KEY LEGAL PRINCIPLES OF A MODERN
SECURED TRANSACTIONS REGIME
Jamie Bowman,
Economic Legal Advisor
Manila, Philippines
November, 2015
Presentation Overview
 Goals & Benefits
 Current Regime in the Philippines
 International Best Practices
 Reform Components
 Key Legal Principles
 Registry Standards
 Approach to Legal Reform
 Questions & Answers
Review – Goals & Benefits
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.
Who else has reformed…? (short list)
Afghanistan
India
Albania
Lao PDR (coming soon)
Australia
Marshall Islands
Bosnia-Herzegovina
Mexico
Cambodia
New Zealand
Canada
Romania
China (receivables and
financial leases)
Sri Lanka
Ghana
United States
Guatemala
Vanuatu
Honduras
Vietnam
Current Regime in Philippines

Legal Framework:
Chattels Mortgage Law (1906)
Provisions of the Civil Code
Provisions of the Criminal Code
Supreme Court Rulings

Registry
Deeds Registry
“It works….”
Telephones - 1906
Ford
“Model T”
1906
Telephones - 2015
Google
Selfdriving
car
2015
Assessments of the Current Regime
“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
SOURCES OF INTERNATIONAL BEST PRACTICES
 UNCITRAL Legislative Guide on Secured
Transactions
 World Bank Principles on Insolvency and
Creditors Rights
 IFC Guide on Secured Transactions and
Collateral Registries
Reform Components
A legal framework that incorporates best practice principles
including:
1.
2.
3.
4.
5.
Broad Scope (collateral, obligations & interests)
Simple creation
Effective publicity
Priorities
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.
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.
Rules regarding Collateral
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 property
Property subject to separate regimes
Ships and wages
Description of 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.
Types of Interests
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…
*
“Other” interests (avoid surprise interests):
- Tax liens
- Court judgments
Common in the Philippines
Multiple Interests & Proceeds
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
Obligations
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
Principle 2 – Simple Creation
 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 3 – Perfection (Publicity)
 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 4 – Priority
“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.
Inclusion of “Other” Interests
.JPB Bank
Loan $50,000
Collateral
Value $75,000
First in Time;
first in Right..!
#1 Tax Lien
Loan $20,000
#2 Court
Judgment
$50,000
#3 JPB Bank
Loan $50,000
=?
Exceptions to “First in Time”
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
Purchase Money Mortgage - Example
San Jose Tire Store
• 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.
Principle 5 – Enforcement
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.
Debtor Rights & Dealing with Creditors
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.
Registry Standards (Overview)
Accessibility:
Registries should be accessible to
both registrants and searchers from
widely available access points, seven
days a week, 24 hours a day.
Simplicity:
Registration requirements should be
as simple as possible in order to
reduce the possibility of error and to
encourage use.
Accuracy:
Unity:
Best practice is to facilitate data entry
A secured transactions registry
by the registrant (secured party),
through an on-line, electronic registry. should include notices of all types of
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.
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,
“Unity”
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
“Simplicity”
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.
Approach to Legal Reform
 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…!
Questions….?
Thank you!
Ms. Jamie Bowman
Economic Legal Advisor
JamiePBowman@gmail.com