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Secured Transactions Law in Asia: Principles, Perspectives and Reform
9781509926497, 9781509926527, 9781509926503

Author / Uploaded
Louise Gullifer
Dora Neo (editors)

Table of contents :
Preface
Table of Contents
List of Contributors
List of Abbreviations
Table of Cases
Table of Legislation
1. Introduction
I. General Introduction
II. Plan of Book
III. Secured Transactions Law Reform
IV. Terminology and Concepts
V. Asia: Variations between Countries
VI. The Contribution of the Book
PART I. GENERAL
2. Lost in Transplantation? Modern Principles of Secured Transactions Law as Legal Transplants
I. Introduction and Background
II. The Modern Principles of Secured Transactions Law
III. Legal Transplantation: Alan Watson's Legal Transplants and its Relevance for the Modern Principles
IV. Transplantation (or not) of the Modern Principles in Context
V. Benefits of Modern Principles: Beyond Credit Enhancement
VI. Conclusion
3. Personal Property Securities Law Reform in Developed Jurisdictions
I. Introduction
II. Federal System Challenges
III. Oversight
IV. Register Upgrades
V. Conclusion
4. Secured Transactions Law Reform in Asia and Access to Finance: What can the UNCITRAL Model Law on Secured Transactions Offer?
I. Introduction
II. Key Objectives and Fundamental Policies of the UNCITRAL Model Law
III. Scope and General Provisions of the Model Law
IV. Creation of Security Interests (Attachment)
V. Third Party Effectiveness of Security Interests (Perfection)
VI. The Registration System
VII. Priority of Security Interests
VIII. Enforcement of Security Interests
IX. Conflict of Laws in Secured Transactions
X. Conclusion
5. Secured Transactions Reform in East Asia: Progress and Challenges
I. Introduction
II. Financial Inclusion, Stability and Access
III. Implementation Challenges
IV. The Role of Law Schools
V. Conclusion
PART II. CIVIL LAW JURISDICTIONS
6. Secured Transactions Law Reform in Civil Law Jurisdictions: Challenging Tradition, Facing Reality, and Embracing Modernity
I. Mapping Secured Transactions Reform in Civil Law Jurisdictions: Challenges and Opportunities
II. The Merits of an International-Principle-Driven Reform for Civil Law Jurisdictions
III. Facing Conceptual Challenges: Policy Implications of a Unitary Approach and Implementation Alternatives
IV. Institutional Challenges: Opportunities for Civil Law Jurisdictions to Decode Institutions and Recode in Digital
V. Fortifying Enforcement of Security Rights – A Matter of Balance
VI. Conclusions and Proposals
7. The Law of Secured Transactions in China: Comparison and Futu
I. Introduction
II. The Period from the Reform and Opening Up to 2007: The Formation of the Legal System of the Law on Secured Transactions
III. The Reform of the Law on Secured Transactions in the 2007 Real Property Law
IV. Future Reform and Chinese Civil Law Codification
V. Conclusion
8. Secured Transactions Law Reform in Indonesia: Fiducia, at a Crossroads
I. Introduction
II. Security and Priority Rights in Indonesia
III. Fiducia Security as a Non-possessory Security Right Over Movables
IV. Conclusion
9. Navigating the Patchwork of Secured Transactions Rules in Japan: Towards a Framework Conducive to Asset Based Lending
I. Introduction
II. Economic Overview and Financing Environment
III. Overview of Security Interests
IV. Creation
V. Perfection and Priority
VI. Identification Issues and Over-collateralisation
VII. Enforcement
VIII. Asset Based Lending (ABL)
IX. Conclusion
10. Banking the Unbanked: An Examination of the Personal Property Security Act of the Philippines
I. Introduction
II. The Legislative Background to the PPSA
III. The PPSA
IV. Early Assessment of the PPSA
V. Steps Forward
11. Banking the Unbanked: An Examination of the Personal Property Security Act of the Philippines
I. Overview on Korea's Secured Transactions Law
II. Pledge and Security by Means of Transfer (Yangdodambo)
III. Security Rights Prescribed in the Act
IV. Prospect for Future Reform in Korea
12. Law Reform of the Secured Transactions Regime in Taiwan: Modernisation, Controversies, and Prospects
I. Introduction
II. Current Law on Secured Transactions in Personal Property
III. Policy and Focus of the Reform on Secured Transactions: Movable Collateral Regime
IV. Regulatory Reform and Research Reports in the Past Decades
V. Issues and Recommendations
VI. Conclusion
13. Implementation of International Standards on Secured Transactions into the Thai Legal System: Possibilities and Proposals
I. Introduction
II. An Overview of Thai Law on Secured Credit
III. Non-compliance of Thai Law with International Standards
IV. Rationales for Non-adoption of International Standards
V. Compatibility of International Standards with the Thai Legal System
VI. Proposals for Implementation of a Functional Approach in the Thai Legal System
VII. Assessment of the Feasibility of Further Adoption of the Modern Principles in Thailand
VIII. Lessons Learned
IX. Conclusion
14. Secured Transactions Reform in Vietnam: Prominent Achievements, Experiences, and Lessons Learnt
I. Introduction and Background
II. Creating and Improving an Enabling Regulatory Environment for Secured Transactions
III. Building a World Class Web-Based Registration System for Secured Transactions
IV. Building Capacity for the Banking Sector and Related Stakeholders
V. Conclusion
PART III. COMMON LAW JURISDICTIONS
15. Secured Transactions Law Reform in Common Law Jurisdictions (Brunei Darussalam as an Example)
I. Introduction
II. History of Secured Transactions Law in Brunei
III. Modern Principles of Secured Transactions Law
IV. Comparison between the Modern Principles and the Common Law
V. Other Challenges
VI. Conclusion
16. Bangladesh Secured Transactions Framework: Moving Towards a Reform
I. Introduction
II. Economic Overview
III. Current Secured Transactions Framework
IV. Why PPSA was used as a Model
V. Structure of the Draft Act
VI. Deviations from the PPSA
VII. Complementary Reforms
VIII. Conclusion
17. Secured Transactions Law in India: Suggestions for Reforms
I. Introduction
II. Indian Law on the Creation and Perfection of Security Rights in Property
III. The Salient Features of the Indian Law on Secured Transactions
IV. The SARFAESI Act
V. Compliance of Indian Law with Modern Principles of Secured Transactions Law
VI. Factoring Regulation Act, 2011
VII. Suggestions for Reform in the Indian Law
VIII. The Impact of the Insolvency and Bankruptcy Code 2016 on Secured Transactions Law
18. Pakistan’s Reform of Secured Transactions Law: Challenges and the Road Ahead
I. Introduction
II. Economic Overview
III. Pre-reform Legal Regime
IV. The ST Act
V. Final Remarks
19. Secured Transactions Law in Singapore: Living with Untidiness
I. Introduction
II. Security Interests
III. Quasi-security Devices
IV. Priorities
V. Enforcement
VI. Law Reform Studies
VII. Assessment and Recommendation
VIII. The Challenges of Reforming Secured Transactions Law in Singapore
IX. The Way Forward
X. Conclusion
20. Conclusion
I. Introduction
II. Attitudes to Reform
III. Method of Reform
IV. Substance of the Law
V. Conclusion
Index

Citation preview

SECURED TRANSACTIONS LAW IN ASIA This collection of essays offers a unique insight and overview of the secured transactions law in many of the most important countries in Asia, as well as reflections on the need for, benefits of and challenges for reform in this area of the law. The book provides a mixture of general reflections on the history, successes and challenges of secured transaction law reform, and critical discussion of the law in a number of Asian countries. In some of the countries, the law has already been reformed, or reform is under way, and here the reforms are considered critically, with recommendations for future work. In other countries, the law is not yet reformed, and the existing law is analysed so as to determine what reform is desirable, and whether it is likely to take place. First, this book will enable those engaging with the law in Asia to understand better the contours of the law in both civil and common law jurisdictions. Second, it provides analytical insights into why secured transactions law reform happens or does not happen, the different methods by which reform takes place, the benefits of reform and the difficulties that need to be overcome for successful reform. Third, it discusses the need for reform where none has yet taken place and critically assesses the reforms which have already been enacted or are being considered. In addition to providing a forum for discussion in relation to the countries in question, this book is also a timely contribution to the wider debate on secured transactions law reform which is taking place around the world.

ii

Secured Transactions Law in Asia Principles, Perspectives and Reform

Edited by

Louise Gullifer and

Dora Neo

HART PUBLISHING Bloomsbury Publishing Plc Kemp House, Chawley Park, Cumnor Hill, Oxford, OX2 9PH, UK 1385 Broadway, New York, NY 10018, USA 29 Earlsfort Terrace, Dublin 2, Ireland HART PUBLISHING, the Hart/Stag logo, BLOOMSBURY and the Diana logo are trademarks of Bloomsbury Publishing Plc First published in Great Britain 2021 Copyright © The editors and contributors severally 2021 The editors and contributors have asserted their right under the Copyright, Designs and Patents Act 1988 to be identified as Authors of this work. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage or retrieval system, without prior permission in writing from the publishers. While every care has been taken to ensure the accuracy of this work, no responsibility for loss or damage occasioned to any person acting or refraining from action as a result of any statement in it can be accepted by the authors, editors or publishers. All UK Government legislation and other public sector information used in the work is Crown Copyright ©. All House of Lords and House of Commons information used in the work is Parliamentary Copyright ©. This information is reused under the terms of the Open Government Licence v3.0 (http://www. nationalarchives.gov.uk/doc/open-government-licence/version/3) except where otherwise stated. All Eur-lex material used in the work is © European Union, http://eur-lex.europa.eu/, 1998–2021. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication data Names: Gullifer, Louise, editor. | Neo, Dora, editor. Title: Secured transactions law in Asia : principles, perspectives and reform / edited by Louise Gullifer and Dora Neo. Description: Oxford, UK ; New York, NY : Hart Publishing, an imprint of Bloomsbury Publishing, 2021. Includes bibliographical references and index. Identifiers: LCCN 2020056175 (print) | LCCN 2020056176 (ebook) | ISBN 9781509926497 (hardback) ISBN 9781509946631 (paperback) | ISBN 9781509926503 (pdf) | ISBN 9781509926510 (Epub) Subjects: LCSH: Security (Law)—Asia. | Law reform—Asia. Classification: LCC KNC235.S43 S43 2021 (print) | LCC KNC235.S43 (ebook) | DDC 346.507/4—dc23 LC record available at https://lccn.loc.gov/2020056175 LC ebook record available at https://lccn.loc.gov/2020056176 ISBN: HB: ePDF: ePub:

978-1-50992-649-7 978-1-50992-650-3 978-1-50992-651-0

Typeset by Compuscript Ltd, Shannon To find out more about our authors and books visit www.hartpublishing.co.uk. Here you will find extracts, author information, details of forthcoming events and the option to sign up for our newsletters.

PREFACE This book examines the law of secured transactions in thirteen Asian jurisdictions which encompass a range of legal traditions and economic models, and are at different stages of reforming their law. In addition to jurisdictional chapters, the book contains chapters that provide general perspectives on the processes, benefits and challenges of secured transactions law reform from a regional and transnational point of view, and also from civil law and common law standpoints. There is awareness of the importance of having a proper functioning secured transactions law in all the jurisdictions covered in the book, and reform activity is ongoing in most of them. The genesis of the book was in a research symposium held at the National University of Singapore Faculty of Law in 2018, which was a joint initiative between the Centre for Banking & Finance Law and the EW Barker Centre for Law & Business (both of the National University of Singapore) and the Commercial Law Centre at Harris Manchester College, University of Oxford. The authors of the various chapters in this book presented their initial drafts and ideas at the symposium for feedback and discussion, after which the chapters were significantly reworked and updated for publication. This book is the third in a series looking at secured transactions law around the world, with a particular focus on reform. The first book1 discussed secured transactions law reform generally, including the history of Article 9 of the US Uniform Commercial Code, the experience in several jurisdictions that had reformed their law, as well as international law reform initiatives, and included a section focusing on Europe and the possibility of reform in European countries. The second book2 concentrated on countries in Africa, many of which have taken up the idea of secured transactions law reform relatively rapidly. This book makes a number of contributions to the literature in this area. It provides a comparative and critical analysis of the current state of secured transactions law in selected countries in Asia. It also provides an analysis of secured transactions law at a number of levels, the purposes of its various aspects and how those purposes can be achieved in different ways, within different legal cultures and systems. It also engages with the debate about legal transplant, not only in relation to the law on the books within different legal cultures, but by identifying and examining measures which can make a legal transplant more successful, such as stakeholder involvement and capacity building. In doing so, it reflects on the reform process itself, widely construed, at an academic level, but also from the experience of some chapter authors who have been very closely involved in the reform process in one or more jurisdictions. While the ability of lenders to successfully take and enforce security is one of the key elements influencing the availability of credit and fuelling economic growth, this can also have potentially devastating effects on borrowers in the event of a severe economic downturn that renders them unable to pay their debts, which happened globally as a result of the COVID-19 pandemic. Some 1 O Akseli and L Gullifer (eds), Secured Transactions Law Reform: Principles, Policies and Practice (Hart Publishing, 2016). 2 M Dubovec and L Gullifer, Secured Transactions Law Reform in Africa (Hart Publishing, 2019).

vi Preface governments have sought to reduce the hardship caused by the pandemic by instituting various measures, such as providing subsidies and low-cost financing for businesses, and imposing moratoria on lawsuits for loan recovery and the enforcement of security interests. The book, however, does not discuss such measures, which are largely temporary, for various reasons. First, most of the text was prepared before the consequences of the pandemic, and the resulting government responses, became clear. Second, its focus is more long-term: it considers reform, which is a process which often takes decades, including not only the legal changes themselves but the preparation beforehand and capacity building afterwards, all of which is considered in the book. There have been several developments in a few of the jurisdictions covered in the book after the chapters were finalised. In China, the new Civil Code, which was adopted on 28 May 2020, entered into force on 1 January 2021. China has also, from 1 January 2021, started work on establishing a uniform recording system for the personal property and rights. In Pakistan, the Secured Transactions Registry was established in May 2020 and is operated by the Securities and Exchange Commission of Pakistan (SECP) that also operates the Companies Registry. The State Bank of Pakistan and the SECP have collectively made efforts to educate and advise the financial sector on using the ST Registry for registrations of prior and future security interests created by individuals and non-corporate entities. We would like to express our deepest gratitude to the Faculty of Law, National University of Singapore (in particular the Centre for Banking & Finance Law and the EW Barker Centre for Law & Business) and the Commercial Law Centre at Harris Manchester College, University of Oxford for their generous sponsorship of the research project and the symposium which made this book possible. We would also like to thank all those participating in the symposium, including those who commented on the country-specific papers which were presented. We are particularly grateful to our student assistant, Phang Ying Cheng, for invaluable help in checking and editing the draft manuscript, and all at Hart Publishing for their excellent work and unstinting support. Louise Gullifer Dora Neo 11 March 2021

TABLE OF CONTENTS Preface�� v List of Contributors�� ix List of Abbreviations�� xi Table of Cases�� xiii Table of Legislation�� xix 1. Introduction�� 1 Louise Gullifer and Dora Neo PART I GENERAL 2. Lost in Transplantation? Modern Principles of Secured Transactions Law as Legal Transplants�� 25 Charles W Mooney, Jr 3. Personal Property Securities Law Reform in Developed Jurisdictions�� 51 Anthony Duggan 4. Secured Transactions Law Reform in Asia and Access to Finance: What can the UNCITRAL Model Law on Secured Transactions Offer?�� 69 N Orkun Akseli 5. Secured Transactions Reform in East Asia: Progress and Challenges�� 87 Elaine MacEachern PART II CIVIL LAW JURISDICTIONS 6. Secured Transactions Law Reform in Civil Law Jurisdictions: Challenging Tradition, Facing Reality, and Embracing Modernity�� 101 Teresa Rodríguez de las Heras Ballell 7. The Law of Secured Transactions in China: Comparison and Future Reform�� 125 Lebing Wang 8. Secured Transactions Law Reform in Indonesia: Fiducia, at a Crossroads�� 145 Ibrahim Assegaf and Aria Suyudi 9. Navigating the Patchwork of Secured Transactions Rules in Japan: Towards a Framework Conducive to Asset Based Lending�� 173 Megumi Hara

viii Table of Contents 10. Banking the Unbanked: An Examination of the Personal Property Security Act of the Philippines�� 197 Anthony Amunategui Abad, David Kintanar Rosario III and Griselda (Gay) Santos 11. Korea: The Coexistence of Old and New Secured Transactions Law Regimes�� 213 Youngjoon Kwon 12. Law Reform of the Secured Transactions Regime in Taiwan: Modernisation, Controversies, and Prospects�� 235 Andrew Jen-Guang Lin 13. Implementation of International Standards on Secured Transactions into the Thai Legal System: Possibilities and Proposals�� 263 Parawee Kasitinon 14. Secured Transactions Reform in Vietnam: Prominent Achievements, Experiences, and Lessons Learnt�� 291 Huyen Pham PART III COMMON LAW JURISDICTIONS 15. Secured Transactions Law Reform in Common Law Jurisdictions (Brunei Darussalam as an Example)�� 315 Louise Gullifer 16. Bangladesh Secured Transactions Framework: Moving Towards a Reform�� 339 Marek Dubovec and Junayed Chowdhury 17. Secured Transactions Law in India: Suggestions for Reforms�� 357 M R Umarji 18. Pakistan’s Reform of Secured Transactions Law: Challenges and the Road Ahead�� 377 Marek Dubovec and Zahra Abid 19. Secured Transactions Law in Singapore: Living with Untidiness�� 397 Dora Neo 20. Conclusion�� 425 Louise Gullifer Index�� 477

LIST OF CONTRIBUTORS Anthony Amunategui Abad, Professor of Law, Ateneo de Manila University; CEO, TradeAdvisors; Senior Partner, Abad Alcantara & Associates, Philippines. Zahra Abid, Partner, Haidermota & Co, Pakistan. N Orkun Akseli, Associate Professor of Commercial Law, University of Durham, UK. Ibrahim Assegaf, Partner, Assegaf Hamzah & Partners; Lecturer, STIH Indonesia Jentera, Jakarta, Indonesia. Junayed Ahmed Chowdhury, Managing Partner, Vertex Chambers (Dhaka, Bangladesh) and Vertex International Consulting (Sydney, Australia). Marek Dubovec, Executive Director, Kozolchyk National Law Center, Tucson, Arizona, USA. Anthony Duggan, Hon Frank H Iacobucci Chair Emeritus and Professor of Law Emeritus, University of Toronto, Canada. Louise Gullifer, QC (hon), FBA, Rouse Ball Professor of English Law, University of Cambridge, UK. Megumi Hara, Professor of Civil Law, Gakushuin University, Japan. Parawee Kasitinon, Law Lecturer in the Faculty of Law, Thammasat University, Bangkok, Thailand. Youngjoon Kwon, Professor of Civil Law, Seoul National University School of Law, Korea. Andrew Jen-Guang Lin, Professor, National Taiwan University College of Law. Taiwan. Elaine MacEachern, Global Specialist, Secured Transactions and Asset Based Lending, World Bank Group, Financial Institutions Group Advisory Services (Washington DC), USA. Charles W Mooney Jr, Charles A Heimbold Jr Professor of Law, University of Pennsylvania Law School, USA. Dora Neo, Associate Professor and Director, Centre for Banking & Finance Law, Faculty of Law, National University of Singapore. Huyen Pham, Operations Officer, Asia-Pacific Financial Institutions Group Advisory Service, International Finance Corporation (IFC), World Bank Group (Hanoi, Vietnam). David Kintanar Rosario III, Senior Associate, Abad Alcantara & Associates, Philippines. Teresa Rodríguez de las Heras Ballell, Associate Professor of Commercial Law, Universidad Carlos III de Madrid, Spain.

x List of Contributors Griselda (Gay) Santos, Financial Inclusion Advocate; Former IFC Specialist and leader of the Philippine secured transactions reform; Executive Director, Fintech Alliance.PH, Philippines; Chair, Financial Inclusion Committee, Financial Executives Institute of the Philippines. Aria Suyudi, Lecturer, STIH Indonesia Jentera, Jakarta, Indonesia. M R Umarji, Former Executive Director, Reserve Bank of India & Chief Advisor – Legal, Indian Banks Association; Indian Delegate to UNCITRAL Working Group VI on Secured Transactions Law. Lebing Wang, Associate Professor and Assistant Dean, Law School, University of International Business and Economics, Beijing, PRC.

