Case study: Philippine Secured Transactions Law

“Reforming Asia-Pacific Financial Infrastructure”

A 2015 APEC FMP Conference

Chester Abellera12 November 2015

Outline

I. Existing Philippine Laws on Secured Transactions

II. International Best Practice

III. General Comparison of the Current Philippine Legal Regime against International Best Practice

IV. Current Initiatives of Philippine Government

V. Conclusion

Existing Philippine Laws on Secured Transactions

Existing Philippine Laws

Act 1508 (July 2, 1906) – The Chattel Mortgage Law

Act No. 2137 (February 5, 1912) – The Warehouse Receipts Law

Act 2243 (February 11, 1913) – Record of Mortgages issued by public service corporations to secure bonds, and other purposes

Republic Act 386 (June 18, 1949) - Civil Code of the Philippines

Presidential Decree No. 1529 (June 11, 1978) – Property Registration Decree

Republic Act 7393 (April 13, 1992) – Quedan and Rural Guarantee Corporation Act

Republic Act No. 10142 (August 16, 2010) – Financial Rehabilitation and Insolvency Act (FRIA)

Best Practice on Secured Transaction

Legal Framework

International Best Practice

Best Practice on Secured Transaction Legal

Framework*

1. Broadly defined scope of permissible collateral, obligations

2. Ease of creating security interest

3. Centralized publicity system

4. Clear, comprehensive priority rules

5. Effective Enforcement

*UNCITRAL Legislative Guide on Secured Transactions

General Comparison of the

Current Legal Regime against

International Best Practice

General Comparison1. Broadly defined scope of permissible

collateral, obligations

Best Practice Current regime

Movable assets that could be included:

• Anything that is not real property;  tangible and intangible property;

assets that do not exist (future assets*), and a changing pool of assets (inventory*).

*To cover these assets, assets must be described generally and generically. 

Includes: • movable assets, exception: house

and equipment may be the subject of chattel mortgage

Section 7 of Act 1508: ‘covers only the property described therein, not like or substituted property’.

Saldana vs. Phil. Guaranty (1960) – spirit of CML allows for mortgage to be extended to after-acquired property

• accounts receivables may not be explicitly covered (due to decription requirement)

General Comparison

1. Broadly defined scope of permissible collateral, obligations

Best Practice Current regime

 

Existing and Future obligations

absolute ownership of asset required - limits application to future property (property not yet owned)

Only valid and existing obligations may be secured by a chattel mortgage (Affidavit of good faith)

Examples of Movables Aircraft Bank accounts Animals, crops and timber Equipment / Machinery Intellectual Property Inventory Leases Promissory Notes, and Chattel Paper Receivables (credit rights under contracts

and invoices)  Shares of stock in a corporation Ships / Vessels Motor vehicles

General Comparison (continued) 2. Ease of creating security interest

Best Practice Current regime

A security agreement is any written agreement signed by the debtor, and identifying the collateral and the secured obligation should be sufficient.

minimal formal requirements for

creating security interests; no special terminology, forms, or notarization required

the security agreement may include warranties and covenants, events of defaults, remedies.

Security over future assets or changing pool of assets may be created by agreement without need for any further acts.

a security, accessory contract where personal property is mortgaged for the performance of an obligation or payment of a debt

Section 5 of CML: A form must be used for

registration of a chattel mortgage, which requires disclosure of: Terms of the agreement Specific Form of the obligation Amount of the obligation Interest rate. 

Form must be signed and sworn by mortgagor and two witnesses before a notary.

General Comparison (continued) 3. Centralized publicity system: Movable Collateral

Registry

Best Practice Current regime

• Two basic functions of an efficient centralized registration system:o Notifies 3rd parties of existence of the

security interest; ando Establishes priority status of a security

interest based on the date of registration

• Registration does not create or transfer property rights; Purely an administrative function; thus, will not necessitate registry officials to determine authenticity, accuracy or validity of the information provided in the registration document

• Requires minimal registration information:o Debtor’s identityo Creditor’s identityo General or specific description of the

collateral

• Use an electronic system with broad access that will enable fast registration and info retrieval

Philippine Chattel Mortgage Registry is embedded in the country’s Torrens system of registry. As such, chattel mortgage registration is done in the provincial Register of Deeds offices level -168 ROD offices. CML also requires double registration in cases where debtor and secured assets are located in different locations.

 LRA is enhancing their system and moving towards web-based registry.

General Comparison (continued) 4. Clear, comprehensive priority rules

Best Practice Current regime

• Priority rules only apply for perfected security arrangements, perfecting a security agreement is effected by o filing a notice in the secured transaction registry,

oro taking possession or control of the collateral

(pledge)

• Priority rules establish the order competing claims will be satisfied, following the basic rule of “first in time, first in priority.”

• Clear and precise priority rules provides high degree of certainty the legal risks associated with granting a secured credit.

• Non-consensual (forced) liens in the collateral by virtue of statue or judicial process (tax lien, judgment lien, statutory lien, or insolvency administrators) should be subject to the same “first in, first in priority” rule.

Civil Code gives preference for duties, taxes, and fees to state, giving absolute priority over other claims, even if registered. Problem: no requirement for government to make its claims transparent. Secured creditors with claims to a specific movable property will be satisfied on a pro rated basis, or treated in pari passu. (i.e. settlement is in proportion to creditors claims.)

General Comparison (continued) 5. Effective Enforcement

Best Practice Current regime

• Speedy, effective, and inexpensive enforcement mechanism

 • Rights and remedies upon default of both the

debtor and creditor must be clear (including seizure and sale of collateral outside the judicial process)

 • For cases requiring judicial intervention,

expedited summary legal proceedings should limit judicial determination of:o Existence of agreement creating/granting

the security interest; ando Event of default.

• Reasonable safeguards should be in place to:o protect against misbehaving creditors; ando obtain commercially fair value for the

private sale of collateral. 

Extrajudicial enforcement, by selling property 30 days from the time of default at a public auction.

If debtor refuses to yield possession, creditor can maintain an action to recover possession, Replevin, then foreclosure through sale at public auction

 

Current Initiatives of Philippine Government

IFC is working together in partnership with the Department of Finance and the Land Registration Authority on this reform

In 2012, a Technical Working Group comprised of a diverse group of stakeholders (BAP, SEC, BSP, SME Groups etc.) was established and they came up with a framework document that provided recommendations on how to pursue a best practice secured transactions reform

LRA adopted these recommendations as it enhanced its registry and move towards a web-based registry

A True Comprehensive Secured Transactions Reform Entails the Following:

• It is more than the establishment of an electronic, consolidated and central registry – This is just among the other elements that need to be in place…

Legal and institutional framework to facilitate the use of movable property as collateral for both business and consumer credit

A shift in mind set among key stakeholders (government/legislators/judicial, financial institutions, MSMEs…)

Thank you