be achieved through possession and control.
Should apply to “other interests” (tax liens, etc.) to avoid “surprise” claims, which improves lender’s certainty.
Principle 3 – Perfection (Publicity)
“Priority” rules determine the sequence in which competing claims to the same collateral will be satisfied if the debtor defaults.
Law must address a wide variety of situations & certain exceptions that address business realities.
Priority rules must be clear and precise to avoid litigation.- General Rule: “First in time, first in right”
- Limited exceptions
Allows creditor to evaluate the risk of lending (vis a vis other potential claimants) at the time the decision to extend credit it made.
Principle 4 – Priority
.
Inclusion of “Other” Interests
JPB BankLoan $50,000
Collateral Value $75,000
First in Time; first in Right..!
#2 CourtJudgment $50,000
#1 Tax LienLoan $20,000
#3 JPB BankLoan $50,000 = ?
Exceptions address the realities of doing business in today’s world:
Purchase money mortgage (Acquisition Finance): Involves the rights of a creditor funding the acquisition of specific property, which may conflict with a prior interest.
Right of retention: Involves a person who provides value to the collateral. May retain possession until paid, even if there is another security interest of lien. (Example: mechanic’s lien)
Commingled goods: Interests in goods that becomes “commingled” with other goods.
Crops and fixtures: Unique issues raised by the land laws
Exceptions to “First in Time”
San Jose Tire Store
Purchase Money Mortgage - Example
• Owner has an existing loan secured by “all inventory & equipment.”
• Owner needs new equipment to expand services and increase business.
• Existing lender won’t extend additional credit, or terms aren’t favorable to owner.
• Owner goes to a vendor, and purchases needed equipment on credit from vendor, secured by new equipment.
• Vendor has right to “new” equipment upon owner default.
Speedy, effective and inexpensive enforcement mechanisms, including “non-judicial” foreclosure are essential to realizing security interest in collateral.
Key principles:• Immediate right to possession by creditor upon default by
debtor/ or abbreviated judicial process – no breach of peace.
• Disposition (private or public sale) of the collateral by the creditor
– No government official involved - Public Action not Required
• Distribution of proceeds in priority sequence.• Protection of rights of the debtor during enforcement.
Principle 5 – Enforcement
Debtor should be entitled to an accounting of the debt.
Debtor should be allowed to reinstate loan by paying any and all amounts in arrears + expenses incurred.
Allow for redemption before sale: debtor or others with an interest in collateral can redeem by paying entire amount of debt.
Significant penalties should be levied on creditors that violate the enforcement procedures.
Debtor Rights & Dealing with Creditors
Registry Standards (Overview)
Simplicity: Registration requirements should be as simple as possible in order to reduce the possibility of error and to encourage use.
Unity: A secured transactions registry should include notices of all types of security interests, in all types of movable property, of all kinds of debtors.
Cost effectiveness: The transactional cost of registration and searching should be sufficient to recover the cost of registry operation, but be low enough to encourage use.
Accessibility: Registries should be accessible to both registrants and searchers from widely available access points, seven days a week, 24 hours a day.
Accuracy: Best practice is to facilitate data entry by the registrant (secured party), through an on-line, electronic registry. Speed and Timeliness: It is important that the database reflects all effective notices as soon as they become effective; there can be no time lag between filing and disclosure.
Only one electronic registry for the entire country.
A “unified” registry fosters comprehensive searches (only one registry to search)
Accept notice for all types of collateral, all types of interests, all types of debtors
The registry will allow for designations of different debtor types and collection of key indexed fields accordingly
“Unity”
Notice based system with minimal information entered - only sufficient to give creditors notice of the collateral interest:
• Debtor name, id and address• Secured Party name and address• Collateral Description
- VIN if automobile or serial number if equipment• Lending agreement details, such as rates,
payment details, or credit information, are not entered.
Enough information to investigate status of debt and collateral.
“Simplicity”
Prepare policy document presenting issues that must be decided by policy makers
Draft a Secured Transactions Law based on policy decisions
Review / revise Draft Law by Drafting Committee Seek enactment by Parliament Establish electronic registry Develop policies and procedures Substantial training of lenders and registry users, borrowers, attorneys, judges, etc.
Go live…!
Approach to Legal Reform
Questions….?
Thank you!
Ms. Jamie Bowman Economic Legal Advisor