LIST OF ABBREVIATIONS Aircraft Protocol

UNIDROIT Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment 2001

APEC

Asia Pacific Economic Cooperation

ASEAN

Association of South East Asian Nations

Cape Town Convention

UNIDROIT Convention on International Interests in Mobile Equipment 2001

DCFR

Draft Common Frame of Reference

EBRD

European Bank for Reconstruction and Development

EBRD Model Law

EBRD Model Law on Secured Transactions (2010)

GDP

Gross Domestic Product

IFC

International Finance Corporation

MSME

Micro, Small and Medium sized enterprise

OAS

Organization of American States

OAS Model Inter-American Law

OAS Model Inter-American Law on Secured Transactions (2002)

OECD

Organization for Economic Cooperation and Development

OHADA

Organisation for the Harmonisation of Business Law in Africa (Organisation pour l’Harmonisation en Afrique du droit des affaires)

OHADA Uniform Act

OHADA Uniform Act on Securities (1998)

PPSA

Personal Property Security Act

SME

Small and medium enterprise

UCC

Uniform Commercial Code (US)

UCC Article 9

US Uniform Commercial Code Article 9

UN Receivables Convention

UN Convention on the Assignment of Receivables in International Trade (2001)

xii List of Abbreviations UNCITRAL

United Nations Commission on International Trade Law

UNCITRAL Registry Guide

UNCITRAL Guide on the Implementation of a Security Rights Registry (2013)

UNCITRAL Legislative Guide

UNCITRAL Legislative Guide on Secured Transactions (2007)

UNCITRAL Model Law

UNICITRAL Model Law on Secured Transactions (2016)

UNCITRAL Model Registry Provisions

UNCITRAL Model Registry Provisions (2016)

UNIDROIT

International Institute for the Unification of Private Law

WBG

World Bank Group

TABLE OF CASES Australia Associated Alloys Pty Ltd v CAN 001 452 106 Pty Ltd [2000] HCA 25��330, 406 Hamersley Iron Pty Ltd v Forge Group Power Pty Ltd [2018] WASCA 1634�� 328 Warehouse Sales Pty Ltd & Lewis and Templeton v LG Electronics Australia Pty Ltd [2014] VSC 644�� 328 Bangladesh Kazi Jawaherul Islam v Standard Co-operative Society 18 BLD 310 (1970)�� 345 Lallan Prasad v Rahmat Ali AIR 1967 SC 1322�� 345 Mohammad Meah v Pubali Bank and others 41 DLR(AD) (1989) 14�� 345 Public Service Commission v Mohammad Sohel Rana VIII ADC (2011) 332�� 346 Rezaur Rahman & others v Al-Haj Ahmed Hossain Khan 6 BLD (HCD) 14�� 354 Rupali Bank v Haji Ahmed Sabur and Another 43 DLR 464�� 353 Sonali Bank v Bengal Liner Ltd 42 DLR (1990) 487�� 345 Sultana Jute Mills v Agrani Bank 46 DLR (AD) 174 (1994)�� 345 Canada Bank of Montreal v I Trade Finance Inc��332–33 Fairbanx Corp v RBC (2010) 319 DLR (4th) 618 (Ontario CA)��53, 331 Innovation Credit Union v Bank of Montreal [2010] SCC 47��332–33 Lambert, Re (1994) 20 OR (3d) 108�� 59 Royal Bank of Canada v Radius Credit Union [2010] 3 SCR 38�� 332 Royal Bank of Canada v Sparrow Electric Corp [1997] 1 SCR 411�� 328 Saulnier v RBC 2008 SCC 58 [13]��57–59 China Haixia Bank of Fujian v Changle Yaxin Sewage Plant Co Ltd, Fuzhou Public Works Co Ltd, Guiding Case No 53�� 131

xiv Table of Cases Germany BGHZ 20, 88 (1956)�� 279 India Canara Bank v NG Subbaraya Setty MANU/SC/0433/2018�� 374 Chirangi Lal v Central Bank of India (1994) 80 Comp Cas 573 (Madhya Pradesh High Court)�� 361 Collector of Tiruchirapalli v Trinity Bank Ltd, Trichirapalli AIR (1962) Mad 59 (Madras High Court)�� 367 CP Motor Spirit Act, Re AIR 1939 FC 1�� 346 Forasol v Oil and Natural Gas Commission AIR 1984 SC 241�� 346 Indian Oil Corporation v NEPC India Ltd [2006] 6 SCC 355�� 360 Jatindra Chandra Chowdhary v Rangpur Tobacco Co Ltd AIR 192 Cal 990 (Calcutta High Court)�� 360 Manickam Chettiar v Income Tax Office (1938) 1 MLJ 351 (Madras High Court); AIR (1955) Bom 305 (Bombay High Court)�� 367 Mardia Chemicals Ltd v Union of India AIR (2004) SC2371 (Supreme Court of India)�� 371 Punjab National Bank v Union of India (1983) 53 Comp Cas 842 (Delhi High Court)�� 360 State Bank of India v SB Shah Ali AIR 1995 AP 134�� 345 Tan Bug Taim v Collector of Bombay AIR 1946 Bom 216�� 346 Tarun Bhargava v State of Haryana AIR 2003 Punj & Har 98�� 361 Indonesia Constitutional Court Decision No 67/PUU-XI/2013 on the Review of Article 95 (4) of Law No 13 Year 2003 on Manpower�� 150 Constitutional Court Decision No 18/PUU-XVII/2019 dated 6 January 2020��168–69 Japan Supreme Court decision of 10 April 1970 [1967 (O) No 1462] Minshu Vol 24, No 4, 240�� 184 decision of 25 March 1971 [1967 (O) No 1279] Minshu Vol 25, No 2, 208�� 192 decision of 8 December 1975, [1969(O) No 655] Minshu Vol 29, No 11, 1864�� 187 decision of 15 February 1979 [1979 (O) No 925] Minshu Vol 33, No 1, 51��181, 190 decision of 28 September 1982 [1981 (O) No 1209] Hanrei Jihou No 1062, 81�� 177 decision of 19 October 1982 [1980 (O) No 1061] Minshu Vol 36, No 10, 2130�� 179 decision of 14 October 1983 [1978 (O) No 944] Hanrei Taimuzu No 482, 80�� 190 decision of 5 June 1997 [1993 (O) 1164] Minshu Vol 51 No 5, 2053�� 184 decision of 29 January 1999 [1997 (O) No 219] Minshu Vol 53, No 2, 1��183, 191 decision of 17 May 1999 [1999 (K) No 2] Minshu Vol 53, No 5, 863�� 178 decision of 21 April 2000 [1996 (O) No 1049] Minshu Vol 54, No 4, 1562�� 183 decision of 7 February 2006 [2005 (Ju) No 282] Minshu Vol 60, No 2, 480�� 177

Table of Cases xv decision of 20 July 2006 [2005 (Ju) No 948] Minshu Vol 60, No 6, 2499��178, 192 decision of 27 March 2009 [2007 (Ju) No 1280] Minshu Vol 63, No 3, 449�� 186 Tokyo District Court decision of 16 June 1986 [1983 (Wa) No 6979; 1984 (Wa) No 1571] Sogetsu Vol 32, No 12, 898�� 183 New Zealand Commissioner of Inland Revenue v Northshore Taverns Ltd (in liq) (2008) 23 NZTC 22,074�� 335 Commissioner of Inland Revenue v Stiassny [2013] NZLR 140�� 328 New Zealand Ltd v Agnew [1998] 2 NZLR 129�� 330 Polymer Systems (1999) Ltd v Montgomerie [2002] 3 NZLR 383�� 330 Pakistan Muhammad Shoaib Arshad v Federation of Pakistan WP No 33872 of 2016 (Unreported)�� 393 Muhammad Umer Rathore v Federation of Pakistan PLD 2009 Lahore 268�� 392 National Bank of Pakistan v SAF Textile Mills Limited PLD 2014 SC 283�� 392 United Bank Limited v PICIC & Others 1992 SCMR 1731�� 394 Singapore Arris Solutions, Inc v Asian Broadcasting Network (M) Sdn Bhd [2017] 4 SLR 1�� 402 Asiatic Enterprises (Pte) Ltd v United Overseas Bank Ltd (Asiatic Enterprises [2018] 2 SLR 129��404–5 City Securities Pte, Re [1990] 1 SLR (R) 413��403–4 Diablo Fortune Inc v Duncan, Cameron Lindsay [2018] 2 SLR 129�� 404 Dresdner Bank AG v Ho Mun-Tuke Don [1991] 3 SLR (R) 307�� 404 Ehrmann Brothers Ltd, Re [1906] 2 Ch 697�� 403 Kay Hian & Co (Pte) v Phua Ooi Yong Jon [1988] 2 SLR(R) 239�� 409 Lin Securities (Pte) Ltd; Chi Man Kwong Peter v Asia Commercial Bank, Re [1988] 1 SLR(R) 220�� 404 Quoine Pte Ltd v B2C2 Ltd [2020] SGCA(I) 2�� 401 Thai Chee Ken v Banque Paribas [1993] 2 SLR 609�� 407 Total English Learning Global Pte Ltd v Kids Counsel Pte Ltd [2014] SGHC 258�� 402 South Korea Seoul High Court Decision, 6 April 2004, Case No 2003Na60855�� 220 Supreme Court Decisions 25 March 1969, Case No 69Da112�� 222 5 June 1973, Case No 73Da38�� 222 25 October 1988, Case No 85Nu941�� 219

xvi Table of Cases 30 July 1996, Case No 95Da7932�� 221 10 September 1996, Case No 96Da25463�� 219 25 July 1997, Case No 95Da21624�� 221 7 September 1999, Case No 98Da47283�� 220 23 June 2000, Case No 99Da65066�� 221 14 March 2003, Case No 2002Da72385�� 219 28 October 2004, Case No 2003Da30463�� 219 12 November 2004, Case No 2004Da22858�� 220 22 February 2007, Case No 2006Do8649�� 219 8 April 2010, Case No 2009Da96069�� 221 28 April 2016, Case No 2015Da221286�� 219 Taiwan Supreme Court 10th Civil Court Meeting Resolution (31 May 1986)�� 245 85 Tai-Shang-2230 Civil Judgment (3 October 1996)�� 240 94-Tai-Shang-1018 Civil Judgment (2 June 2005)�� 248 103-Tai-Shang-573 (27 March 2014)�� 249 Thailand Supreme Court Dika 1959, 2 The Thai Bar Association 496–516�� 272 Supreme Court Dika 1971, 1 The Thai Bar Association 526–39�� 271 Supreme Court Dika 1979, 12 The Thai Bar Association 2210–13�� 269 United Kingdom Agnew v Commissioners of Inland Revenue [2001] 2 AC 710�� 404 Alpstream AG v PK Airfinance Sarl [2015] EWCA Civ 1318�� 334 Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676�� 406 Armour v Thyssen Edelstahlwerke AG [1991] 1 AC 339��329, 406 Birmingham Citizens Permanent Building Society v Caunt [1962] Ch 883�� 322 Bond Worth, Re [1980] Ch 228�� 406 Borden (UK) Ltd v Scottish Timber Products Ltd [1981] Ch 25��325, 329 Brightlife Ltd, In re [1987] 2 WLR 197�� 412 Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd [1985] Ch 207�� 317 Clough Mill Ltd v Martin [1985] 1 WLR 111��330, 406 Coggs v Bernard (1703) 2 Ld Raym 909�� 317 Compaq Computer Ltd v Abercorn Group Ltd [1991] BCC 484��325, 330 Cox Moore v Peruvian Corporation Ltd [1908] 1 Ch 604�� 321 Cuckmere Brick Co v Mutual Finance Ltd [1971] Ch 949�� 322, 333–34 Dearle v Hall (1828) 3 Russ 1�� 408 Donaldson v Donaldson (1854) Kay 711; 69 ER 303�� 322

Table of Cases xvii Downsview Nominees Ltd v First City Corporation Ltd [1993] AC 295�� 322, 333, 410 English & Scottish Mercantile Investment Co Ltd v Brunton [1892] 2 QB 700�� 391 Fletcher and Campbell v City Marine Finance Ltd [1968] 2 Lloyds Rep 520�� 322 Florence Land and Public Works Company, Re (1878) 10 Ch D 530��317, 321 Four-Maids Ltd v Dudley Marshall (Properties) Ltd [1957] Ch 317�� 322 General South American Company, Re (1875) 2 Ch D 337��317, 321 Hallas v Robinson (1885) 15 QBD 288�� 326 Hamilton’s Windsor Ironworks ex p Pitman & Edwards, Re (1879) 12 Ch D 707��317, 321 Hartley v Hitchcock (1816) 171 ER 512�� 345 Heath v Crealock (1874) LR 10 ChApp 22�� 326 Holroyd v Marshall (1862) 10 HLC 191�� 75, 321, 400, 430 Holt v Heatherfield Trust Ltd [1942] 2 KB 1 (KBD)�� 322 Illingworth v Holdsworth [1904] AC 355 (HL)�� 360 Johnson v Diprose [1893] 1 QB 512�� 322 Joseph v Lyons (1884) 15 QBD 280�� 326 Linden Gardens Trust Ltd v Leneseta Sludge Disposal Ltd [1994] 1 AC 85�� 402 Maugham v Sharpe (1864) 17 CB NS 443�� 317 Medforth v Blake [1999] EWCA Civ 1482��322, 333 Miller v Race (1758) 1 Burr 452�� 328 Morritt, Re (1886) LR 18 QBD 222�� 322 National Westminster Bank v Spectrum Plus [2005] UKHL 41�� 404 Owen, Re [1894] 3 Ch 220�� 325 Panama, New Zealand and Australian Royal Mail Company, Re (1870) 5 Ch App 318��317, 321 Peachdart Ltd, In re [1984] Ch 131��330, 406 Pfeiffer Weinkellerei-Weineinkauf GmbH & Co v Arbuthnot Factors Ltd [1988] 1 WLR 150��330, 406 Pilcher v Rawlins (1872) LR 7 ChApp 259�� 326 Santley v Wilde [1899] 2 Ch 474�� 317 Tailby v Official Receiver (1888) 13 App Cas 523�� 75, 321, 385, 430 Taylor v London & County Banking Co [1901] 2 Ch 231�� 326 Tennant v Trenchard (1869) Law Rep 4 Ch 537�� 325 Thomas v Kelly (1888) 13 App Cas 506�� 318 Tinsley v Milligan [1994] 1 AC 340 (HL)�� 320 Tse Kwong Lam v Wong Chit Sen [1983] 1 WLR 1349�� 333 Wheatley v Silkstone and Haugh Moor Coal Co (1885) 29 Ch D 715��317, 321 Wilson v Kelland [1910] 2 Ch 306�� 409

xviii

TABLE OF LEGISLATION Australia Commonwealth of Australia Constitution, s 51(xxxvii)�� 62 Personal Property Securities Act 2009 (Cth)�� 14–15, 51, 65, 73, 261, 319, 328, 334–35, 412 s 10�� 331, 348, 447 s 12(3)(a)�� 203 s 13��203, 325 s 14�� 329 s 17�� 16 s 19(2)�� 331 s 32�� 328 s 55(2)�� 16 s 64�� 330 s 71�� 447 s 81�� 327 s 109�� 319 s 111�� 333 s 119�� 324 s 254(1)�� 331 s 339(5)�� 334 s 340(1)(b)�� 335 s 340(5)�� 335 s 343�� 65 Bangladesh Bangladesh (Adaptation of Existing Laws) Order 1972��315, 346 Bankruptcy Act 1997��344, 354 s 14�� 354 s 31(4)�� 354 s 54�� 354 s 54(2)�� 354 s 75(1)(c)�� 354 Civil Aviation Act 2017��344, 355 Civil Aviation Rules 1984��344, 355

xx Table of Legislation Companies Act�� 339, 344–45 Financial Institution Act 1993�� 342 Inland Mechanically Propelled Vessels Rules 1951��344, 355 Inland Shipping Ordinance 1976��344, 355 Insurance Act 2010�� 344 Margin Rules 1999�� 344 Merchant Shipping Ordinance 1983��344, 355 Microcredit Regulatory Authority Act 2006��344, 355 Microcredit Regulatory Authority Rules 2010�� 344 Money Loan Court Act 2003��344–45, 347, 354, 442 s 21�� 345 s 22�� 345 Motor Vehicle Ordinance 1983�� 344 Road Transport Act 2018�� 344 draft Secured Transaction (Movable Property) Act�� 327, 339–40, 347–56, 423, 446, 456, 458, 460, 462–64, 466–68, 475 s 2(1)(ee)�� 349 s 2(1)(i)�� 349 s 2(aaa)�� 348 s 3�� 349 s 5(5)�� 349 s 14�� 352 s 21�� 350 s 22�� 350 s 24(7)�� 351 s 27�� 356 s 41�� 460 s 44�� 469 draft Secured Transaction (Movable Property) Rules��347, 350–51, 353, 441 r 19(3)�� 350 r 24�� 350 r 25�� 350 rr 28–29��350, 352 rr 32–33�� 350 r 38�� 351 r 42�� 351 r 43�� 351 r 43(4)�� 349 r 45�� 351 r 50�� 353 r 55�� 351 Securities and Exchange Ordinance 1969�� 344 Belgium Act on security interests over moveable assets 2013�� 107

Table of Legislation xxi Brunei Darussalam Application of Laws Act 1951��315–16 Bills of Sale Act 1984�� 317–18, 336 s 6�� 321 s 7�� 321 s 7(b)�� 317 First Schedule�� 317 Companies Act 1984�� 317–18, 336 s 80(1)�� 317 s 81(3)�� 317 s 89�� 317 Constitution, Art 83(3)�� 318 Insolvency Order 2016�� 335 s 30(1)�� 335 s 147(7)�� 335 Secured Transactions (Amendment) Order 2016�� 318 Secured Transactions Order 2016�� 4, 6, 315, 318, 323, 441–42, 456, 458, 460, 463 s 2(1)�� 318 s 2(1)(b)�� 318 s 2(1)(b)(iv)�� 325 s 2(2)(a)�� 462 s 3��318, 329 s 3(1)�� 318, 334, 448 s 11(1)(a)�� 328 s 12(i)(b)(ii)�� 324 s 14�� 324 s 15�� 460 s 26�� 329 s 27�� 330 s 38��328, 331 s 39��328, 331 s 40�� 331 s 41�� 448 s 43�� 331 s 44��328, 331 s 45�� 321 s 45(1)�� 326 s 47(3)�� 326 s 56�� 324 s 62�� 319 s 68�� 334 Secured Transactions Regulations 2016�� 318 Cambodia Civil Code�� 89

xxii Table of Legislation Canada Bank Act 1991�� 332 Bankruptcy and Insolvency Act 1985�� 55 British Columbia, Personal Property Security Act 1996, s 1(1)�� 59 Financial System Review Act 2012�� 332 Manitoba Personal Property Security Act, s 24(1)�� 55 Ontario Cutting Unnecessary Red Tape Act 2017, sch 9�� 63 s 9�� 61 s 12�� 59 Ontario Legislation Act 2006�� 61 Ontario Personal Property Security Act 1990��19, 28, 51–52, 57, 67, 73, 331, 347, 350, 475 Pt III�� 77 s 1(1)��54, 57 s 3(1)�� 59 s 5(1)�� 59 s 7(1)�� 59 s 7(2)�� 61 s 7(3)�� 60 s 20(1)(a)(i)�� 60 s 20(1)(b)�� 55 s 22(1)��55, 350 s 30(6)�� 56 s 33�� 54 s 33(1)�� 54 s 46�� 66 s 46(4)�� 53 s 72�� 331 Ontario Protecting What Matters Most (Budget Measures) Act 2019, sch 49�� 63 Saskatchewan Personal Property Security Act 1990�� 19, 52, 68, 73, 319, 347, 447, 475 s 2(1)(f)�� 447 s 2(1)(jj)�� 329 s 2(1)(y)�� 203 s 2(w)�� 59 s 7(1)�� 59 s 10(3)�� 324 s 31(7)�� 447 s 34(6)�� 54 s 34(8)�� 330 s 35(1)(c)�� 16 s 41(9)�� 327 s 43(4) and (5)�� 206 s 55�� 319 s 65(3)�� 333 Saskatchewan Personal Property Security Amendment Act 2019��60, 63

Table of Legislation xxiii China Administrative Measures for the Registration of Mortgage on Enterprises’ Movable Property�� 135 Art 3��128, 135 Art 42(5)�� 127 Contract Law 1999�� 137 General Part of Civil Law 2017, Art 111�� 133 Guarantee Law 1995��126–28, 132, 139, 426 Interim Regulation on Real Estate Registration, Art 5�� 142 Judicial Interpretation on Guarantee Law 2000��127–28 Art 70�� 139 Measures for the Registration of Mortgages over Personal Property�� 135 Art 5�� 135 Measures for the Registration of Pledge of Account Receivables��136–38 Art 2�� 131 Operating Rules for the Registration of Pledge of Account Receivables��136–37 Art 3�� 137 Art 26�� 137 Operating Rules for the Uniform Platform for the Registration of Secured Transaction on Personal Property��136–37 Real Property Law 2007�� 6, 11–12, 107, 125–30, 132–40, 426, 435, 443, 456, 459, 463, 472 Art 5�� 136 Art 180��129–30, 139, 459 Art 181��129–30, 135, 139, 459 Art 188�� 138 Art 199�� 138 Art 223��130, 133 Art 228��137–38 Art 239��138–39 Colombia Ley No 1676 del 20 de Agosto de 2014��28, 279 Ethiopia Proclamation of 2019, s 2(46)�� 348 European Union Directive 2002/47/EC on financial collateral arrangements�� 113, 133, 415 Regulation (EU) No 910/2014 on electronic identification and trust services for electronic transactions in the internal market�� 115

xxiv Table of Legislation France Civil Code�� 279 Germany Civil Code�� 127 Ghana Borrowers and Lenders Act 2008�� 327 s 26�� 11 s 38�� 456 India (Colonial) Code of Civil Procedure (CPC) 1908 s 2(13)�� 344 s 60�� 387 Contract Act 1872�� 344–45, 358, 362, 393, 453 s 10�� 354 s 170�� 390 ss 170–79�� 344 s 171�� 345 s 172��360, 383 ss 172–79�� 360–61, 371 s 176�� 345, 360, 383 General Clauses Act 1897, s 3(34)�� 344 Penal Code 1860�� 344 s 22�� 344 Presidency Towns Insolvency Act 1909, s 17�� 368 Provincial Insolvency Act 1920, ss 28(2) and (6)�� 368 Registration Act 1908��362, 392 s 23�� 369 s 29�� 383 s 47�� 358 s 48�� 358 Reserve Bank of India Act 1934, s 45-I�� 362 Sale of Goods Act 1930��344–45, 387, 390, 455 s 4�� 345 s 6�� 345 s 9�� 345 s 10�� 345 s 25�� 345

Table of Legislation xxv Stamp Act 1899��367, 372 Transfer of Property Act 1882��344–45, 358, 362, 365–66, 391 s 3�� 355 s 5�� 358 s 58�� 358 s 69��364, 366 ss 69 and 69A�� 364 s 69A�� 364 India Banking Regulation Act 1949�� 374 Civil Procedure Code �� 372 Companies Act 1956��345, 360 s 4A�� 362 Companies Act 2013��368, 374 s 2(16)�� 360 s 77(1)�� 369 ss 77–87�� 368 Constitution�� 365 Art 300A�� 358 Depositories Act 1996, s 12�� 361 Designs Act 2000�� 368 s 30�� 368 Enforcement of Security Interest and Recovery Debts Laws and Miscellaneous Provisions (Amendment) Act 2016��366–67 Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act 2016�� 363–64, 371 Factoring Regulation Act 2011��14, 359, 371–72, 458 s 3�� 372 s 7�� 372 s 19�� 364, 372, 458 Insolvency and Bankruptcy Code 2016�� 374 s 52�� 368 s 52(1)�� 368 s 110�� 368 s 172�� 368 s 178�� 370 International Finance Corporation (Status, Immunities and Privileges) Act 1958�� 362 Motor Vehicles Act 1988��361, 368 Patents Act 1970�� 368 ss 68 and 69�� 368 Recovery of Debts and Bankruptcy Act 1993�� 368 Recovery of Debts due to Banks and Financial Institutions Act 1993�� 357 s 2�� 362

xxvi Table of Legislation Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (SARFAESI Act)�� 6, 14, 16, 357, 359, 361–64, 366–70, 372–75, 442, 444, 453–56, 458, 462–64, 468, 472, 475 ch III��363, 370 ch III�� 359 ch IV��363–64 pt IV�� 359 s 2(1)(zd)�� 456 s 2(1)(ba)�� 366 s 2(1)(c)�� 362 s 2(1)(c)(v)�� 362 s 2(1)(g)�� 364 s 2(1)(k)�� 363 s 2(1)(m)(iv)�� 362–63, 372 s 2(1)(n)��361, 363 s 2(1)(t)��359, 363 s 2(1)(zd)��362–63 s 2(1)(zf)��359, 361, 363–64 s 2(zf)�� 368 s 3�� 366 s 5�� 366 s 5(1)��359, 366 s 5(1A)�� 367 s 13��364, 367 s 13(2)�� 365 s 13(3A)�� 365 s 13(4)�� 365 s 14�� 365 s 17��365, 367 s 18�� 365 s 20(1)�� 364 s 25�� 373 s 26B��363, 368 s 26B (4) and (5)�� 369 ss 26B-E�� 369 s 26B–E�� 368 s 26C��16, 369 s 26C(1)��368–69 s 26C(2)�� 368 s 26D�� 16 s 26E��369–70 s 31(h)�� 363 Security Interest (Enforcement) Rules 2002��361, 365 r 5�� 365 r 6�� 365 r 8�� 365 r 8(2)�� 365 r 8(5)�� 365

Table of Legislation xxvii Indonesia Civil Code�� 146–49, 156 Art 613��153, 161 Arts 1150–1161�� 149 Art 1152�� 154 Art 1153�� 154 Art 1156�� 162 Art 1413�� 149 Civil Procedure for Outside Main Islands�� 157 Arts 206–54�� 163 Art 215�� 163 Art 258�� 163 Art 285�� 157 Commercial Code Art 1870�� 157 Art 1871�� 157 Company Law�� 154 Constitutional Court Case No 21/PUU-XVIII/2020�� 170 Copyright Law Art 16(2)(f)�� 155 Art 16(3)–(4)�� 155 Director General Administration of General Law Circular Number No AHU-06.OT.03.01 Tahun 2013 on the Operationalization of Electronic Fiducia Registration System (online)�� 159 Director General Administration of General Law Number C.HT.01.10–74 Year 2006 on the Rejection of Fiducia Security in Form of Bank Account and Other Personal Rights�� 154 Director General Air Transportation Regulation Number KP 347 Year 2018 on Technical Regulation on Civil Aviation Safety part 47-02�� 148 Directorate General of State Treasury Regulation No 2/KN/2017 on Technical Guidelines to Conduct Auctions Indonesia��165–66 Art 1(1)�� 165 Art 14(1)�� 166 Art 27�� 166 Art 30�� 166 Art 55�� 166 Fiducia Law (No 42 of 1999)��146, 148–62, 164–65, 167–68, 431–33, 440, 450, 456 Art 1�� 152 Art 1(1)�� 150 Art 1(2)�� 155 Art 1(2) and (4)�� 151 Art 1(3)�� 156 Art 1(7)�� 156 Art 4�� 156 Art 5�� 156 Art 5(1)�� 157 Art 6�� 157

xxviii Table of Legislation Art 6(d)�� 156 Art 7(b)�� 156 Art 7(c)�� 156 Art 9�� 151 Art 10�� 153 Art 11(1)�� 158 Art 12�� 159 Art 12(1)�� 158 Art 13�� 158 Art 13(1)�� 159 Art 13(2)�� 157 Art 13(3)�� 157 Art 14�� 156, 158, 161 Art 14(1)�� 157 Art 14(3)�� 153 Art 15(2)�� 163–64, 169 Art 15(3)�� 163–64, 169 Art 16��152, 158 Art 20�� 153 Art 21(1)�� 152 Art 21(2)�� 153 Art 21(4)�� 153 Art 22�� 153 Art 23(2)�� 152 Art 25(2)�� 153 Art 27(1)�� 156 Art 29�� 151, 156, 163 Art 29(1)�� 158, 164, 167 Art 30�� 168 Art 32�� 162 Art 33�� 162 Art 34�� 156 Art 34(1)��151, 158 Art 213)�� 153 Government Regulation No 25 Year 1999 on the Revocation of License, Dissolution and Liquidation of Banks�� 149 Government Regulation No 86 Year 2000 on Procedures to Register Fidusia Security and Fees for Establishment of Fiducia Security Deed, Art 3�� 159 Government Regulation No 21 Year 2015 on Procedures of Fiducia Registration and Fee of Fiducia Deed Creation�� 161 Head of Indonesian Police Force Regulation No 8 of 2011 on Safeguarding Fiducia Security Enforcement��165, 168 Art 22�� 168 Industrial Design Law, Art 31(1)(e)�� 155 Law Number 6 Year 1983, Art 21�� 149 Law Number 11 Year 1995, Art 11�� 149 Law Number 4 Year 1996 on Mortgage, Art 12�� 162 Law Number 13 Year 2003 on Manpower, Art 95(4)�� 149

Table of Legislation xxix Law Number 9 Year 2006�� 149 Law Number 40 Year 2007 on Limited Liability Company Art 60(2)�� 154 Art 60(4)�� 154 Law Number 9 Year 2011�� 149 Ministry of Finance Regulation No 130/PMK.010/2012 Fiducia Registration for Finance Companies Providing Consumer Financing for Motorized Vehicles�� 159 Ministry of Law Regulation Number 8 Year 2013 on Delegation on the Signing of Fiducia Security Certificate Electronically�� 159 Ministry of Law Regulation Number 9 Year 2013 on the Application of Electronic Registration Procedure for Fiducia Security�� 159 Notary Law�� 157, 161–62 Arts 16(1)(m) to 16(7)�� 157 Art 16(7)�� 157 Art 28�� 162 Art 36(3)�� 161 OJK Regulation No 30/POJK.05/2014, Art 49�� 168 Patent Law Art 74(1)(f)�� 155 Art 108(1)–(2)�� 155 Police Force Law (No 2 of 2002), Art 15(1)(l)�� 168 Presidential Decree 139/2000�� 159 Revised Civil Procedure Art 165�� 157 Arts 195–244�� 163 Art 200�� 163 Art 224�� 163 Art 226�� 164 Trademarks Law, Art 16(2)(f)�� 155 International Draft Common Frame of Reference (DCFR)��111, 346 EBRD Model Law on Secured Transactions�� 4, 70, 72, 77–78, 268, 273, 346 Art 2�� 268 Art 5(4)�� 327 Art 5(6)�� 268 Art 8�� 78 Art 17�� 78 Art 25�� 268 Organization of American States Model Inter-American Law��116, 346 Art 19�� 327 UN Assignment of Receivables Convention 2001��71–72, 84, 372, 458 Preamble�� 72 Art 9�� 76 Art 10(6)�� 76 Art 11�� 327

xxx Table of Legislation Art 14�� 76 Art 86�� 84 UNCITRAL Model Law on Secured Transactions 2016�� 4, 6, 9, 14–17, 19–20, 25, 50, 68–85, 90, 95, 116, 180, 184, 197, 201–3, 208, 227, 233, 237, 247, 249–50, 255–61, 268, 286, 299, 316, 323, 335, 339, 346–49, 351–55, 374–75, 387–88, 414, 422, 441, 443, 445–47, 452, 473, 475 Art 1��73, 268 Art 1(1)�� 41 Art 1(5)��45, 74 Art 2 (ff)�� 281 Art 2 (jj)�� 281 Art 2 (k)�� 281 Art 2 (kk)�� 281 Art 2 (o)�� 281 Art 2(a)�� 302 Art 2(b)�� 329 Art 2(bb)�� 75 Art 2(e)�� 80 Art 2(g)�� 78 Art 2(kk)�� 202 Art 2(kk)(i)��41, 268 Art 2(kk)(ii)�� 268 Art 2(o)��15, 324 Art 2(o)(i)�� 256 Art 2(r)��81, 328 Art 3��74, 323 Art 4��74, 82, 323, 333, 356, 471 Art 6�� 74, 78, 203, 323 Art 6(1)��78, 231, 331 Art 6(2)�� 74 Art 6(3)��75, 204, 463 Art 6(4)��75, 204, 463 Art 7��75, 224 Art 8��75, 112, 353 Art 8(e)�� 11 Art 9�� 74, 323–24 Art 9(1) and (2)�� 204 Art 9(2)��43, 328 Art 10�� 78, 81, 371, 430, 460 Art 11��42, 301 Art 13��76, 186, 327 Art 13(2)�� 76 Art 14�� 76 Art 15�� 185 Art 16��76, 78 Art 17�� 76 Art 18��77, 116, 463

Table of Legislation xxxi Art 18(1)�� 78 Art 18(2)�� 324 Art 19(1)�� 78 Art 24�� 324 Art 25�� 77–78, 463 Art 26�� 78 Art 27��77–78 Art 28�� 78 Art 29�� 80–81, 468 Art 29(a)��206, 390 Art 30�� 80 Art 32�� 81 Art 34(1)�� 209 Art 34(2) and (3)�� 328 Art 34(3)�� 469 Art 34(4)�� 206 Art 34(4)(5)(6)�� 328 Art 34(9)�� 324 Art 35�� 80 Art 36��81, 302 Art 37��81, 302 Art 38�� 74, 81, 275, 324, 329 Art 39��74, 81 Art 41��81, 329 Art 42�� 329 Art 46(1)�� 81 Art 47(5)�� 81 Art 47(6)�� 328 Art 48��81, 328 Art 49�� 81 Art 51�� 82 Art 51(5)�� 82 Art 53��74, 323 Art 54��74, 323 Art 57�� 224 Art 64�� 187 Art 69�� 185 Art 72��121, 323 Art 72(3)��74, 82 Art 77�� 353 Art 77(2)�� 83 Art 78�� 121 Art 79�� 83 Art 79(2)(a)�� 83 Art 79(2)(c)�� 83 Art 80��83, 393 Art 81(3)�� 83 Art 81(4)�� 83

xxxii Table of Legislation Art 82(1)�� 83 Art 85(1)�� 84 Art 85(2)�� 84 Art 85(3)�� 84 Art 85(4)�� 84 Arts 85-107��74, 323 Art 86�� 84 Art 87�� 84 Art 88�� 84 Art 90�� 84 Art 97�� 84 Arts 97–100�� 84 Art 99�� 353 Art 99(1)�� 84 Art 99(2)�� 84 Art 99(3)�� 84 Art 100(1)�� 84 Art 100(2)�� 84 Ch V�� 258 Ch VI��349, 351 Ch VII�� 207 Ch IX�� 353 Registry Provisions�� 6, 42, 80, 232, 441 Art 2(1)��232, 467 Art 2(5)�� 232 Art 3�� 326 Art 4�� 79 Art 7(3)�� 232 Art 8�� 326 Art 9��79, 185, 324 Art 9(2)�� 79 Art 10�� 79 Art 11�� 79 Art 22�� 79 Art 24�� 80 Art 26�� 80 Art 31�� 80 Arts 31–32�� 80 UNIDROIT Convention on International Interests in Mobile Equipment 2002 (Cape Town Convention)�� 26–27, 72, 78–79, 106, 108–10, 116, 121, 148, 355, 403, 429 Art 2(4)�� 108 Art 8��108, 110 Art 9��108, 110 Art 10��108, 110 Art 18�� 28 Art 49(1)�� 106 Art 54(2)�� 120 Aircraft Protocol to the Cape Town Convention�� 27–28, 106, 148, 355, 403, 442

Table of Legislation xxxiii UNIDROIT International Factoring Convention 1988��70, 72 Uniform Act of the Organisation for the Harmonisation of Business Law in Africa��268, 346 Art 226�� 268 Japan Act on Purchase of Renewable Energy Sourced Electricity by Electric Utilities�� 193 Act on Registration��177, 187–89, 194, 456 Art 4(2)�� 188 Agricultural Goods Credit Act��176, 179 Aircraft Mortgage Act��176, 179 Canal Act��176, 180 Car Mortgage Act��176, 179 Civil Code�� 176–77, 181, 187–88, 192, 194–95 Art 85�� 182 Art 90�� 190 Art 116�� 184 Art 183�� 188 Art 192�� 189 Art 295 et seq�� 176 Art 303 et seq�� 176 Art 311(5)�� 178 Art 342 et seq�� 176 Art 349�� 192 Art 364�� 187 Art 369 et seq�� 176 Art 466�� 186 Art 466-2�� 184 Art 466-4�� 185 Art 466-6(1)�� 183 Art 467�� 187 Art 469�� 187 Art 541�� 187 Civil Enforcement Act�� 192 Civil Execution Act��176, 192 Commercial Code, Art 848��176, 179 Construction Machine Act��176, 179 Enterprise Mortgage Act�� 176, 179–80 Factory Mortgage Act�� 176, 179–80 Financing Facilitation Act�� 175 Fishery Estate Act��176, 180 Harbour Transport Act��176, 180 Law No 44 of 2017�� 45 Mining Mortgage Act��176, 180 PRAMC��43–44 Art 1�� 44 Railway Mortgage Act��176, 180

xxxiv Table of Legislation Registration Order on Transfer of Goods and Receivables, Art 7�� 194 Road Traffic Transportation Estate Act��176, 180 Small-Gauge Railway Mortgage Act��176, 180 Tourism Establishment Estate Act��176, 180 Jersey Security Interests (Jersey) Law 2012, s 39�� 327 Kenya Movable Property Security Rights Act 2017, s 27(1)(e)�� 11 Laos Civil Code�� 90 Secured Transactions Decree�� 90 Netherlands Civil Code�� 279 New Zealand Personal Property Securities Act 1999�� 14–16, 19, 51, 73–74, 255, 315–16, 318, 327, 334–36, 389, 423, 441, 460, 474 Pt 4�� 77 s 16�� 203 s 16(1)�� 329 s 17��318, 447 s 25(1)�� 334 s 35�� 336 s 37�� 324 ss 43–44�� 75 s 44�� 324 s 52��315, 336 ss 54–55�� 324 s 66(a)��315, 336 s 66(c)�� 16 ss 73–74�� 74 s 75A�� 330 s 85(1)��315, 336 s 87�� 331

Table of Legislation xxxv s 98�� 447 s 103��315, 336 s 105(2)�� 319 s 146�� 206 s 161�� 324 s17(1)(b)�� 318 Nigeria Interpretation Act 1958, s 45�� 315 Registration of Security Interests in Movable Property by Banks and other Financial Institutions in Nigeria Regulations 2015, Reg 12(2)�� 11 Secured Transactions in Movable Property Act 2017, s 4(2)(b)�� 327 Pakistan Companies Act 2017��388, 395 s 14(2)(a)�� 388 s 14(2)(b)–(c)�� 388 s 39�� 389 s 47�� 388 s 48(3)�� 389 s 49�� 388 s 100(1)�� 389 s 100(2) and (5)�� 388 s 100(5)�� 389 s 390(3)(b)�� 394 Financial Institutions (Recovery of Finance) Ordinance 2001�� 44 Financial Institutions (Recovery of Finances) (Amendment) Act 2015�� 392 Financial Institutions (Recovery of Finances) Ordinance 2001�� 392 s 15��392–93 s 16(3)�� 393 Financial Institutions (Secured Transactions) Act 2016�� 4, 6, 45, 377–78, 381–82, 385–95, 441–42, 447, 456, 460, 465, 475 Pt II�� 387 Pt III��388, 392 Pt IV��388, 392 Pt V�� 390 Pt VI��386, 392 Pt VII�� 392 Pt VIII�� 393 Pt IX�� 393 s 2(1)(xi)–(xii)�� 390 s 2(1)(xix)�� 387 s 2(1)(xxi)�� 391 s 2(1)(xxxii)��387–88

xxxvi Table of Legislation s 2(1)(xxxviii)�� 387 s 2(1)(xlvi)�� 387 s 2(1)(xlviii)�� 386 s 2(1)(xlix)�� 389 s 2(a)�� 463 s 3�� 386 s 6(1)�� 387 s 7�� 387 s 8�� 387 s 11�� 387 s 12�� 387 s 12(2)�� 387 s 14�� 388 s 16�� 388 s 17�� 388 s 19(2)�� 381 s 21�� 389 s 23(2)(g)�� 387 s 23(3)�� 389 s 25�� 389 s 28�� 389 ss 36–39�� 390 s 43�� 390 s 44�� 390 s 46(2)�� 391 s 51�� 391 s 53�� 392 s 53(2)�� 391 s 53(4)�� 391 s 53(5)�� 391 s 54(1)�� 392 s 55�� 392 s 56�� 392 s 58�� 392 s 62(1)�� 393 s 64�� 393 s 65�� 393 s 68�� 394 s 69�� 394 s 70�� 377 s 71�� 393 s 72�� 394 s 73�� 394 Recovery of Mortgage-backed Security Ordinance 2019�� 393 Secured Transactions Act 2016, s 23(2)(g)�� 11

Table of Legislation xxxvii Philippines Agri-Agra Reform Credit Act�� 200 Chattel Mortgage Act��199, 203–4, 206, 208 s 3�� 202 s 5�� 203 s 7�� 204 s14�� 207 Civil Code�� 202, 205, 472 Art 1305�� 203 Art 1318�� 203 Art 1484��201–2 Art 1485�� 202 Art 1486�� 202 Art 2124�� 204 Art 2127�� 204 Art 2241��205–6 Art 2241(10)�� 206 Art 2241(3)�� 206 Art 2241(5)�� 206 Art 2247�� 206 Magna Carta for MSMEs�� 200 Personal Property Security Act 2018��197–212, 318, 324, 460, 463, 469, 473 Ch 4�� 206 s 3(f)�� 209 s 3(h)�� 205 s 3(j)�� 202 s 3(k)�� 204 s 4�� 202 s 5(a)�� 203 s 5(b)�� 204 s 6��203–4 s 7�� 204 s 8��204, 209 s 10�� 460 s 11(b)�� 205 s 12�� 205 s 13�� 205 s 17��205–6 s 18�� 206 s 19�� 206 s 21�� 206 s 23�� 206 s 27(c)�� 205 s 28(d)�� 206

xxxviii Table of Legislation s 28(e)��205–6 s 29�� 465 s 30�� 466 s 47(a)�� 207 s 47(c)�� 207 s 48�� 207 s 49�� 207 s 50�� 207 s 66(b)�� 206 Sierra Leone Courts Act 1965, s 74�� 315 Singapore Application of English Law Act��315, 398 Bankruptcy Act (repealed)�� 403, 407, 418 s 104�� 403, 407, 413 s 104(2)�� 418 Bills of Sale Act�� 398, 401–3, 406–8, 411–15, 418–19, 421, 459 s 2(2)�� 403 s 4(1)�� 401 s 5(1)�� 401 s 5(2)�� 401 s 6(b)�� 401 s 8�� 410 s 9�� 410 s 10�� 402 s 11��402, 408 s 13�� 402 s 15�� 402 s 16�� 402 Civil Law Act s 4(8)�� 401 s 5��315, 397 Civil Law Ordinance, s 6�� 397 Companies (Amendment) Act�� 403, 405, 421 Companies Act��398, 400–402, 404, 406–7, 409, 411–13, 416, 418–19 s 4�� 400 s 131��405, 421 s 131(1)�� 403 s 131(1A)�� 405 s 131(2)�� 403 s 131(3)��403, 412–13, 415 s 131(3)(d)�� 413 s 131(3)(g)�� 404

Table of Legislation xxxix s 131(3A)�� 403 s 131(3AB)�� 404 s 131(3B)�� 403 s 132�� 403 s 134�� 409 s 134(1)�� 405 s 136�� 406 s 137�� 406 s 138(1)�� 406 s 138(2)�� 406 s 138(3)�� 406 s 226(1)�� 409 s 328(5)�� 409 Copyright Act, s 194(3)�� 401 Hire Purchase Act�� 398 ss 16–18�� 410 Sch 1�� 407 Insolvency, Restructuring and Dissolution Act 2018�� 411 International Interests in Aircraft Equipment Act�� 403 Merchant Shipping Act��400, 402 s 25(1)�� 402 s 28�� 408 Patents Act s 41�� 402 s 41(6)�� 401 Pawnbrokers Act��398, 410 s 61�� 410 s 64�� 410 Registered Designs Act s 32(6)�� 401 s 34�� 402 Sale of Goods Act�� 406 s 17�� 406 s 19(1)�� 406 s 21(1)�� 410 Second Charter of Justice��315, 397 Securities and Futures Act, s 81SS�� 401 Trade Marks Act s 38(3)�� 401 s 39�� 402 South Korea Act on Mortgage on Motor Vehicles and Other Specific Movables�� 213–14, 226 Act on Security over Movable Property and Claims��6, 214, 222–30, 454, 456–57, 463–64, 470 Art 2�� 223 Art 2(1)�� 223

xl Table of Legislation Art 2(2)�� 226 Art 2(3)�� 229 Art 2(5)�� 223 Art 2(9)�� 16 Art 3(3)��226, 229 Art 4�� 223 Art 5�� 223 Art 5(1)�� 223 Art 6��224, 227 Art 7��16, 223, 232 Art 7(1)�� 226 Art 7(2)�� 227 Art 7(3)�� 227 Art 8�� 224 Art 10�� 224 Art 12��223, 227 Art 13�� 225 Art 15(1)�� 224 Art 15(2)�� 224 Art 17�� 225 Art 18(2)�� 227 Art 19(2)�� 227 Art 19(3)�� 227 Art 20�� 227 Art 21(1)�� 227 Art 21(2)�� 228 Art 22(1)�� 227 Art 22(2)�� 227 Art 23�� 228 Art 23(1)�� 228 Art 23(2)�� 228 Art 23(3)�� 228 Art 23(4)�� 228 Art 24�� 228 Art 26(1)�� 228 Art 34(2)�� 229 Art 35�� 232 Art 35(1)��229–30 Art 35(2)��229–30 Art 35(3)�� 229 Art 36(1)�� 230 Art 36(2)�� 230 Art 36(3)�� 230 Art 38�� 225 Art 39(1)�� 225 Art 41(1)�� 225 Art 41(2)�� 225 Art 41(3)�� 225 Art 42�� 226

Table of Legislation xli Art 43(1)�� 226 Art 45(1)�� 226 Art 45(2)�� 226 Arts 58–61�� 223 Presidential Decree to the Act, Art 2�� 229 Act on the Credit Guarantee for Farmers and Fishermen�� 231 Civil Code��213–15, 222, 229 Art 2�� 224 Art 101�� 220 Art 186��214, 232 Art 188(1)��216, 219 Art 188(2)��216, 219 Art 189��216, 219 Art 190��216, 219 Art 249�� 221 Art 303�� 217 Art 332�� 216 Art 333��216, 218 Art 335�� 216 Art 338�� 216 Art 339�� 217 Art 345�� 217 Art 347�� 217 Art 348�� 217 Art 349�� 217 Art 349(2)�� 218 Art 350�� 217 Art 351�� 217 Art 353(1)�� 218 Art 353(2)�� 218 Art 353(3)�� 218 Art 353(4)�� 218 Art 354�� 218 Art 355�� 218 Art 357(1)�� 223 Art 449(1)�� 217 Art 449(2)�� 217 Art 450��217, 220 Art 450(1)�� 218 Art 450(2)�� 218 Art 451�� 217–18, 220 Art 451(2)�� 218 Art 607�� 222 Art 681�� 222 Art 708�� 222 Civil Execution Act�� 218, 221, 227, 230 Art 36(3)�� 230 Art 56�� 221 Art 229(1)�� 230

xlii Table of Legislation Art 264(1)�� 227 Art 273(1)�� 230 Commercial Registration Act�� 457 Copyright Act�� 223 Credit Guarantee Fund Act�� 231 Factory and Mining Assets Mortgage Act��213, 226 Financial Investment Services and Capital Markets Act�� 229 Framework Act on Small and Medium Enterprises�� 231 Korea Technology Credit Guarantee Fund Act�� 231 Labor Standards Act�� 217 Art 86�� 217 Patents Act�� 223 Provisional Registration Security Act�� 213 Regional Credit Guarantee Foundation Act�� 231 Ship Registry Act�� 226 State Compensation Act�� 217 Art 4�� 217 Supreme Court Regulation on the Registration of Security over Movable Property and Claims��225–26 Value Added Tax Act�� 223 Spain Company Law, Art 132�� 112 Law regulating hire-purchase agreements of personal property�� 120 Non-Possessory Pledge and Chattel Mortgage Act 1954�� 103 Art 12�� 103 Art 20�� 112 Art 21�� 112 Art 22�� 112 Securities Market Act, Art 12�� 112 Sri Lanka Secured Transactions Act 2009�� 4 Taiwan Civil Code��236, 245, 258–59, 460 Art 67�� 251 Art 513�� 249 Art 758-1�� 245, 248, 258

Table of Legislation xliii Art 881-1�� 245 Art 881-2�� 245 Art 928�� 244 Company Act�� 243, 252, 260 Personal Property Secured Transactions Act 1963�� 4, 6, 235–61, 455–56, 460, 463, 465, 470, 474 Art 2�� 238 Art 4�� 238 Art 5�� 244, 248, 463 Art 5(1)�� 238 Art 7�� 238 Art 7(1)�� 244 Art 10�� 245 Art 15�� 239 Art 16�� 239 Art 17�� 239 Art 17(3)�� 240 Arts 17–24�� 254 Art 18(1)�� 239 Art 19�� 239 Art 19(1)�� 239 Art 20�� 240 Art 21�� 239 Art 22�� 240 Art 23�� 239 Art 26�� 240 Art 27�� 240 Art 28(1)�� 240 Art 29(2)�� 240 Art 30�� 240 Art 32�� 240 Art 34�� 241 Art 35(1)�� 241 Art 35(2)�� 241 Arts 38–40�� 245 Ch II�� 239 PPSTA Enforcement Rules�� 238, 244, 246–47, 250, 252–53, 257, 260 Art 2�� 246 Art 3(2)�� 247 Art 3(3)�� 246 Art 4(2)�� 246 Art 5(2)�� 247 Art 11�� 247 Art 12�� 247 Securities and Exchange Act�� 243

xliv Table of Legislation Thailand Bankruptcy Act�� 272 Business Security Act 2015��6, 44, 94, 264, 266–74, 276–77, 279, 282, 284, 287–89, 431–32, 436, 446, 450, 455–56, 459–60, 462–64, 466, 470, 474 s 2�� 266 s 3�� 44, 266–67 s 5�� 266 s 7��44, 266 ss 7–10�� 267 s 8(1)�� 268 s 8(6)�� 267 s 9�� 267, 270, 459 s 12��267–68 s 13��266–67 s 16�� 267 s 17�� 267 s 18��267–68 s 18(4)�� 267 s 33�� 267 s 34�� 268 s 39�� 267 s 46�� 267 s 54�� 267 s 55�� 267 ss 61–79�� 268 s 73�� 267 s 86��266, 273 Civil and Commercial Code (CCC)��264–73, 275, 278–83, 289, 431, 460 s 241�� 265 s 251�� 265 s 253�� 265 s 259�� 265 s 273�� 265 s 278�� 268 s 282�� 268 s 287�� 268 s 306�� 265, 272, 276, 280 s 307��265, 280 s 459�� 265 s 491��265, 269 s 492�� 265 s 499�� 269 s 572��265, 269 s 573�� 265 s 574�� 269 s 702��265, 278

Table of Legislation xlv s 703�� 265 s 703(4)�� 266 s 705�� 270 s 714�� 265 s 728�� 265 s 729�� 265 s 729(1)�� 265 s 732�� 278 s 747��264, 278 s 750�� 264 ss 751–53�� 264 s 764�� 265 s 767�� 278 s 769(2)�� 266 s 777�� 264 s 785�� 264 s 926�� 264 s 985�� 264 s 989�� 264 s 1129�� 264 s 1298�� 278 s 1330��269, 275 s 1332��269, 275 s 1336�� 278 Consumer Protection Act�� 269 Art 35bis�� 269 Consumer Protection Law regarding Hire-Purchase of Electronic Appliances and Consumer Protection Law regarding Vehicles and Motorcycles�� 269–70, 279 Emergency Decree on Specific Purpose Juristic Person for Securitisation�� 280 Machinery Registration Act, s 5�� 266 Ministerial Regulation on Specifying the Types of Encumbered Properties under the Business Security Act�� 267 Ministerial Regulation on Specifying the Types of Lender under the Business Security Act�� 44 ss 1–6�� 266 s 6�� 269 ss 7–10�� 267 Notification of the Committee of Contracts concerning Hire-Purchase Business as a Business under the Committee’s control�� 269 Notification of the Committee of Contracts concerning Hire-Purchase of Electric Appliances as a Business under the Committee’s Supervision�� 269 Notification of the Committee of Contracts concerning Hire-Purchase of Vehicles and Motorcycles as a Business under the Committee’s Supervision�� 269 Plant and Machinery Act��94, 432, 442 Rental of Immovable Property for Commerce and Industry Act�� 266 Royal Decree on Specification of Rules and Procedures regarding identification of businesses and terms of contracts under supervision of the Committee of Contracts�� 269 Securitisation Transaction Law�� 280

xlvi Table of Legislation Temporary Constitution�� 277 Vehicle Act�� 266 Vessel Mortgage and Maritime Lien Act�� 266 s 6�� 266 s 7�� 266 s 21(1)�� 266 Vessel Mortgage and Maritime Lien Act No 2�� 266 United Kingdom Bankruptcy Act 1914, s 43�� 318 Bills of Sale (1878) Amendment Act 1882�� 401 Bills of Sale (Amendment) Act 1882, s 6�� 321 Bills of Sale Act 1878��73, 317, 401 Bills of Sale Act 1882�� 317 Sch�� 318 Business Contract Terms (Assignment of Receivables) Regulations 2018�� 7, 327, 398, 416 Business Contract Terms (Restrictions on Assignment of Receivables) Regulations 2018�� 76 Companies Act 1985�� 345 Companies Act 1993, Sch 7�� 335 Companies Act 2006�� 317, 398, 415 Pt 25�� 73 s 859D(2)(c)��326, 415 s 859D(3)�� 322 s 859E(1)�� 322 s 859H(3)�� 330 Companies Act 2006 (Amendment of Part 25) Regulations 2013��398, 415 Consumer Credit Act 1974�� 325 Enterprise Act 2002�� 334 Financial Collateral Arrangements (No 2) Regulations 2003�� 415 Insolvency Act 1986 s 344�� 318 s 344(2)�� 321 Sch A1, para 12�� 322 Sch B1, para 43�� 322 Judicature Act 1873�� 320 Law of Property Act 1925 s 101�� 322 s 101(1)(iii)�� 322 Sale of Goods Act 1893�� 345 Small Business Enterprise and Employment Act 2015�� 76

Table of Legislation xlvii United States Uniform Commercial Code (UCC)��47, 50–51, 61, 64, 68, 112, 214, 233, 359 Art 1-201(35)�� 364 Art 9�� 3, 8, 14–17, 25, 47, 51–52, 61, 73–77, 79, 103, 107, 116, 129–31, 137, 139, 141, 143, 214, 255, 273, 276, 297–99, 303, 319, 336, 347, 352, 386–88, 411, 414, 422, 434, 436, 446–47 Art 9-102(a)(11)�� 336 Art 9-102(a)(2)�� 130 Art 9-102(a)(42)�� 131 Art 9-103(B)(2)�� 329 Art 9-104�� 75 Art 9-105�� 75 Art 9-106�� 75 Art 9-107�� 75 Art 9-109��131, 281 Art 9-109(d)(4)-(7)��281–82 Art 9-203(a)�� 74 Art 9-203(b)��75, 387 Art 9-309�� 131 Art 9-314(a)�� 388 Art 9-324(a)�� 390 Art 9-406(d)�� 327 Art 9-608(a), (b)�� 276 Vietnam Circular 6�� 308 Civil Code 1995�� 292–93, 295–97, 306 Civil Code 2005��293, 297–98, 306, 309 Art 309�� 302 Art 320�� 297 Civil Code 2015�� 7, 16–17, 19, 90, 292–93, 295, 298–301, 303–4, 306, 309–11, 452, 454, 456, 474 Art 292�� 299 Arts 292–350�� 298 Art 295�� 299 Art 295(2)�� 299 Art 297��16, 300 Art 298�� 441 Art 299��303–4 Art 300�� 304 Art 301�� 304 Art 302�� 304

xlviii Table of Legislation Arts 303–306�� 304 Art 307�� 304 Art 308�� 301 Art 365�� 302 Civil Procedure Code�� 304 Decree 165/1999/ND-CP��293, 296–97, 306, 308 Art 6�� 296 Art 7�� 296 Art 15�� 296 Art 137(2)(b)�� 301 Decree 178/1999/ND-CP��296–97 Art 1�� 296 Art 8�� 296 Art 11�� 296 Art 12(1)�� 296 Art 14�� 296 Decree 08/2000/ND-CP��293, 308 Decree 85/2002/ND-CP��296–97 Decree 163/2006/ND-CP��293, 297–98, 300–304, 306, 309–11, 441 Art 4(2)�� 298 Art 5�� 298 Art 13�� 302 Art 20�� 301 Art 20(1)�� 302 Art 20(3)��302, 469 Art 22��301–2 Art 22(1)�� 302 Art 22(4)�� 302 Art 58�� 303 Decree 83/2010/ND-CP�� 293, 306, 308 Decree 11/2012/ND-CP��298, 303 Art 1.Art 1(2)�� 298 Art 1(15)�� 303 Decree 102/2017/ND-CP on Secured Device Registration�� 293, 295, 300, 302, 306, 308–10, 441 Art 3(1)�� 300 Art 4(2)�� 300 Art 4(2)(c)�� 302 Art 5(1)�� 300 Law No 51/2014/QH13 on Bankruptcy��302–3 Law No 64/2014/QH13 amending the Law on Enforcement of Civil Judgements�� 302–3, 306, 441 Law on Amending and Supplementing a number of articles in the Law on Enforcement of Civil Judgements 2014, Art 20�� 303 Resolution 42/2017/NQ-QH13�� 304, 306, 441 Art 7�� 304 Art 8�� 304 Art 10�� 304

Table of Legislation xlix Art 11�� 304 Art 12�� 304 Art 15�� 304 Art 19�� 304 Zambia Movable Property (Security Interests) Act 2016 s 35(3)�� 324 s 37�� 324 s 42�� 327

Zimbabwe Movable Property Security Interests Act 2017, Second Schedule, para 4 ..................................... 327

l

1 Introduction LOUISE GULLIFER AND DORA NEO

I. General Introduction This book is the third in a series looking at secured transactions law around the world, with a particular focus on reform. The first book,1 of which one of the editors of this book was an editor, was a general discussion of reform so far, with particular focus on Europe and the possibility of reform in European countries. As well as discussion of the position in many European countries, it included chapters on the history of reform in the US and its transplant into Canada, Australia, New Zealand and the first African country to undertake wholesale reform, Malawi. The second book2 concentrated on African countries, in many of which there has been a relatively rapid take-up of the idea of reform. As in the first book, countries with different legal cultures (civil law, common law and mixed jurisdictions) were examined, and the existing law (reformed or unreformed) and proposed changes were critically examined. This third book focuses on selected countries in Asia. As with the first two books, both civil and common law jurisdictions are examined. There are also some more general reflections on secured transactions law reform, which draw out themes illustrated in the country-specific chapters, and which analyse, from a transnational perspective, the benefits and challenges of introducing legal and institutional reform. These reflections will be beneficial to future reformers, and will inform the debate in the future not only in Asian countries, but globally. The book is first and foremost an academic study, and a critical and analytical approach is taken throughout. It will be of interest to all who are involved in considering secured transactions law reform, its content, the process by which it is achieved and its operation in practice. In addition, the in-depth and critical studies of the secured transactions laws in thirteen Asian countries3 form a resource for all those operating within the Asian credit markets, and those

1 O Akseli and L Gullifer (eds), Secured Transactions Law Reform: Principles, Policies and Practice (Hart Publishing, 2016). 2 M Dubovec and L Gullifer, Secured Transactions Law Reform in Africa (Hart Publishing, 2019). 3 There are twelve chapters which each consider a specific Asian country. Chapter 15, which focuses on secured transactions law reform in common law jurisdictions, also includes a discussion of the law in Brunei, which was reformed in 2016.

2 Louise Gullifer and Dora Neo who are learning about these laws, whether as students or those engaging with the law as a matter of practice. The countries were chosen carefully to include many important economies in Asia, and also to provide a range of different legal cultures and different economies and to include countries at many different stages of the reform process. The genesis of the book was in a conference held at the National University of Singapore Faculty of Law in 2018, which was a joint initiative between the Centre for Banking & Finance Law, and the EW Barker Centre for Law & Business (both of the National University of Singapore) and the Commercial Law Centre at Harris Manchester College, University of Oxford. Those contributing chapters to the book presented their initial drafts and ideas at the conference for feedback and discussion. Since then, the chapters have been significantly reworked, and, in many cases, brought up to date to reflect developments in particular countries, including the enactment of some legal reforms. This introductory chapter not only introduces the subject matter of the book, but also provides some information about matters which will be dealt with throughout the book, such as the definition of, and types of, secured transactions law reform, terminology, benchmarks for legal systems and the different legal cultures in Asia.

II. Plan of Book The book is divided into three parts, plus this introduction and a conclusion, which draws together all the themes and issues discussed earlier in the book. The first part comprises of four chapters which consider secured transactions law, and its reform, generally. In chapter 2, Charles Mooney identifies modern principles which have become generally accepted around the world as epitomising best practice to which a reformed secured transactions law should adhere. This chapter considers the role of the modern principles in legal transplant, and discusses examples of failure to follow the modern principles even in countries where secured transactions law is partly reformed. It also serves to introduce the modern principles, which are used in many chapters of the book as a benchmark to assess the current law in a country, whether reformed or unreformed. Chapter 3 discusses the experience of reformed law in developed jurisdictions, and the challenges that continue to arise even though law reform has been fully embedded within the legal system. Chapter 4 discusses the United Nations Commission for International Trade Law (UNCITRAL) Model Law, which exemplifies the modern principles, and which provides a more detailed model with which reformed law in a particular jurisdiction can be compared. Chapter 5 gives an overview of secured transactions law reform in East Asia, from the point of view of the author who has worked on secured transactions law and infrastructure reform on the ground for over twenty years. This chapter, in particular, stresses the importance of the way in which reform is undertaken, the critical significance of cooperation and collaboration between many different actors and the need for infrastructure and market practices to be developed in order for legal reform to be effective. Reference is made in this chapter to Lao PDR, Cambodia, Philippines, Indonesia, Thailand and Malaysia in particular. The second part of the book focuses on civil law jurisdictions. As can be seen from V D below all the jurisdictions included here have had at least some limited reform,4 and many are

4 See

III B below for an explanation of what is meant by ‘reform’.

Introduction 3 considering further reform. The first chapter in the part, chapter 6, considers reform from a general civil law perspective. It identifies the civil law concepts which have to be accommodated in a law which corresponds with the modern principles and analyses the rules and practices which would need to be changed in order to comply with those principles. The competing policies behind the existing civil law rules and practices, and those of the modern principles are examined, and suggestions are made as to how a civil law jurisdiction can attain some of its existing policy objectives while obtaining the benefits of a reformed law. Many of the themes identified in this chapter are picked up in some of the country-specific chapters which follow. Of the countries discussed in these chapters, two have introduced wholesale reform (the Philippines, discussed in chapter 10 and Vietnam,5 discussed in chapter 14). China (chapter 7), South Korea (chapter 11) and Thailand (chapter 13) have introduced partial reform, while even more limited reform has been introduced in Indonesia and Taiwan, including the introduction of electronic registration of some security interests. Japan (chapter 9) has introduced legislation overriding anti-assignment clauses, but, although a research group is considering at least partial reform, no firm proposals have yet been put forward. Part 3 of the book focuses on common law jurisdictions. Chapter 15 considers reform in common law jurisdictions with particular reference to Brunei, a common law jurisdiction which recently carried out wholesale legal reform. As with the equivalent civil law chapter, this chapter discusses the conceptual and practical differences between a common law system and a system according with the modern principles, and identifies areas in which the law needs to be changed, and those which merely need ‘translating’, in order to comply with the principles. Many of these themes are picked up in the chapters in this part. Of the four countries discussed, only Pakistan (chapter 18) has introduced wholesale reform, although reform is also pending in Bangladesh (chapter 16). There has been extensive, but still partial, reform in India (chapter 17), while Singapore (chapter 19) is a largely unreformed common law system, despite having reformed its registration system for company charges. Each of the country-specific chapters in Parts 2 and 3 gives a critical account of the current law in that country, as well as identifying challenges in the future, and, in many cases, making proposals for further change. These themes, as well as the arguments about reform made in Part 1, are drawn together in the conclusion, which provides a thematic overview of the reform process and the substantive law, with close reference to the arguments made in the book and to examples from the country-specific chapters.

III. Secured Transactions Law Reform A. What is Meant by ‘Secured Transactions’ Law The title of the book, and the headings of a number of chapters, assume that there is such a thing as ‘secured transactions law’, which can be reformed. This section explores the concept of ‘secured transactions’ and ‘secured transactions law’. The phrase ‘secured transactions’ appears to have originated in the United States, as a result of the legal reform adopted in Article 9 of the Uniform Commercial Code. It is now used

5 Vietnam’s

law is still somewhat fragmented, though, see n 116 below.

4 Louise Gullifer and Dora Neo globally, for example, as the title of many university courses,6 in the title of many books7 and, more recently, the title of national legislation8 and international instruments.9 On its face, the phrase might be thought to cover every transaction in which a security interest is taken to secure an obligation. The reason why the phrase needs explanation is that not every jurisdiction has the same view as to what counts as a ‘security interest’ or ‘secured financing’. The question of what does count is begged by the use of the phrase, and, since it means different things to different people, it could become of little utility. This section of the Introduction, therefore, explains what this phrase means in the context of this book, and why it is, in itself, somewhat contentious. The phrase ‘secured transactions’ covers all transactions in which a proprietary interest in an asset10 is used to enable someone to whom an obligation is owed (an ‘obligee’ or ‘creditor’11) to have recourse to that asset if the ‘obligor’ (or ‘debtor’) does not perform the obligation. In some jurisdictions, every such transaction, however it is structured, will fall within this definition of secured transactions, and will fall within a single piece of secured transactions legislation. This is known as the functional approach.12 However, in other jurisdictions, only certain transactions will be seen as giving rise to security. In some jurisdictions, a transaction where the creditor retains title to the asset (as opposed to an interest in the asset being granted by the debtor to the creditor) is not viewed as giving rise to a security interest. Similarly, in some jurisdictions, a transaction where ownership of the asset to which the creditor can have recourse in the event of default is transferred to the creditor by the debtor is not viewed as creating a security interest. In addition, the term ‘secured transactions’ can include outright transfers of receivables, at least when done for financing purposes. These outright transfers are typically included within a reformed system of secured transactions law but only for some and not all purposes. However, in many jurisdictions, the outright sale of receivables as a mode of financing is seen, in law, as a different type of transaction from secured financing. Despite the possible variation in the way the phrase ‘secured transactions’ could be interpreted from jurisdiction to jurisdiction, in this book it is used in its widest iteration. It therefore 6 A few selected examples are: ‘Commercial Law: Secured Transactions’ at Harvard Law School (https://hls.harvard. edu/academics/curriculum/catalog/index.html?o=67857); ‘Secured Transactions’ at the University of Toronto Faculty of Law (www.law.utoronto.ca/course/2019-2020/secured-transactions); ‘Secured Transactions Law’ at the University of Adelaide (www.adelaide.edu.au/course-outlines/107344/1/sem-1/2017/); ‘Comparative Secured Transactions Law’ at the Central European University, Budapest (https://courses.ceu.edu/courses/2019-2020/comparative-securedtransactions-law); ‘International and Comparative Secured Transactions’ at University College, London Faculty of Law (www.ucl.ac.uk/laws/study/llm-master-laws/modules-2019-20/international-and-comparative-secured-transactionslaws0100). 7 There are, of course, many textbooks written to support the courses on secured transactions law. A few other examples of scholarly writing are F Dahan and J Simpson (eds), Secured Transactions Law Reform and Access to Credit (Edward Elgar Publishing, 2008); C Iheme, Towards Reforming the Legal Framework for Secured Transactions in Nigeria (Springer, 2016); O Akseli (ed), Availabilty of Credit and Secured Transactions in a Time of Crisis (Cambridge University Press, 2013). 8 See, eg the Personal Property Secured Transactions Act in Taiwan (see ch 12); the Brunei Secured Transactions Order (ch 15); the Financial Institutions (Secured Transactions) Act in Pakistan (see ch 18); and the Secured Transactions Act 2009, Sri Lanka (www.lawnet.gov.lk/wp-content/uploads/2016/11/49of2009.pdf). 9 eg the EBRD Model Law on Secured Transactions (2010) at www.ebrd.com/news/publications/guides/model-lawon-secured-transactions.html and the UNCITRAL Model Law on Secured Transactions (2016) at https://uncitral.un.org/ sites/uncitral.un.org/files/media-documents/uncitral/en/19-08779_e_ebook.pdf. 10 In this section, the singular ‘asset’ is used to cover the situation where a single asset or more than one asset is involved. 11 Since most obligations in this context are either obligations to pay money, or to pay monetary damages if an obligation is not performed, the obligee will be called the ‘creditor’ and the obligor the ‘debtor’. 12 It can also be called the ‘unitary’ approach, although this term is often used more narrowly, to refer to the treatment of acquisition financing in a jurisdiction. See UNCITRAL Legislative Guide on Secured Transactions (2007) (UNCITRAL Legislative Guide), ch 1, paras 111–12.

Introduction 5 covers all financing transactions in which the creditor is protected by a proprietary interest in an asset, whether by having recourse to that asset in the event of default by the debtor or by virtue of being the absolute owner of that asset. A related, but separate, question relates to what is meant by ‘secured transactions law’. Broadly speaking, it is the law relating to secured transactions as defined above. However, it has come to encompass, typically, the law relating to particular (and critical) aspects of such transactions, while other aspects are governed by general law, such as the law of contract or insolvency law. The particular aspects are as follows. First, how they come about (creation), which can be either consensual or by operation of law. Secondly, how they are made effective against third parties, so that they can be successfully asserted against competing claimants to the asset in question. This aspect will usually include the rules regarding the establishment of a registry and its operation. Thirdly, how priority between competing claimants is determined, and fourthly, how they are enforced in the event of the debtor’s default. In many jurisdictions, the law relating to these aspects will be found in a number of sources. There will be various pieces of legislation, and, particularly in common law jurisdictions, a great deal of case law. There may be few or no places in which the law relating to these aspects is gathered in one place, not even in commentary or academic literature. As discussed in the next section, wholesale reform of secured transactions law following the modern principles13 will comprise one, or maybe two, pieces of legislation forming a codified body of secured transactions law. Such a code is likely to contain provisions covering two other important aspects. The first are the conflict of laws rules relating to secured transactions, and the second are transitional provisions covering the move from the previous law to the new law. It should also be pointed out that the phrases ‘secured transactions’ and ‘secured transactions law’ cover transactions between any sort of parties. The borrower can therefore be a company, an unincorporated business or an individual (whether acting in the course of business or as a consumer) or any other type of legal person. The same is true of the lender, who can be a legal or natural person in the business of lending, or one who extends credit as part of another type of commercial transaction (such as a sale) or even someone who is not acting in the course of business. This book, however, focuses on financing and credit extended by businesses to businesses (whether incorporated or not) and does not, generally, deal with consumer credit.

B. What is Meant by ‘Reform’ Here, ‘reform’ is used in the sense of the process of changing the law from what it was before. In most cases, this will be effected by legislation. Whether reformed or unreformed secured transactions law is consistent with the modern principles is an entirely separate question: sometimes ‘unreformed’ law can align with many of these principles, and sometimes ‘reformed’ law might not align in many respects. However, if the law of a jurisdiction does not align with those principles, it can be made to align more closely by reform. This is the type of reform discussed in this section and in the book generally: where the law is changed by legislation so as to align more closely with some or all of the modern principles. Reform of secured transactions law can be brought about in a number of different ways. While there is no hard and fast categorisation, one possibility is to distinguish between wholesale reform, partial reform and limited reform, that is, reform relating to specific issues. This

13 For

a description and discussion of the modern principles, see ch 2, especially part II.

6 Louise Gullifer and Dora Neo section will describe these three paradigms, although it must be borne in mind that each shades into the other in reality. Examples of all three can be found in the countries discussed in this book. Some of the chapters also discuss the merits of the paradigms, and the considerations that lead to one rather than another being adopted. These discussions are summarised in the conclusion.14

(i) Wholesale Reform This paradigm is the easiest to describe, since it usually (though not always) takes a very specific form. In such a reform, the secured transactions law is codified into one piece of legislation.15 The legislation will usually cover all types of creditors and all types of debtors, including consumer debtors (though this is not always the case). As mentioned above, the law will include provisions covering the creation of security rights,16 the making of such rights effective against third parties, priority and enforcement. It is also likely to include provisions on the conflict of laws and transitional provisions, though one or both of these are sometimes omitted. Detailed provisions about the registry and registration are often contained in a separate legislative instrument.17 Where wholesale reform takes place, it replaces the existing law. While easily stated, this replacement is not necessarily straightforward to effect, and problems can be caused by failure to repeal or amend existing statutory provisions, or even whole registrations systems. This issue is examined in some chapters and summarised in the conclusion.18

(ii) Partial Reform Partial reform, by its nature, can take many forms. One form is the amendment of the law relating to one or more particular security devices19 or the introduction of a new device.20 Another form (which can be combined with the first) is the introduction of a registration system, or the reform of an existing registration system.21 However, in a partial reform the registration system will be limited to certain security devices,22 or maybe in other ways.23 Partial reform can be a

14 Ch 20 III A. 15 Examples in this book include the Philippine Personal Property Security Act 2018 (see ch 10), the Brunei Secured Transactions Order (see ch 15) and the Pakistan Financial Institutions (Secured Transactions) Act 2016 (see ch 18). 16 This term is used to cover all proprietary interests that protect creditors within the broad definition of ‘secured transactions’. 17 The UNCITRAL Model Law, which is drafted as a codified instrument, contains a section, which can form a separate piece of legislation, entitled ‘Model Registry Provisions’. 18 Ch 20 III A (i) (b). 19 See, eg the 2007 PPSTA in Taiwan, which clarified the rights embodied in the repairman’s lien (ch 12 IV A (i)) and the Chinese Real Property Law 2007, which expanded the assets available to be taken as security under the existing security interests (mortgage and pledge) (ch 7 III A). 20 See the Thai Business Security Act 2015 (ch 13 II C) which created a general security right which could cover all types of assets, including future property, as well as providing for a registry system for those rights and extra judicial enforcement. See also the South Korean Act on Security over Movable Property and Claims 2012, which created a general security right, but which left all previous security rights also in existence (ch 11 III A (i)). 21 eg Indonesia had a paper registration system for fiducia, which was reformed to an electronic system by two reforms in 2013 and 2015 (see ch 8 III D (iv) (a) and (b)). 22 eg the registration systems introduced by the Thai and South Korean reforms only provided for registration of the general security right created by those reforms, and not for other existing security devices (see ch 13 II B and C, III A (i) and B (ii), and ch 11 III A (i) and B). 23 eg the Indian SARFAESI Act 2002 introduced a registration system for security interests taken by banks and other financial institutions (as defined in the Act in a definition which was broadened in 2016) (ch 17 IV A and B). The South Korean Act on Security over Movable Property and Claims 2012 does not apply to unincorporated businesses, see ch 11 III A (i).

Introduction 7 precursor to wholesale reform, since the existing reforms can be adapted and extended to cover more types of security devices, more types of lenders or borrowers, or otherwise refined and improved.24 In this sense, all reform is incremental since, as pointed out in chapter 3, reformed law needs to be kept under constant review.25 The danger of partial reform, however, is that it can lead to fragmentation and increased complexity of the law.

(iii) Reform of the Law Relating to Specific Issues Sometimes, rather than introducing even a partial reform, a country will just enact legislation dealing with one or more specific issues within the general area of secured transactions law. This legislation will typically target one or more issues which have been identified as causing difficulties in practice. An example of such reform in one of the countries covered in this book, is the changes in the law relating to assignments of receivables in Japan.26 These changes included, first, a provision that future receivables could be assigned27 and, second, reform of the law relating to anti-assignment clauses.28 This type of specific reform can be transformative and very important to the parties affected, but, again, there is a danger that it can lead to fragmentation and complexity, and also that it does not tackle more fundamental problems affecting access to credit.

C. Benchmark of Reform If law reform is to be meaningful, there need to be methods of assessing it, both before it takes place and after it has occurred. This section describes and critically considers various possible methods.

(i) Assessment of the Legal Content As will be seen from the discussion below, and from many of the chapters in the book, merely introducing legislation to change the content of secured transactions law is not enough for a reform to be effective. It is, however, a necessary condition for effective reform, and, logically, has to come before other changes, such as the establishment of a registry, or changes to an existing registration system.29 Legal reform can be critically assessed in many ways, for example, by considering how well it dovetails with the principles and rules in the rest of national law in the reforming country, or by analysing the nature and number of disputes to which the new law gives rise. These types of assessment mirror the way in which law reform generally is assessed and are purely focused on the legal consequences of reform. However, with secured transactions law reform, it is important to recognise that the purpose of reform will be to produce

24 See, eg the position in Vietnam, where the current legal position was achieved by three iterations of the Civil Code (1995, 2005 and 2015) as well as a number of decrees amending particular aspects of the law, see ch 14 II and III. 25 See ch 3 III. 26 These changes were effected by amendments to the Civil Code on obligations, which took effect on 1 April 2020, see ch 9 IV B. 27 This reflected a 1999 Supreme Court decision, see ch 9 IV B (i). 28 See ch 9 IV B (iii). Another example of reform relating to a specific issue is the UK legislation overriding the effect of anti-assignment clauses in certain contracts giving rise to receivables owed to SMEs (see The Business Contract Terms (Assignment of Receivables) Regulations 2018). 29 See the discussion in ch 5 III C on the various stages of secured transactions reform.

8 Louise Gullifer and Dora Neo economic benefits.30 The purpose of the legal assessment must, therefore, reflect what is thought to be the best way, in legal terms, of achieving those economic benefits. Over the years, many international and regional institutions have developed principles and standards, the adoption of which is considered to facilitate the achieving of these economic benefits. This conclusion can be supported by arguments, such as that creditors are encouraged to lend by clear, certain and predictable rules, and effective publicity and enforcement of security interests.31 It can, and has been, also supported by empirical studies, although these tend to consider reform as a whole, without being able to determine which aspects of legal reform have led to particular economic conclusions.32 The principles and standards thus developed have been included in a number of instruments and texts, which have been particularly influential in informing reform initiatives around the world. In terms of global institutions, the UNCITRAL has produced a Legislative Guide on Secured Transactions,33 a Model Law on Secured Transactions and associated Model Registry Provisions,34 and a Guide to Enactment35 and a Practice Guide36 to the Model Law. The World Bank has produced ‘Principles for Effective Insolvency and Creditor/Debtor Regimes’37 (known as the World Bank Principles). Regional organisations have similarly produced texts, for example, the European Bank for Reconstruction and Development produced Core Principles for a Secured Transactions Law38 and a Model Law39 for use, originally, in Eastern Europe and the Organisation of American States produced a Model Law on Secured Transactions,40 for use primarily in Latin America. Although there are differences between these texts, resulting from their different purposes and, in some, different regions to which they are addressed, there are certain core principles that can be extracted from all of them. These ‘modern principles’41 can therefore be seen as representing an international consensus as to the basic attributes of a modern and effective secured transactions law. It should be pointed out, however, that despite this consensus, there are some criticisms of the modern principles and their various iterations, particularly on the grounds that they are too influenced by the US Uniform Commercial Code Article 942 and are not sensitive enough to the basic tenets of civil law legal culture.43 The second of these grounds 30 See III C (iii) below and ch 2 I. The same is true of much commercial law reform. See, eg the Economic Assessment of International Commercial Law Reform project run by the Cape Town Convention Academic Project at https://unidroitfoundation.org/economic-assessment-of-law/. 31 See, eg ch 4 I. 32 See, eg, from an extensive literature, J Armour, ‘The Law and Economics Debate about Secured Lending: Lessons for European Lawmaking?’ (2008) 5 European Company and Financial Law Review 3; R Haselmann, K Pistor and V Vig, ‘How Law Affects Lending’ (2010) 23 Review of Financial Studies 549; M Afavuab and S Sharma, ‘When Do Creditors’ Rights Work?’, World Bank Policy Research Working Paper No 4296 (2007); A Saunders, A Srinivasan, I Walters and J Wool, ‘The Economic Implications of International Secured Transactions Law Reform: A Case Study’ (2014) U Penn Journal of International Law 309; M Campello and M Larrain, ‘Enhancing the Contracting Space: Collateral Menus, Access to Credit and Economic Activity’ [2016] Review of Financial Studies 249. 33 (2007) www.uncitral.org/pdf/english/texts/security-lg/e/09-82670_Ebook-Guide_09-04-10English.pdf. 34 (2016) www.uncitral.org/pdf/english/texts/security/ML_ST_E_ebook.pdf. See ch 4 of this volume. 35 (2017) www.uncitral.org/pdf/english/texts/security/MLST_Guide_to_enactment_E.pdf. 36 (2019) https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/19-10910_e.pdf. 37 www.worldbank.org/en/topic/financialsector/brief/the-world-bank-principles-for-effective-insolvency-andcreditor-rightsb (developed in 2001 and most recently revised in 2011). 38 (2002) www.ebrd.com/what-we-do/legal-reform/access-to-finance/transactions.html. 39 (1994) ibid. 40 (2002) www.oas.org/dil/Model_Law_on_Secured_Transactions.pdf. 41 The principles are enumerated and discussed in detail in ch 2; see particularly ch 2 II and IV B. 42 See, eg G McCormack, ‘American Law Writ Large: the UNCITRAL Secured Transactions Guide’ (2011) 60 International and Comparative Law Quarterly 597. 43 ibid.

Introduction 9 is discussed extensively in Part 2 of this book, which discusses reform of secured transactions law in civil law countries both from a general44 and a specific standpoint.45 Moreover, many civil law states contributed to the discussions leading to the various UNCITRAL instruments, and the regional models mentioned above were specifically designed to operate in civil law jurisdictions. In terms of assessment of a legal reform, the modern principles provide a benchmark against which that assessment can be made. The UNCITRAL Model Law can also be used, but, because of its detailed nature, is perhaps more useful as a comparator for specific provisions. The principles are general enough to be used to assess a legal reform that is drafted or organised differently from the Model Law. The modern principles can also be used as a benchmark to assess existing (nonreformed) law, which may well comply with some of the modern principles while using different language or concepts from the Model Law. Such an assessment also facilitates identification of areas of the law that need to be changed to comply with the modern principles.46

(ii) A Global Benchmark: ‘Getting Credit’ Index of the World Bank ‘Doing Business’ Report The World Bank produces an annual report entitled ‘Doing Business’ which scores 190 economies47 on many matrices relating to the business law and regulation and its impact on the ease of doing business.48 The report is compiled by a large scale survey process, with questionnaires being sent out to very many lawyers and other experts in each country.49 The results, which are verified through analysis of the legislation of the relevant state and other public sources of information, are used to compile the report. The report is divided into 10 topics, and each economy is given a score for each topic and an overall score, which is an average of the 10 topic scores. The index ranks economies according to the overall score and each topic score. The Getting Credit topic includes two indicators. One is the availability of credit information (‘depth of credit information index’) and the other is the protection of creditor and debtor rights under secured transactions and insolvency laws (‘strength of legal rights index’). Each are assessed by the use of questionnaires,50 as described above. The depth of credit information index consists of 8 questions (formerly 6) and the strength of legal rights index consists of 12 questions (formerly 10).51 Three of the questions relate to the effect insolvency has on the enforcement of security interests, while the rest relate directly to ‘secured transactions law’ in the sense that that phrase is used in this book.52 The questions reflect the modern principles mentioned above, and can be criticised on the same grounds as the modern principles.53 There has also been criticism of the way in which the criteria in the questions are applied in practice to the law in

44 Ch 6. 45 Chs 7–14. 46 See, eg the discussion in ch 15 IV (reform in common law jurisdictions) and ch 17 V (India). 47 This is the number of countries scored and ranked in 2020. The Doing Business report has been produced every year since 2003. 48 See www.doingbusiness.org. 49 The questionnaires are available at www.doingbusiness.org/en/methodology. 50 See www.doingbusiness.org/content/dam/doingBusiness/pdf/db2020/DB20-Credit-Bureau-Questionnaire.pdf and www.doingbusiness.org/content/dam/doingBusiness/pdf/db2020/DB20-Legal-Rights-Questionnaire.pdf. 51 The questions in the strength of legal rights index are set out in ch 12 (Taiwan) III A. 52 See III A above. 53 See, eg G McCormack, ‘Why “Doing Business” with the World Bank May Be Bad for You’ (2018) 19 European Business Organisation Law Review 649.

10 Louise Gullifer and Dora Neo any given country, which can sometimes result in the rankings arguably not reflecting the true legal position,54 or, at any rate, the actual ease of getting credit in that country.55 However, a low ranking of a country in the Getting Credit strength of legal rights index can be a powerful driver towards reform.56 It should be remembered, though, that where reform is embarked upon as a means to an end, particularly where there has been extensive technical assistance provided by external agencies, it is imperative that this is complemented by capacity building so that the legal and business community in the jurisdictions concerned have the knowledge and understanding to sustain and operate the reformed system independently.57

(iii) Economic Assessment In the end, the success of a reform of secured transactions law can only be judged on whether it achieves the desired economic aims. These are usually one or more of the following. The first aim is an increase in access to credit. This can mean either that a borrower who could not formerly obtain credit at all can, post-reform, obtain it, or that a borrower who could previously only borrow a certain amount can borrow more. A second, related, aim is a reduction in the cost of credit. A third could be to achieve other improvements (from the borrowers’ point of view) in the terms on which credit can be obtained, for example, by the increase in the length of the loan term. A related fourth aim could be other improvements for borrowers in the obtaining of credit, such as a reduction in the time it takes for credit to be obtained. Fifth, there could be other benefits which are targeted, such as an increase in lending by, and borrowing from, formal institutions (which can be beneficial for borrowers in some countries as the behaviour of these institutions is regulated and therefore likely to be better than that of unregulated institutions), or an increase in lending to enterprises run by women. Occasionally, the aims are more modest, such as a reduction in the transaction costs of secured credit transactions. Most of the benefits identified in the previous paragraph are expected to come from a few key factors of secured transactions law reform. First, an increase in the types of assets that can be used as collateral. This is most notable in countries where lenders, formerly, would only take land as collateral, which excludes businesses with only movable assets to offer as collateral.58 In a country where lenders do take movables as collateral an expansion of the scope of eligible collateral can also be beneficial, though. This reform will increase the number of borrowers who potentially could offer collateral, and the amount of collateral that borrowers can offer. The second factor is an efficient collateral registry. This enables lenders to have information about other interests in the collateral, and, by registering, to ensure their priority over other competing claimants. The third factor is an efficient system for the enforcement of collateral, as this enables lenders to have confidence that they will be able to recover their advance. 54 In 2012, Zambia reformed its framework based on the Canadian PPSAs. In the 2012 Getting Credit strength of legal rights index, Zambia ranked 8th while Canada ranked 24th. 55 See ch 12 III B, which describes this criticism being made by the Taiwanese Government. 56 Of the countries featured in this book, Brunei, which reformed its law in 2016, ranks equal first in the 2020 Getting Credit strength of legal rights index, while Vietnam, which reformed its law most recently in 2017, ranks joint 25th (failing on only two secured transactions related questions, both of which concern the collateral registry). Singapore, which has ‘unreformed’ law, ranked 37th on the Getting Credit strength of legal rights index (as did the United Kingdom), but notably ranked 2nd in the world overall in the Doing Business rankings. The Philippines (132nd), Bangladesh and Pakistan (joint 119th) have low rankings, but all these rankings are likely to be raised considerably once the reforms in those countries come into operation. 57 See, further, ch 5 III. 58 H Fleisig, M Safavian, and J Steinbuks, ‘Unlocking Dead Capital’, Private Sector Development Vice Presidency Note Number 307, World Bank Group (March 2006) 2.

Introduction 11 As well as the benefits expected to be produced by secured transactions law reform, there are also some potential downsides. For example, lenders may rely on collateral to such an extent that they reduce the amount of pre-credit screening that they perform, and so they make loans that are too risky, even when collateralised.59 Furthermore, the strengthening of the creditor rights in enforcement imposes a cost on borrowers, so that for those borrowers who have a choice, secured lending may become less attractive.60 If the aims of a secured transactions law reform are relatively modest, such as a reduction in transaction costs, the benefits may be fairly easily measurable. If the aims are wider, as described above, the economic benefit is harder to measure, and proper assessment requires several steps to be taken. First, the necessary information needs to be gathered. One source of information is usually the collateral registry, which will be able to produce statistics of numbers of registration, and, sometimes, other information. Analysis of the number of registrations can show a rising trajectory post-reform, and this is an indication that the new system is being used and that access to credit is increasing.61 A similar exercise can be conducted in relation to the number of searches. The mere number of registrations and searches is not necessarily a robust measure, for example. While it shows that the system is being used, it does not usually reveal how much is being lent or at what rates or on what terms.62 Some registries collect other information, such as whether the borrowing business is run by women,63 which can also be used for assessment. It is often possible to obtain figures for overall lending by banks or other financial institutions in a country pre- and post-reform, and these can often be broken down into loans of different types (such as lending secured by movable assets),64 and/or to different types of borrowers. If the lending to SMEs, for example, has increased since the reform, this can be seen as an indication of the success of the reform. Information may also be available about the debt levels of borrowers, although in most countries this tends only to be publicly available in a granular form in relation to listed companies. In this regard, the World Bank Enterprise Survey can be useful. This project involves periodic surveys carried out in many countries at the level of individual businesses and includes questions about what finance businesses have and who provides it.65 The sample of businesses questioned is carefully constructed to include businesses in many categories, so as to give an overall picture of the businesses in that country.66 Some countries may also carry out similar 59 See, eg M Manove, AJ Padilla and M Pagano, ‘Collateral versus Project Screening: A Model of Lazy Banks’ (2001) 32 RAND Journal of Economics 726. 60 V Vig, ‘Access to Collateral and Corporate Debt Structure: Evidence from a Natural Experiment’ (2013) 68 Journal of Finance 881. 61 eg the Credit Reference Centre registry set up in China as part of the reforms introduced under the Real Property Law 2007 has had a large number of registrations (see ch 7 (China) III C (ii)(a)) and the numbers of registrations has steadily risen (see A Alvarez De La Campa, ‘IFC Secured Transactions Advisory Project in China’ (World Bank Group) 3, http://documents.worldbank.org/curated/en/610531486453400854/IFC-secured-transactions-advisory-project-inChina). 62 Some registries do require the amount secured to be registered (eg the Ghanaian Borrowers and Lenders Act, s 26) but this is unlikely to be satisfactory, since the amount will change over time: new credit may be extended or the amount secured may be paid down. It is much more common for a ‘maximum amount’ for which the collateral can be security to be required (see UNCITRAL Model Registry Provisions, Art 8(e), where this is an option for enacting states; Pakistan Secured Transactions Act 2016, s 23(2)(g) – see ch 18 (Pakistan) IV D; Nigerian Registration of Security Interests in Movable Property by Banks and other Financial Institutions in Nigeria Regulations 2015, Reg 12(2)). This is useful in that it enables future creditors to see what ‘free assets’ the borrower has, but is not helpful for statistical purposes, since it is usually a figure much higher than the actual amount advanced. 63 See, eg the Kenyan Movable Property Security Rights Act 2017, s 27(1)(e). 64 See De La Campa (n 61) 3, which shows that the number of secured loans and their amount in China rose in the years after the introduction of the Real Property Act 2007. 65 See www.enterprisesurveys.org/content/dam/enterprisesurveys/documents/methodology/ES_Manufacturing_ Questionnaire_1.pdf for a sample survey. The finance section is section K. 66 See www.enterprisesurveys.org/en/methodology.

12 Louise Gullifer and Dora Neo nationwide surveys. Post-reform surveys of lenders can also be useful, as they can be asked not only whether they lent more, but why they did so, as well as their other views on the new system.67 Information of another indicator of success can also be useful. This is the development and use of new financial products, particularly for SMEs, which would only be possible under the reformed secured transactions regime. The development of such products is seen as a key part of the implementation and operation of the reformed system,68 and their use is therefore an indication of the success of the reform. The second step that needs to be taken in an economic assessment is the processing of the data to give results. The most difficult part of this process is controlling for other factors that could explain the raw results, since what is sought is a robust causative link between the increase (or decrease) in credit shown by the data and the secured transactions law reform. Other factors that could explain an increase in credit include additional steps taken by governments to boost credit, such as the introduction of a credit reporting system, or a Government loan guarantee scheme.69 There are factors unconnected with reform that could explain a decrease in credit, such as a macroeconomic crisis or an epidemic. There are various ways that control for such factors can be included, and these vary from study to study. For example, in a study involving data for many countries,70 the results from countries which had reformed their law were compared with countries that had not reformed. The study was focused on the benefit from the introduction of a collateral registry, so the results from countries that had done this were then compared with the results from countries who had reformed the law (for example, to increase the scope of assets which could be taken as collateral) but had not introduced a modern collateral registry. Another important comparison is between pre- and post- reform data in a particular jurisdiction, although sometimes comparable data is not available, and all that can be shown is a rising trajectory of lending post reform. Awareness of the types of factors mentioned in the previous paragraph is also critical. There have been a number of recent economic studies, most focusing on individual countries, but some focusing on several countries. Country specific studies can attempt to assess the consequences of the entire reform package in that country,71 while international studies have to concentrate on a particular aspect of reform, such as the introduction of a collateral registry72 or an increase in the scope of available collateral.73 While these studies all conclude that secured transactions law reform has a positive effect on access to credit, sometimes a study can show a different effect. A study in India found that one effect of the Securitisation and Reconstruction

67 This was the main technique of the study of the Chinese reform by De La Campa (n 61). 68 See ch 5 III C. See also World Bank, ‘Secured Transactions, Collateral Registries and Movable Asset-Based Financing: Knowledge Guide’ (World Bank, 2019) 10–22 at https://openknowledge.worldbank.org/handle/10986/32551. 69 The OECD highlighted that credit guarantee programmes continue to be ‘the most widely used instrument that governments deploy to ease SME access to finance’: European Investment Bank, ‘Credit Guarantee Schemes for SME Lending in Western Europe’, Working Paper 2017/42 (June 2017) 10, www.eif.org/news_centre/publications/eif_wp_42.pdf. 70 See I Love, MS Martinez Pería and S Singh, ‘Collateral Registries for Movable Assets: Does Their Introduction Spur Firms’ Access to Bank Financing?’ (2016) 49 Journal of Financial Services Research 1. 71 In relation to the Chinese Real Property Act 2007, see, eg J Zeng, X Wang and M Xiao, ‘The Impact of Government Property Right Law on Collateral Loans: A Quasi-natural Experiment Based on the Enactment of Chinese Property Law’ (2019) 63 International Review of Economics and Finance 273; B Xu, ‘Permissible Collateral and Access to Finance: Evidence from a Quasi-natural Experiment’, Discussion Paper 3/2018 (Bank of Finland Institute for Economies in Transition, 2018); in relation to reform in Romania (with some other Eastern European countries taken as comparators), see M Campello and M Larrain, ‘Enlarging the Contracting Space: Collateral Menus, Access to Credit and Economic Activity’ (2016) 29 Review of Financial Studies 349. 72 eg Love et al (n 70). 73 eg C Calomiris, M Larrain, J Liberti and J Sturgess, ‘How Collateral Laws Shape Lending and Sectoral Activity’ (2017) 123 Journal of Financial Economics 163.

Introduction 13 of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act 200274 was that there was a decline in secured credit.75 The study suggests the explanation that, because of the strengthening of creditor rights so that enforcement was more efficient, businesses that were in a position to bargain reduced the collateral they were prepared to give for loans, and this was not entirely offset by the increase in secured credit for those who were not previously able to obtain it. A study in Sweden showed that a reform which reduced the resort a creditor could have to a floating lien had the effect of reducing access to credit.76

(iv) Benchmarks in this Book This book contains a critical assessment of secured transaction law and reform, both generally and in the various countries featured in the country specific chapters. The assessment is generally a legal one rather than an economic assessment: the chapters do not contain empirical studies as described in the previous section or economic analysis. The frameworks used for this legal assessment vary between the chapters, but in many cases are based on the modern principles, so that the current or proposed law is assessed in the light of those principles, deviations noted and suggestions made as to what could be done to comply further with those principles.

IV. Terminology and Concepts An attempt has been made for terminology to be consistent throughout the book, but this has not always been possible, given the differences in concepts and terminology between different jurisdictions, as well as the fact that English is not the primary language in many of the jurisdictions considered. This section concerns two issues relating to terminology. The first mentions some general terms which are used frequently in the book and which are not necessarily obvious to all readers. The second addresses the common concepts of a secured transactions law which has been reformed according to the modern principles, and explains some of the variations in terminology found between jurisdictions.

A. General Terms Jurisdictions which do not have a functional approach to secured transactions,77 have different terms for different types of security interests. Some terms frequently used (either in English or as an English translation of a term in another language) are ‘pledge’, ‘mortgage’ and ‘hypothec’. It is not possible to give definitions of these terms which are consistent throughout the book, and the reader is referred to the description given in the relevant chapter. For example, a ‘pledge’ under the common law is always possessory and can only be taken over goods,78 while in other jurisdictions it can be possessory (over goods)79 or non-possessory (over intangibles).80 A ‘mortgage’, 74 See ch 17 (India) especially at IV. 75 Vig (n 60). 76 G Cerqueiro, S Ongena and K Roszbach, ‘Collateral Damage? On Collateral, Corporate Financing and Performance’, ECB Working Paper No 1918 (2016). 77 See III A above; ch 20 IV A. 78 See ch 19 (Singapore) II A (ii). 79 See, eg ch 9 (Japan) IV A (i). 80 See ch 9 (Japan) IV B; ch 7 (China) III C (ii).

14 Louise Gullifer and Dora Neo under the common law, is a security interest based on title transfer and can be taken over land or movable property.81 However, in some other jurisdictions, a ‘mortgage’ can only be taken over land.82 ‘Hypothec’ or ‘hypothecation’ can, in common law jurisdictions, refer to a non-possessory security interest over movables83 while in some civil law countries it refers to a security interest over immovable property (land).84 Some terms used to describe particular classes of assets might need some explanation. First, certain general words are used to describe certain types of property, which vary according to legal tradition. There is a basic distinction between immovable and movable property. Immovable property is a concept which has a common core in most jurisdictions of ‘land’ but which may also include buildings, fixtures, plants and crops and, in some jurisdictions, even non-fixtures such as equipment used on the land. Where relevant in the book, the precise content of the term ‘immovable property’ will be made clear. Other words used for ‘immovable property’ in the book are ‘land’, ‘real property’ and ‘real estate’. Movable property is divided into tangible property (‘goods’ or ‘chattels’) and intangible property which includes (though is not necessarily limited to) choses in action (rights against another party). A very important asset class is that of ‘receivables,’ which are a species of intangible property. A receivable is a debt which is owed to a person: as far as that person is concerned, the debt is an asset, and that person can (or should be able to) use that asset to secure its borrowing. Other terms used for ‘receivables’85 are ‘accounts’86 and ‘accounts receivable’.87 In this book, except where the context otherwise requires, ‘receivables’ is used. A security interest can be granted in receivables to secure a debt. In those circumstances, the ‘debtor’ is the person who owes the secured debt, and a different term is needed for the person who owes a receivable. Again, different terms can be used. The UNCITRAL Model Law uses ‘debtor of the receivable’. Where the term ‘account’ is used for a receivable, the person owing the account is called the ‘account debtor’. This term can also be used where the term ‘account receivable’ or ‘receivable’ is used for what is owed by the ‘account debtor’.88 In this book, ‘account debtor’ is used unless the context otherwise requires. Another important concept is that of ‘circulating assets’. This term is used for assets which are part of the business cycle. Typically, a business that manufactures goods will, at different times, own ‘raw materials’, which are made into ‘stock in trade’, which are then sold to generate ‘receivables’, which are then paid to become ‘cash’ (money which may well be held in a bank account), which is then used to buy more raw materials. The term ‘inventory’ is used to refer to both raw materials and stock in trade. Obviously, the actual assets that comprise any particular business cycle will depend on the operation of the business. For example, a retail business will not have raw materials, and may have few receivables depending on how customers pay, and a business which provides services will only have receivables and their proceeds (cash). The ability to take security over circulating assets is very important if SMEs are to have access to finance, and this issue is discussed in many chapters of the book.

81 See ch 19 (Singapore) II A (ii). 82 See ch 11 (South Korea) I. 83 See ch 16 (Bangladesh) III; ch 17 (India) III B. 84 Ch 8 (Indonesia) II, although certain ships and aircraft can also be the subject of a hypothecation. 85 This term is used in the UNCITRAL Model Law and in the Pakistan legislation. The SARFAESI Act in India uses both ‘receivables’ and ‘debts’, although ‘receivables’ is used in the Factoring Regulation Act 2011: see ch 17 (India) VI. 86 Used in the Australian PPSA, the Canadian PPSAs and UCC Art 9. 87 See, eg the New Zealand PPSA and the legislation in Bangladesh, the Philippines and Brunei. In ch 8, and in some official translations of Chinese legislation, the equivalent term ‘account receivables’ is used. 88 eg in the New Zealand PPSA, and in the legislation in Pakistan, Bangladesh, the Philippines and Brunei.

Introduction 15 Some chapters also use terminology in relation to the reform process that might be unfamiliar to some readers. One is ‘credit infrastructure’ which is particularly used by the World Bank Group (WBG) and other international organisations. The WBG definition of this term is ‘the set of laws and institutions that enables efficient and effective access to finance, financial stability, and socially responsible economic growth through credit reporting, secured transactions & collateral registries; and insolvency & debt resolution’.89 Another is ‘capacity building’, which refers to the development of knowledge, skills, processes and resources in a country to enable (for example) credit infrastructure reform to produce the desired benefits for that country.

B. Terminology of a Reformed Secured Transactions Law A reformed law is likely to have a functional concept of a ‘secured transaction’ as discussed above.90 Such a transaction will involve the creation of a proprietary right or interest which the creditor obtains to secure an obligation owed by the debtor. There are different possible names for this proprietary right. The UNCITRAL Model law calls it a ‘security right’, while the Personal Property Security Acts (PPSAs) in Canada, Australia and New Zealand call it a ‘security interest’, as does Article 9 of the Uniform Commercial Code (UCC Article 9). In terms of the reformed systems discussed in this book where the legislation is in, or has been translated into, English: ‘security interest’ is used in the Philippines,91 South Korea,92 Brunei,93 India94 and Pakistan95 while Bangladesh uses ‘security right’96 and Vietnam uses the term ‘security’.97 In this book, unless the country-specific context otherwise requires, the term ‘security interest’ is used. The subject matter of a security interest (that is, the goods, receivables, intellectual property and so on over which the security interest is taken) can also be referred to in a number of ways. The UNCITRAL Model Law uses the term ‘encumbered asset’, while Article 9 and the PPSAs use ‘collateral’. ‘Collateral’ is the term used in the Philippines, Brunei, Bangladesh, South Korea, Pakistan and Vietnam, and is generally used in this book. The term ‘eligible collateral’ is also used frequently to denote what types of assets can be given as collateral in a particular legal system. The person who creates a security interest is called the ‘grantor’ in the UNCITRAL Model Law,98 since it is possible that a security interest can be created by someone other than the person who owes the secured obligation. A ‘grantor’, therefore, could be the person who owes the secured obligation (the ‘debtor’), or could be another person. However, under UCC Article 9, the term ‘debtor’ is used for the person who creates a security interest, and the Canadian and New Zealand PPSAs use this term as well, while the Australian PPSA uses ‘grantor’. ‘Grantor’ is the term used in the Philippines, while ‘debtor’ is used in Brunei, ‘obligor’ in Bangladesh and

89 See www.worldbank.org/en/topic/creditinfrastructure. 90 III A. See also ch 20 IV A. 91 See ch 10. 92 See ch 11. 93 See ch 15. 94 See ch 17. 95 See ch 18. 96 See ch 16. 97 See ch 14. These terms are taken from the English language version of the 2015 version of the Civil Code, available at www.wipo.int/edocs/lexdocs/laws/en/vn/vn079en.pdf. 98 Art 2(o).

16 Louise Gullifer and Dora Neo South Korea,99 ‘customer’ in Pakistan, ‘and ‘securing party’ in Vietnam. In this book, ‘grantor’ is used where possible, but there is considerable variation between countries and therefore between chapters. There are two approaches to the creation of a security interest in a reformed system. Both approaches follow the modern principles, and separate creation from third party effectiveness.100 However, one approach, which is followed by the UNCITRAL Model Law, is that there is a set of rules governing creation of a security interest, after which the interest is valid as between the parties (the secured creditor and the grantor) but is not valid against any third parties, including the grantor’s insolvency representative, until a further step is taken. The second approach separates out rules stipulating requirements for a valid security agreement (creation of the security interest) from rules which determine whether the security interest ‘attaches’ to any particular asset.101 The criteria for attachment are typically (a) that there is a valid security agreement (b) that the secured creditor has given value to the grantor and (c) that the grantor has rights in the collateral. Under this approach, therefore, a security interest could be created by a valid security agreement, but will not attach to any assets until an advance is made. In relation to any particular asset, a created security interest will not attach until the grantor obtains rights in the collateral (that is, when the grantor acquires it). On attachment, the security interest in the asset is valid as between the two parties to the agreement, but not, generally, as against third parties.102 The first approach is taken by the Philippines, Vietnam, South Korea, Brunei, Pakistan103 while the second approach is taken by Bangladesh.104 All reformed systems include the concept of making a security interest effective against third parties as a separate concept from creation, or creation and attachment. The methods for making a security interest effective against third parties will include, as the predominant method, registration, but may also include other methods such as the taking of possession. The terminology varies: the UNCITRAL Model Law uses the phrase ‘effective against third parties’ or ‘third party effectiveness’ while UCC Article 9 and the PPSAs use the word ‘perfection’. The latter term (and the verb ‘perfect’) is shorter and less cumbersome than the Model Law phrase, but needs explaining while the Model Law phrase is self-evident. The term ‘perfection’ is used in the Philippines, Brunei, Bangladesh and Pakistan, while the Vietnamese Civil Code refers to a registered security interest as ‘taking effect against third parties’105 and the SARFAESI Act in India provides specifically for the consequences of registration of a security interest, namely, that it provides public notice, gives priority over later registered interests and enables the security interest to be enforced.106 In this book, the use of the terms ‘third party effectiveness’ and ‘perfection’ is governed by the context: what needs to be appreciated is that in almost every case the two terms mean the same.

99 See South Korean Act on Security over Movable Property and Claims, Art 2(9). 100 See below. 101 See, eg Australian PPSA, s 17; New Zealand PPSA, s 40. It is usually possible for the parties to postpone the moment of attachment by agreement. 102 Attachment can give some very limited third party effect in that priority between two security interests neither of which has been made effective against third parties is governed by the date of attachment. See, eg Australian PPSA, s 55(2); New Zealand PPSA, s 66(c); Saskatchewan PPSA, s 35(1)(c). 103 See ch 18 IV B. 104 See ch 16 V D. 105 Vietnam Civil Code 2015, Art 297: see ch 14 IIB. 106 SARFAESI Act 2002, ss 26C and 26D: see ch 17 IV F. The South Korean legislation takes a similar approach: see South Korean Act on Security over Movable Property and Claims, Art 7.

Introduction 17 There can be variation in terms that are used in the context of registration. First, the information that is required to be submitted to the registry can be called a ‘notice’ (as it is under the UNCITRAL Model Law and Registry Provisions) or a ‘financing statement’ (the term used by the PPSAs). The term ‘notice’ is used in the Philippines legislation, while the term ‘financing statement’ is used in Brunei, Bangladesh and Pakistan. In India the term ‘particulars of transaction’ is used, while the Vietnamese Civil Code refers to registration of the security. Second, the act of registration is known as ‘filing’ in UCC Article 9 (which has given rise to the common term ‘notice filing’ to describe the type of registration system described in the modern principles), but the term ‘registration’ (and the verb ‘register’) is widely used, including in the UNCITRAL Model Law, the PPSAs and the legislation in the countries discussed in this book.

V. Asia: Variations between Countries The Asian countries discussed in this book107 are geographically located in South Asia (India, Pakistan and Bangladesh), East Asia (China, Taiwan, Japan and Korea) and South East Asia (Brunei, Indonesia, Philippines, Singapore, Thailand and Vietnam). These countries are characterised more by their diversity rather than their similarities.

A. Legal Culture The varying law reform experience in each of these countries can be explained partly by their differences in legal history and culture. Historically, India was part of the British Raj (the Crown rule in the Indian subcontinent), as were the physical territories now forming Pakistan and Bangladesh, prior to Pakistan’s partition from India and prior to the subsequent secession of Bangladesh from Pakistan. Singapore was part of a group of British colonies in South East Asia known as the Straits Settlements. Brunei, a close geographical neighbour of Singapore, although not officially a Crown colony, was a British protectorate. As a result of their historical links with England, these five countries, India, Pakistan, Bangladesh, Singapore and Brunei, have legal systems which are largely based on the English common law. In contrast, Japan, South Korea, China, Taiwan, Indonesia, the Philippines, Thailand and Vietnam have had more varied legal histories. The generalisation may be made that the legal systems of these eight countries are based broadly on, or are highly influenced by, the civil law tradition. Specific details vary for each country. For instance, the Philippines, which had historically been ruled by the Spanish for many years, later became subject to US rule in the early twentieth century. Indonesia was once a Dutch colony and Vietnam a French one. In a further variation from the common-civil law divide, China and Vietnam have socialist regimes. The religious composition of the countries may also influence their laws. For example, Islamic legal principles are relevant to differing degrees in selected areas of law (such as criminal or family law) and may apply either to the whole population or only to the Muslim community.

107 This refers to the twelve countries considered in the jurisdictional chapters and Brunei, which is discussed in ch 15 on secured transactions law reform in common law countries.

18 Louise Gullifer and Dora Neo

B. Economic Indicators The level of economic development in the countries varies considerably. Using the World Bank classification based on GNI per capita in 2020, five countries (Bangladesh, India, Pakistan, the Philippines and Vietnam) fall into in the lower middle income category, three countries (China, Indonesia and Thailand) fall into the upper middle income category, and five countries (Brunei, Japan, Korea, Singapore and Taiwan) fall into the high income category.108 There could be significant divergences in GNI within each category, particularly in the high income category, which has no upper limit.109 In terms of the relative size of the economies, based on World Bank 2019 figures,110 China was the largest economy with a GNI of USD 14.54 trillion followed next by Japan with a GNI of USD 5.26 trillion and India with a GNI of USD 2.91 trillion. The smallest economies were Vietnam with a GNI of USD 244 billion, and Brunei with a GNI of USD 13.96 billion. The COVID-19 pandemic in 2020 severely affected economic growth in Asia, as it did worldwide, and it is difficult to predict what the future will bring or which countries will weather the pandemic better than others. Taking 2019 annual GDP percentage growth rates as a rough indicator, Bangladesh (7.9%), Vietnam (7%) and China (6.1%) ranked amongst the fastest growing countries in the world, as compiled by the IMF.111 The Philippines and Indonesia, with growth rates of 5.9% and 5% respectively followed closely behind. GDP Growth rates in 2019 were lowest amongst the more mature economies with higher incomes such as Japan (0.7%), Singapore (0.7%) and Korea (2%). The services sector forms the largest component of GDP in most of these countries, with the highest percentages seen in Singapore and Japan, although the percentage of the labour force engaged in services vary, and are lowest in India, Pakistan and Bangladesh. Industrial production forms a significant part of GDP in many of the countries, with a varied range of products from textiles and metals to electronics and pharmaceuticals. China is the biggest manufacturing country in the world with the most comprehensive industrial system worldwide, with the largest output of many of the world’s industrial products.112 Japan is among the world’s most technologically advanced manufacturers of technologically advanced products such as motor vehicles, electronic machine tools. The highest component of Brunei’s GDP is made up of its industrial production, chief of which is related to petroleum, petroleum refining and liquefied natural gas. The agricultural sector is relatively small or insignificant in Singapore, Taiwan, Korea, Japan and Brunei. However, this sector is a significant component of GDP in the other countries, and it employs a particularly large proportion of the work force in India, Bangladesh, Pakistan and Vietnam.113 108 The World Bank classification is done according to GNI per capital as follows: low-income economies (USD 1,035 or less); lower-middle income economies (USD 1,035–USD 4,045); upper middle income economies (USD 4,046–USD 12,535) and high income economies (USD 12,536 or more). None of the 13 countries considered fall within the low-income category. See https://datahelpdesk.worldbank.org/knowledgebase/articles/906519-worldbank-country-and-lending-groups. 109 eg in the higher income category, World Bank statistics in 2019 for GNI per capita in US dollars are as follows: Brunei, USD 32,230; Korea, USD 33,720; Japan, USD 41,490; and Singapore, USD 59,590. 110 The information in this paragraph was sourced from World Bank data available online at https://data.worldbank.org/ indicator/NY.GNP.ATLS.CD?most_recent_value_desc=true&view=chart Note: the World Bank does not publish equivalent figures for Taiwan. 111 These countries were in the top 10% of the 189 IMF member countries. The information in this paragraph was sourced from IMF data available online at www.imf.org/external/datamapper/NGDP_RPCH@WEO/OEMDC/ADVEC/ WEOWORLD. 112 Ch 7 (China) I. 113 Unless otherwise stated, the information in this paragraph was sourced from the country studies in The World Factbook published by the CIA and available online at www.cia.gov/library/publications/the-world-factbook/.

Introduction 19

C. General Characteristics Amongst the countries considered in this book are the top two most populous countries in the world, China (1.38 billion) and India (1.36 billion).114 Indonesia (270.62 million), Pakistan (216.56 million), Bangladesh (163.04 million), Japan (126.26 million), Philippines (108.11 million), Vietnam (96.46 million) and Thailand (69.62 million) also rank amongst the top 20 most populous countries in the world, while Korea (23.58 million), Singapore (5.7 million) and Brunei (433,000) are well spread out much lower down the scale. The land masses of these countries range from a sprawling 9.32641 million square kilometers (China) to a mere 709 square kilometres (Singapore). The main language used in each country is different, with a few exceptions: Mandarin Chinese in China and Taiwan; Malay in Brunei and Bahasa Indonesia (a standardised version of Malay) in Indonesia; Korean in Korea; Japanese in Japan; Thai in Thailand; Filipino in the Philippines; and Vietnamese in Vietnam. Many different overlapping languages are used in the Indian subcontinent, but the official ones are Hindi in India, Urdu in Pakistan and Bengali in Bangladesh. English is a joint official language in the Philippines, India, Pakistan, and Singapore. In Singapore, in addition to English, there are three other official languages: Mandarin Chinese, Malay and Tamil. This linguistic diversity, together with the diversity in legal culture, could have implications for the ease of intra-regional legal transplant and collaboration in this region. The influence of Islamic principles to the legal systems of some the countries discussed in this book was mentioned earlier. Islam is the official religion in Pakistan, Bangladesh and Brunei. Indonesia, a secular state with six official religions,115 has a high majority of Muslims in its population. Singapore, India and the Philippines also have segments of their population who are Muslim. Other particularly prevalent religions include Hinduism in India, Buddhism in Thailand and Christianity in the Philippines.

D. Secured Transactions Law Reform There has been increasing awareness amongst the countries in Asia regarding the desirability of reforming secured transactions law. Of the countries covered in this book, Pakistan, Brunei, Vietnam116 and the Philippines and have each enacted unitary legislation that is generally in accordance with the modern principles.117 There is also proposed unitary legislation in Bangladesh which is pending approval.118 Amongst the other countries, China, Korea, Thailand and India119 have instituted important partial reforms (over the past twenty years and up to very recently) which have moved their law closer in varying degrees to the ideals embodied in the

114 The information in this paragraph was sourced from World Bank data available online at https://databank.worldbank. org/data/download/POP.pdf. 115 www.indonesia-investments.com/culture/religion/item69. 116 While the Vietnamese law aligns well with the modern principles and is contained in one source (the 2015 Civil Code) it does not entirely follow a functional/unitary approach, since there are nine different security devices in the Code, each with their own rules: see ch 14 (Vietnam) II A (iv). 117 The models used and year of reform are as follows: Pakistan (UNCITRAL Legislative Guide, 2016); Brunei (New Zealand PPSA, 2016); Vietnam (partly UNCITRAL Legislative Guide, 2017 (in the 2105 Civil Code)); and the Philippines (UNCITRAL Model Law, 2018). 118 This is based on the Ontario and Saskatchewan PPSAs of the Canadian Provinces with influences from the UNCITRAL Model Law. 119 Indian law, in particular, aligns well with the modern principles in many respects: see ch 17 V.

20 Louise Gullifer and Dora Neo modern principles.120 Further behind on the law reform journey are Indonesia, Taiwan and Japan, which have reformed specific aspects of their secured transactions law.121 Singapore stands out in not having had any particular reform agenda in relation to secured transactions law, apart from a significant development in 2003 where it converted its paper-based company charges registry to an online one as part of the government’s nationwide e-services development plan.122 The example of Singapore illustrates that reform as a process must be distinguished from the question of the extent to which the substance of the law reflects the modern principles. How much reform is needed will depend on how far the law of a particular jurisdiction diverges from the modern principles. Because Singapore’s secured transactions law has historically conformed to quite a number of the modern principles, this starting point means that its law may display more of the modern principles than the law of another jurisdiction which may have been more active in its reform efforts. Ongoing law reform is also taking place in other Asian countries not considered in the jurisdictional chapters of this book. One example is Malaysia, which is considering a new secured transactions legal framework based broadly on policies from the New Zealand and the Canadian (particularly the provinces of Ontario and Saskatchewan) PPSAs, adapted to the local situation, for instance, by the inclusion of security interests arising from Shariah transactions. This new legal framework is at the proposal stage and the policies are still being refined. Other law developments are also discussed in chapter 5, which gives an overview of the challenges of secured transactions law reform in East Asia.

VI. The Contribution of the Book This book makes a number of contributions to the literature in this area. First, it provides a comparative account of the current state of secured transactions law in selected countries in Asia. This account is not merely descriptive: it comprises a critical analysis, including identification of problems with the existing law, reflection on the reasons for those problems and normative discussion as to how those problems can be overcome. The modern principles123 are used as a general benchmark for the evaluation of the law in those countries, although, as perhaps might be expected, a country’s enthusiasm to reform has a much to do with the state of its economy as to whether its law conforms well to the modern principles. Second, the book provides an analysis of secured transactions law at a number of levels. The framework used is generally that used in the UNCITRAL Model Law, and many reforming statutes:124 the law relating to creation, perfection, priority and enforcement of security interests.125 This framework is used throughout the chapters, to a greater or lesser extent. This enables the policy or other reasons for various approaches to each issue to be identified and compared. In many cases, a balance needs to be struck (for example, between ex ante certainty and a high level of efficiency in the creation of a security interest126), and the reasons for that

120 See III B (ii) above. 121 See III B (ii) and (iii) above. 122 See ch 19 II C (v). The reform of the system of company charges has been considered as part of the reform of the Companies Act, but minimal changes have been made: ch 19 VI B. 123 See III C (i) above. 124 See also IV B above. 125 See III A above for a fuller description of the framework. 126 See ch 6 IV B.

Introduction 21 balance being struck in different places in different jurisdictions is illuminating. The reader will be left with a deep understanding of the purposes of the different aspects of secured transactions law, and an understanding of how various ways of achieving those purposes can be adopted and can, in particular contexts, effectively result in the facilitation of secured transactions, and protection of the parties thereto. Third, the book engages with the debate about legal transplant.127 It examines differences in legal culture, and how these affect the development of secured transactions law, including its reform, in Asia. The two chapters on secured transactions law reform in civil128 and common law129 jurisdictions set the stage for this analysis, by identifying the areas in which reform would actually require change, and examining how that change can be effected in order to achieve a modern law while respecting a country’s legal tradition.130 Moreover, one aspect of the debate on legal transplant is identification of measures which can make a legal transplant more successful, such as stakeholder involvement and capacity building. The book not only examines the content of the law, reformed or otherwise, but reflects on the reform process itself. The ‘reform process’ is widely construed, including the arguments for and against reform, the impediments to reform and steps to facilitate reform, the steps to be taken within the law reform process, and the many other necessary actions outside that process, from the establishment of online registries to the development of secondary markets for collateral. Some of the authors of chapters in the book have been very closely involved in this process in one or more jurisdictions, and have a deep understanding of what is important, and what works and what does not.

127 See ch 2 III. 128 Ch 6. 129 Ch 15. 130 This theme is also discussed overtly in some of the chapters, eg ch 2 IV A (i)(b); more generally, see ch 13 (Thailand) IV and VI (civil law), and ch 19 (Singapore) (common law).

22

part i General

24

2 Lost in Transplantation? Modern Principles of Secured Transactions Law as Legal Transplants CHARLES W MOONEY, JR

I. Introduction and Background A global consensus is emerging as to a set of general principles to which secured transactions law for personal property should adhere. I refer to these as the Modern Principles of Secured Transactions Law (or Modern Principles).1 The sources of the Modern Principles include Article 9 of the Uniform Commercial Code (UCC Article 9)2 and its many progeny, including the 2016 United Nations Commission for International Trade Law Model Law on Secured Transactions3 (UNCITRAL Model Law) and its antecedent UNCITRAL texts.4 This chapter seeks to situate the Modern Principles into the more general sphere of the transplantation of law from one system to another. In particular, the chapter considers the adoption of the Modern Principles by States through the lens of the late Alan Watson’s pathbreaking book, Legal Transplants.5 Insights provided by Legal Transplants and its various adherents and critics offer an interesting and useful heuristic for examining the legal transplantation of the Modern Principles.6 The process of enactment (or the failure to enact) Modern Principles-based laws plays a crucial role in transplantation. That process must negotiate various political obstacles and incentives, such as the positions of organisations and individuals with entrenched interests,

1 For an overview of the Modern Principles and their principal sources, see part II below. 2 UCC, Art 9 (Secured Transactions) (American Law Institute and Uniform Law Commission 2017). 3 UNCITRAL, ‘Model Law on Secured Transactions’ (2016) (UNCITRAL Model Law), www.uncitral.org/pdf/english/ texts/security/ML_ST_E_ebook.pdf. 4 The Model Law was inspired by its predecessor, UNCITRAL Legislative Guide on Secured Transactions (2007), www.uncitral.org/pdf/english/texts/security-lg/e/09-82670_Ebook-Guide_09-04-10English.pdf (UNCITRAL Legislative Guide). In July 2017 UNCITRAL approved the UNCITRAL Model Law on Secured Transactions Guide to Enactment, www.uncitral.org/pdf/english/texts/security/MLST_Guide_to_enactment_E.pdf (UNCITRAL GTE). 5 A Watson, Legal Transplants: An Approach to Comparative Law, 2nd edn (Athens, University of Georgia Press, 1993). 6 For an enlightening and important study that takes a different approach to the study of transplantation of the principles embedded in modern secured transactions laws, see RJ Wood, ‘Identifying Borrowed Sources in Secured Transactions Law Reform’ (unpublished manuscript on file with author). Wood undertakes to ‘fingerprint’ personal property security legislation in jurisdictions around the globe to determine ‘the extent to which the jurisdiction has borrowed from each of … three templates’ – UCC, Art 9, the Canada/New Zealand model, and the Model Law. Professor Wood’s illuminating study will be a mandatory resource for the future examination and understanding of secured transactions law reforms.

26 Charles W Mooney, Jr governmental encouragement and discouragement, attitudes of legal elites, and sometimes the fortuitous intervention of particular individuals who champion (or oppose) the reforms. Moreover, an important focus for any analysis of transplantation of the Modern Principles is whether and to what extent laws embracing the Modern Principles, even if enacted, are actually used and accepted. The same factors that have an impact on the success or failure of the enactment process also may influence transplantation through the post-enactment use and acceptance of such laws. In a recent article I advocate studies that would take ‘a more systematic approach to the use – and memorialisation in the literature – of experiences and lessons learned from work of individuals and organisations ‘on the ground’ in the process of implementing [secured transactions law and insolvency law] reforms’.7 That article reaffirms earlier work that articulated the significant impact of insolvency law on the behaviour of market participants outside actual or anticipated insolvency proceedings and the important role of insolvency law (and the actual use of insolvency proceedings in a given market) on the effectiveness of secured transactions laws.8 It also elaborates on the crucial importance of private international law rules (ie, choice-of-law rules) for secured transactions. And it argues that such rules are vital for the operation of secured transactions in the business credit markets and should be an integral part of the adoption and implementation of the Modern Principles. While much of the discussion here may be applicable to consumer credit (ie, credit extended to natural persons for personal, family, or household purposes), the focus here is on the Modern Principles in the context of business credit.9 The studies that I propose derive from some hypotheses. One is that incorporation of the Modern Principles into a State’s legal regime is a necessary – but not a sufficient – condition for a successful transplantation. Rephrasing this hypotheses in a more familiar vernacular: putting the Modern Principles ‘on the books’ will have little or no impact if the system is not actually used. Another is that successful transplantation of the Modern Principles into a given State’s laws may depend on (sometimes sui generis) adaptations of and adjustments to the legal environment and business credit markets of the adopting State as well as modifications of the substance of the Modern Principles themselves. The adoption of the Modern Principles need not be seen as an ‘ultimate’ goal. Rather, it is adequate access to credit that holds the most promise for enhancing social welfare. But access to credit does not necessarily depend on a market for secured credit (ie, a market for credit which is conditional on the effective provision of collateral) or the adoption of the Modern Principles. So an important goal should be not merely the adoption of the Modern Principles but the development and support for a robust market for credit and an assessment of whether and how adoption of the Modern Principles can facilitate such a market. For example, if there exists a robust and accessible market for credit without collateral (or without the Modern Principles), then imposition of the Modern Principle legal regime may not have major, transformative effects on credit markets. On the other hand, adoption of Modern Principles-based laws may offer substantial benefits aside from such material market effects.10

7 See CW Mooney Jr, ‘Insolvency Law as Credit Enhancement and Enforcement Mechanism: A Closer Look at Global Modernization of Secured Transactions Laws’ (2018) 27 Norton Journal of Bankruptcy Law and Practice 673. 8 CW Mooney Jr, ‘Insolvency Law as Credit Enhancement: Insolvency-Related Provisions of the Cape Town Convention and the Aircraft Equipment Protocol’ (2004) 13 International Insolvency Review 27, 34–39. 9 As mentioned in ch 1 II, business credit is the focus of this book. 10 See V below.

Modern Principles of Secured Transactions Law as Legal Transplants 27 These qualifications notwithstanding, the ‘overall objective’ of the Modern Principles, as reflected by the Model Law and related UNCITRAL texts, ‘is to increase the availability and decrease the cost of credit by providing for an effective and efficient secured transactions law’.11 The same can be said of the Cape Town Convention (CTC)12 and its Protocols.13 Several studies and overwhelming empirical evidence confirm that the CTC and Aircraft Protocol have fulfilled this objective.14 While the Aircraft Protocol may be sui generis in its strikingly demonstrable effects, the adoption of the UNCITRAL texts and the ongoing Modern Principles-influenced global reforms demonstrate that at least an important segment of expert opinion subscribes to the general effectiveness of Modern Principles-based laws for these purposes. Consequently, this chapter proceeds on the general premise that adoption of the Modern Principles promotes social welfare as a general matter and is a worthy goal to be pursued. But the adoption of the Modern Principles does not necessarily contemplate the enactment of any particular statutory text – whether that might be based on Article 9, the Model Law, or any other model or template. Following this Introduction, part II outlines the substance of the Modern Principles and their antecedents. Part III then summarises relevant aspects of Watson’s Legal Transplants and the positions of some significant adherents and critics of his theses and conclusions. It explains the potential relevance and utility of Watson’s historical perspectives for the practical context of transplantation of the Modern Principles. With this background, part IV considers the transplantation of the Modern Principles from several of the most important perspectives, including the role of legal elites and legal culture, governmental and regulatory influences, opposition of entrenched interests, the role of insolvency law and proceedings, registration in public registries, descriptions of collateral in the context of registration and creation of security interests, and the market for business credit. In particular, it addresses various impediments to the adoption of the Modern Principles by States, obstacles to the use and acceptance of Modern Principles-based laws in the markets for business credit, and hurdles for both adoption and use. Part V explains that the Modern Principles offer potential benefits other than the measurable expansion of access to credit and the lowering of the cost of credit, such as coherence, certainty, and ease of application and use. This is an important consideration that generally has been overlooked or underappreciated. Part VI then concludes the chapter.

11 UNCITRAL GTE (n 4) II, para 4. 12 Convention on International Interests in Mobile Equipment 2001, 2307 UNTS 285 (CTC). 13 Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment 2001, 2367 UNTS 517 (Aircraft Protocol). Since entering into force on March 1, 2006, the CTC and Aircraft Protocol have been adopted by 77 contracting States and one regional economic integration organisation (European Union) UNIDROIT, Status of the Convention on International Interests in Mobile Equipment, www.unidroit.org/status-2001capetown). The Protocols covering railway rolling stock and space assets are not yet in force. These are the Luxembourg Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Railway Rolling Stock, 2007, 46 ILM 662; Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Space Assets (adopted 9 March 2012). A fourth Protocol covering mining, agricultural, and construction equipment has recently been adopted. See macprotocol.info; UNIDROIT, ‘Report’ (November 2017), www.unidroit.org/english/ documents/2017/study72k/cge02/s-72k-cge02-report-e.pdf; R Goode, Official Commentary to the Convention on International Interests in Mobile Equipment and Protocol Thereto on Matters Specific to Aircraft Equipment, 3rd edn (Rome, UNIDROIT, 2013) para 2.1 (‘A sound, internationally adopted legal regime for security, title-retention and leasing interests will encourage the provision of finance and leasing and reduce its cost’). 14 CW Mooney Jr, ‘The Cape Town Convention’s Improbable-but-Possible Progeny Part Two: Bilateral Investment Treaty-Like Enforcement Mechanism’ (2015) 55 Virginia Journal of International Law 451, 454–58 (summarising economic studies and CTC Discount, under which debtors located in CTC/Aircraft Protocol jurisdictions can receive substantial discounts on costs of financing).

28 Charles W Mooney, Jr

II. The Modern Principles of Secured Transactions Law The UNCITRAL Model Law epitomises the Modern Principles. It is a relatively direct descendant of the Legislative Guide,15 UCC Article 916 and the various Personal Property Security Acts adopted by Canadian Provinces.17 The Modern Principles are reflected as well in other model laws,18 in other secured transactions laws enacted by several States during recent years,19 and in laws that are currently being considered by other States.20 The Modern Principles also are embodied in the enormously successful CTC and Aircraft Protocol as well as the other CTC Protocols.21 There is no definitive or ‘official’ version of the Modern Principles. However, the Legislative Guide describes its ‘fundamental legal policies’.22 The European Bank for Reconstruction and Development (EBRD) and the World Bank Group (WBG) each has published their own synthesised and distilled versions as well.23 Based on the available statutory texts mentioned above as well as the Legislative Guide, WBG, and EBRD principles, I propose to include in the Modern Principles the following features:24 (i) public notice as a general condition for third-party effectiveness (perfection), including (x) a grantor identifier-based registry for registration of notices of security interests, and (y) possession of tangible assets; 15 UNCITRAL Legislative Guide (n 4). 16 By any measure UCC, Art 9 has been an enormously successful legislative achievement. From its original promulgation in 1954 through several major revisions it has been adopted in all United States jurisdictions in substantially uniform fashion. Significantly, Art 9’s principles have been emulated and adopted outside of the United States. This is evidenced by the influence of these principles on the laws actually adopted in other jurisdictions and on international harmonisation efforts. 17 See, eg, Ontario Personal Property Security Act, RSO 1990, c P-10. 18 See, eg, EBRD, ‘Model Law on Secured Transactions’ (2004), www.ebrd.com/news/publications/guides/model-lawon-secured-transactions.html; Organization of American States, ‘Model Inter-American Law on Secured Transactions’, www.oas.org/dil/Model_Law_on_Secured_Transactions.pdf. 19 Eg, Colombia, Ley No 1676 del 20 de Agosto de 2014, Por la Cual se Promueve el Acceso al Crédito y se Dictan Normas sobre Garantías Mobiliarias. See Mayer Brown, ‘Colombia’s New Law on Security Interest over Movable Assets Comes into Effect’ (28 April 2014), www.mayerbrown.com/files/Publication/4868229b-de56-4b53-8669-a55fcfdd728a/ Presentation/PublicationAttachment/56e374b9-fab3-467f-b3b1-aa1d67beafbb/Update_New_Regulations_Moveable_ Assets_Colombia_0414.pdf; Jordan, Pakistan; e-mail from Murat Sultanov, Secured Transactions Specialist, World Bank Group, to CW Mooney Jr (18 June 2018, 03:01 EDT) (on file with author). In Africa, reforms that have taken place based completely, or near completely, on the Modern Principles include those in Kenya, Liberia, Malawi, Nigeria, Zambia, Rwanda and Zimbabwe. Reform which partially reflects the Modern Principles has taken place in Ghana, Sierra Leone, Burundi and Ethiopia: see M Dubovec and L Gullifer, Secured Transactions Law Reform in Africa (Oxford, Hart Publishing, 2019) ch 2. In Asia, Brunei (ch 15) and the Philippines (ch 10) have introduced reforms based on the Modern Principles, while other reforms, eg India (ch 17), partially reflect them (for analysis, see ch 17 (India), V). 20 These states currently include, eg, Bahrain, Bangladesh (see ch 16), Chile, Paraguay, Sri Lanka, St Lucia, and Tunisia. Email from Andres F Martinez, Senior Financial Sector Specialist, World Bank Group, to CW Mooney Jr (July 1, 2017, 08:34 EDT) (on file with author); email from Murat Sultanov, Secured Transactions Specialist, World Bank Group, to CW Mooney Jr (July 1, 2017, 07:41 EDT) (on file with author); email from Murat Sultanov, Secured Transactions Specialist, World Bank Group, to CW Mooney Jr (18 June 2018, 03:01 EDT) (on file with author). 21 Note, however, that these instruments adopt an object-based registry rather than a grantor identifier-based registry, as contemplated by the Modern Principles. See, eg CTC, Art 18 (registration requirements). 22 UNCITRAL Legislative Guide (n 4) 22–26. 23 EBRD, ‘Core Principles for a Secured Transactions Law’, www.ebrd.com/what-we-do/legal-reform/access-to-finance/ transactions.html (EBRD Principles); WBG, ‘Principles for Effective Insolvency and Creditor/Debtor Regimes’, www. worldbank.org/en/topic/financialsector/brief/the-world-bank-principles-for-effective-insolvency-and-creditor-rights (WBG Principles). Professor Wood also has summarised a set of ‘operational principles’ that ‘provide the foundational building blocks’ of secured transactions law reform, see Wood (n 6) 7. 24 All of these principles are discussed and explained in great detail elsewhere. See, eg UNCITRAL Legislative Guide (n 4).

Modern Principles of Secured Transactions Law as Legal Transplants 29 (ii) clear and easy to achieve methods for creation of security interests; (iii) clear and predictable priority rules, including the general effectiveness of security interests in insolvency proceedings and priority of security interests over other interests; (iv) provision for effective enforcement of security interests following a debtor’s default, including extrajudicial enforcement; (v) availability of all types of personal property as collateral, including future assets securing future obligations; (vi) free assignability of receivables; (vii) comprehensive coverage of all forms of security devices; (viii) extension of security interests to the proceeds of collateral; (ix) the general acceptance of freedom of contract for inter-party relations; (x) general equality of treatment of creditors providing acquisition financing; (xi) clear private international law (choice-of-law) rules. Other important principles embraced by the Model Law and other modern iterations of secured transactions laws are implicit in and follow as a part of the policy penumbra of these features.25

III. Legal Transplantation: Alan Watson’s Legal Transplants and its Relevance for the Modern Principles The analysis offered here draws on Watson’s Legal Transplants not as a ‘how to’ for transplanting law – which certainly was not Watson’s aspiration – but as a heuristic. The discussion aspires to offer a useful and accessible means of exploring legal transplantation in general and the transplantation of the Modern Principles in particular. Given this chapter’s premise that the successful transplantation of the Modern Principles is on balance beneficial, Watson provides insights on both the practical and theoretical planes. It is important to bear in mind that a successful transplant would require not only the incorporation of the Modern Principles into the local law, typically by legislation, but the actual use and application of Modern Principles-based law in transactional settings. In particular, Watson’s work provides some guidance for areas of inquiry in future investigations of law reform processes. Part IV considers these insights in addressing the challenges, successes, and failures of transplanting the most important elements of the Modern Principles. Watson views comparative law as the ‘study of the relationship, above all the historical relationship, between legal systems or between rules of more than one system’.26 But the primary focus here is not the dissection of the discipline of comparative law but rather the process of transplantation of law to (ie the borrowing of law by) a State. Watson analyses the historical instances of legal transplants throughout the world, from ancient Near Eastern provisions regarding a goring ox27 to Roman law in Scotland28 and Holland29 to English law in New Zealand.30 25 I have not proposed to include as Modern Principles increasing access to credit and lowering the cost of credit, although these are included in both the EBRD and WBG Principles. See EBRD, Principle 1; WBG, Principle A3. Although these goals and aspirations of the Modern Principles certainly are important, adoption of the Modern Principles is not the exclusive means for achieving them. Moreover, the Modern Principles may serve other purposes as well. See part V below. 26 Watson (n 5) 9. 27 ibid 22. 28 ibid 44. 29 ibid 57. 30 ibid 74.

30 Charles W Mooney, Jr Watson makes the case – and makes it convincingly – that transplanting individual rules of law or larger parts of legal systems is extremely common, and that most changes in legal systems are the result of borrowing.31 Watson contends that transplanting legal rules is socially easy – even with opposition from the legal establishment or the legislature.32 ‘[I]t remains true that legal rules move easily and are accepted into the system without too great difficulty … even when the rules come from a very different kind of system’.33 He concludes that legal rules are not usually ‘peculiarly devised for the particular society in which they … operate and also that this is not a matter for great concern’.34 Watson also emphasises the overwhelming importance of authority for transplantation and for law generally.35 In examining a legal system’s receipt of a transplant Watson encourages attention to how a system diverges from other, donor systems, not to the overall system, in order to determine what led a State to voluntarily seek and adopt the transplant.36 Significantly, Watson questions the extent to which adjustments made by recipient States actually conform law to fit their particular situations, arguing that the more important point is ‘the psychological value of having [a State’s] … own legal system’.37 It is not surprising that the book has been widely critiqued. Perhaps the most controversial aspects of Watson’s theories are his conclusion that transplanting laws is socially easy and his failure to consider social variables surrounding legal transplants.38 Sir Otto Kahn-Freund in particular criticised Watson’s lack of concern with the society that generated the transplanted law.39 By only presenting individual instances of legal transplants into recipient countries, Watson may not have captured the full picture.40 But Watson emphasised that it was primarily the idea of a foreign law that is being transplanted.41 Many scholars agree that for a legal transplant to ‘fit in’ with the importing system, that system will need to be adaptive and receptive to different socioeconomic conditions, which requires taking notice of social, economic, and cultural conditions in both the importing and donating country.42 31 ibid 96. 32 ibid 95. 33 ibid 95–96. He concludes that ‘it would be a relatively easy task to frame a basic code of private law to operate throughout, with each nation being left free to modify for itself any part it found not to its liking’. ibid 100–01. 34 ibid 96. 35 ibid. In support, Watson argues that reception is possible and easy even when the receiving society is less materially and culturally advanced, and that foreign law may be influential even when ‘totally misunderstood’. ibid 99. 36 ibid 97. 37 ibid 101. 38 ibid, discussing R Seidman, ‘Book Review’ (1975) 55 Boston University Law Review 682, 682–83. 39 O Kahn-Freund, ‘On Uses and Misuses of Comparative Law’ (1974) 37 MLR 1. Kahn-Freund strongly disagreed with Watson’s conclusions about the ease of transplanting laws, and claimed that borrowing law required understanding of the system from which the rules were being borrowed: ibid. See also J Cairns, ‘Watson, Walton, and the History of Legal Transplants’ (2013) 41 Georgia Journal of International and Comparative Law 637, 644–45. 40 Watson, among other comparative law scholars, ‘missed an equally important phenomenon – the impact of the process on the “donor” country’. F Foster, ‘American Trust Law in a Chinese Mirror’ (2010) 94 Minnesota Law Review 602, 607. 41 In A Watson, ‘Legal Transplants and Law Reform’ (1976) 92 LQR 79, Watson responded to Kahn-Freund: ‘What, in my opinion, the law reformer should be after in looking at foreign systems was an idea which could be transformed into part of the law of his country. For this a systematic knowledge of the law or political structure of the donor system was not necessary, though a law reformer with such knowledge would be more efficient. Successful borrowing could be achieved even when nothing was known of the political, social or economic context of the foreign law.’ 42 W Shi, ‘Globalization and Indigenization: Legal Transplant of a Universal TRIPS Regime in a Multicultural World’ (2010) 47 American Business Law Journal 455, 456. Inga Markovits has conceded that Watson is correct about the ease of legal transplants, but only in the case of self-executing law reforms that do not need popular approval or compliance to gain effect. I Markovits, ‘Exporting Law Reform – But Will It Travel?’ (2004) 37 Cornell International Law Journal 95, 98. Generally, however, in her view these are not the type of laws in question, and most legal reforms require cooperation from the citizenry and cultural harmony between the donor and recipient to become effective. ibid 99.

Modern Principles of Secured Transactions Law as Legal Transplants 31 Criticisms notwithstanding, Legal Transplants continues to have ‘legs’ in the world of comparative law. Legal Transplants has been described as a ‘landmark book’ and a ‘“seminal” text’ of comparative law.43 For example, Meryl Dean has drawn upon Watson’s transplant theory but with refinements in her study of the jury trial in Japan.44 In another refinement, Hideki Kanda and Curtis Milhaupt, in their study of the transplantation of the corporate director’s duty of loyalty from US law to Japanese law, argue that the success of a legal transplant turns on whether there is a ‘“fit” between the imported rule and the host environment’.45 The goal here is not a critique of Watson’s theory and methodology. It is instead the use of Legal Transplants as a heuristic and metaphor for assessing the transplantation of the Modern Principles. For example, Watson compares law to technology, offering the wheel as a useful metaphor.46

IV. Transplantation (or not) of the Modern Principles in Context It seems abundantly clear that the Modern Principles can be successfully transplanted. Adoptions in Canada and more recently in New Zealand and Australia, adoptions and introductions in other States, and the acceptance of the Modern Principles in various international harmonisation projects (the UNCITRAL Legislative Guide and Model Law being the principle examples) and their ongoing influence on global reform efforts attest to this conclusion. But what of the situations in which the Modern Principles have not been successfully transplanted notwithstanding efforts to do so? And what of the situations in which substantial secured transactions law reforms have been made but which do not follow the Modern Principles? And what of the situations in which no meaningful attempts have been made to reform secured transactions law, much less to embrace the Modern Principles? This part explores some more and less successful aspects of the transplantation of the Modern Principles. In considering secured transactions law reforms it may be useful to imagine Watson’s ‘wheel’ metaphor in considering whether the Modern Principles offer a ‘fit’ for a recipient (or would-be recipient) State and in the assessment of local adaptations.47

43 Cairns (n 39) 641–42. 44 M Dean, ‘Legal Transplants and Jury Trial in Japan’ (2011) 31 Legal Studies 570. 45 H Kanda and C Milhaupt, ‘Re-examining Legal Transplants: The Director’s Fiduciary Duty in Japanese Corporate Law’ (2004) 51 American Journal of Comparative Law 887, 891. The authors view ‘success’ in this context as the ‘use of the imported legal rule in the same way that it is used in the home country, subject to adaptations to local conditions’. ibid 890. ‘[F]ailure’ in their view ‘occurs when the imported rule is ignored by relevant actors in the host country, or the application and enforcement of the rule lead to unintended consequences’. ibid. They explain: ‘“Fit” might be thought of as having two components – micro and macro. Micro-fit is how well the imported rule complements the preexisting legal infrastructure in the host country. Macro-fit is how well the imported rule complements the preexisting institutions of the political economy in the host country’. ibid 891. 46 In Watson (n 5) 100, he explained: ‘[L]aw like technology is very much the fruit of human experience. Just as very few people have thought of the wheel yet once invented its advantages can be seen and the wheel used by many, so important legal rules are invented by a few people or nations, and once invented their value can readily be appreciated, and the rules themselves adopted for the needs of many nations. It might be helpful to consider adaptations of the Modern Principles in light of examples of possible positive and negative adaptations of the wheel. Positive examples are: rubber tires (for smoothing out bumps), ball bearings (for relatively frictionless wheel rotation), and front-wheel steering mechanisms (for steering through easy, rounded turns). Negative adaptations might include: substitution of a flat, sleigh-like skid (fine perhaps for ice or snow, but difficult for sand, rocks, or other rough surfaces), square or octagon wheels (possible to rotate, but bumpy and requiring much more power than round versions, and a log- or tube-shaped single wheel instead of two opposite-side wheels (rotation is adequate but heavy and involves much friction).’ 47 See text at n 46 above.

32 Charles W Mooney, Jr For example, did a State ‘get’ the ‘idea’ of the Modern Principles to be transplanted? And even if local adjustments are understandable from political and economic perspectives, are the local adjustments and the justifications for the adjustments coherent? The discussion draws in part on the country-specific chapters in this volume. It also is inspired and informed in by an ongoing research project that I am currently undertaking with two Japanese scholars.48 The project consists of a qualitative empirical study of business credit in Japan – the Japanese Business Credit Project (or JBCP) – involving interviews of representatives of Japanese financial institutions, governmental bodies, and businesses as well as legal professionals such as practitioners and academics. Our goal is an assessment of Japanese markets for private business credit, including the Japanese laws that govern secured transactions in tangible movables (such as a firm’s inventory or business equipment) and claims (such as a firm’s accounts receivable) to secure extensions of business credit. Among other aspects of the Japanese business credit market, the study investigates underlying causes of Japan’s failure to embrace Modern Principles. This chapter also draws insight from invitational conferences on the coordination of global reforms of secured transactions laws held in February 2017 and October 2018.49 Those conferences brought together individuals representing many of the most important organisations that work on reforms of secured transactions laws and insolvency laws. During the conferences several themes emerged. One overarching theme was that enactment by a State of statutory reforms is insufficient of itself for successful implementation of a modern secured transactions law. Another was that global reform efforts would benefit greatly from increased coordination among the various organisations involved with that work. Examples of coordination failures abounded. Several problems associated with implementation of reforms were discussed. For example, some States have received conflicting advice and have enacted secured transactions laws that are not sufficiently compatible with newly adopted insolvency laws. Some advisors present States with very simple, streamlined versions of secured transactions laws that others consider hopelessly incomplete. Other advisors favour more complete statutory approaches that some consider unnecessarily complex. A clear consensus emerged that an important but enormously challenging obstacle to reform is the need for capacity building – stimulation of the capacities of prospective debtors and creditors to usefully and profitably employ secured transactions law reforms. This would include steps such as consultations with and education of the various stakeholders affected by secured transactions laws as well as cultural shifts in relevant attitudes and social norms.50 Of course, the foregoing offers only a taste of the discussions. But a common thread appears to be that capacity building in various forms, including fundamental and structural changes in characteristics of credit markets and cultural and legal traditions and norms, are necessary conditions for successful implementation of modern secured transactions laws. Enactment of statutory text, alone, often may be a necessary but insufficient step.

48 My co-investigators are Megumi Hara (Professor of Law, Gakushuin University Law School) and Kumiko Koens (Professor, Yamagata University Faculty of Literature and Social Sciences, Department of Public Policy and Social Studies). 49 The 2017 Coordination Conference was held on 9–10 February 2017, at the University of Pennsylvania Law School, Philadelphia, PA. It was co-sponsored by the International Insolvency Institute (III), the National Law Center for Inter-American Free Trade (now, Kozolchyk National Law Center (NatLaw)), and the Organization for the Harmonization of Business Law in Africa. The 2018 Coordination Conference was held in Madrid, 16–17 October 2018, co-sponsored by the III, NatLaw, and Universidad Carlos III de Madrid. 50 See, eg N Cohen, ‘Capacity Building as a Key Determinant of Success in Secured Transactions Reform’, www.uncitral.org/pdf/english/colloquia/4thSecTrans/Presentations/2ContGonST2/COHEN_Colloquium_ Presentation.pdf.

Modern Principles of Secured Transactions Law as Legal Transplants 33 One theme of this chapter is to advocate for further and more rigorous empirical studies of secured transactions laws reforms. It makes no claim to have developed a definitive set of conclusions about the transplantation of the Modern Principles. But it does aspire instead to offer some useful guidance for the development of further investigation. The following discussion in Subpart A addresses several challenges and obstacles to transplantation of law in general and of the Modern Principles in particular. These are impediments to the adoption of the Modern principles, to their effective use and implementation even if adopted, or to both their adoption and use. Subpart B then turns to several components of the Modern Principles. It addresses the impact and role of the various obstacles to transplantation on these aspects of the Modern Principles. Drawing on part III, Subpart C offers a ‘Watsonesque’ perspective on transplantation of the Modern Principles.

A. Selected Challenges and Obstacles (i) Impediments to Adoption of Modern Principles (a) The Fallacy of Expertise Before focusing on a taxonomy of more specific obstacles to the adoption of the Modern Principles and causes of relevant adjustments and deviations, it is useful to reflect on an overarching impediment. I refer to this factor as the ‘Fallacy of Expertise’. It is based on an aggregation of anecdotal observations and experiences over several decades of involvement with commercial law reform efforts. It may be stated as a simple syllogism relating to a proposal for a reform of legal rules from the perspective of a person (below, ‘I’) occupying a position of formal or informal influence and whose views are respected in the law reform process: (i) I exercise my expertise competently to recognise the need to improve the law and to propose any beneficial law reforms. (ii) I did not think of the proposed law reform. (iii) Therefore, the proposed law reform is not a good idea and should not be adopted. The problem with this silly little syllogism, of course, is that its first predicate incorporates the term ‘competently’ – not ‘perfectly’. It is all too rare an event for a relevant expert to respond to a proposal – no matter how sound – with something like: ‘By golly, why didn’t I think of that? What a great idea!’ Of course, no one actually ‘admits’ reliance on the Fallacy. Moreover, I have no doubt that the Fallacy may be most influential on the behaviour of those who have no subjective consciousness of its operation and who, in the utmost good faith, rely on ‘objective’ and ‘rational’ argumentation, reasoning, and evidence.51 But most readers will easily recognise the Fallacy when they see it and appreciate its operative role in the process. (b) Legal Elites, Legal Culture and Legal Concepts In the realm of ‘technical’ aspects of private law doctrine – of which the Modern Principles would generally be considered a part – experts among the legal elites often are the most influential 51 For example, consider Eric Berne’s metaphor in the context of script analysis of human behaviour: ‘[M]ost people spend their time sitting in front of a player piano going like this with their fingers and saying, “How do you like the music I am making?”, under the delusion that they are making the music’. E Berne, ‘Transcription of Eric Berne in Vienna, 1968 IV International Congress of Group Psychotherapy’ (1973) III Transactional Analysis Journal 63, 68. The Fallacy sometimes may be a manifestation of the Dunning-Kruger effect: ‘[W]hen people are incompetent in the strategies they

34 Charles W Mooney, Jr advisors and actors. This is understandable and, in many respects, is a good thing. Experts among the legal elites (experienced and successful practitioners and respected academics and judges) play an important role in adapting the prevailing ‘legal culture’ and ‘legal concepts’ to reforms such as the Modern Principles and in making appropriate adjustments to those principles as well as reciprocal adjustments to the local legal culture and concepts. Certainly such adaptations and adjustments may be beneficial and important conditions for successful transplantation. And, as a practical (read: political) matter, support or opposition from the legal community may be the most important box to tick in the reform process. But this necessarily means that the legal establishment also may be the most significant obstacle to reform.52 The role of the Fallacy of Expertise and the success or failure of resisting its influence may be most obvious and significant among the legal elites. Legal establishments in general appear to harbour great scepticism of changes perceived to be fundamental,53 especially if advanced by ‘external’ sources.54 Reforms such as the Modern Principles are agnostic inasmuch as they tend to conflict with both civil and common law doctrines and traditions.55 However, legal elites in some jurisdictions are less accustomed than others to evaluating legal doctrine in terms of standards as specific as economic efficiency or as general as social welfare. The ‘ought’ may be too often gleaned from the ‘is’. ‘Reasons’ for resistance to reforms may be repeated over and over with little rigorous analysis or debate, forming a difficult-to-penetrate-and-rebut conventional wisdom.56 Moreover, the intensive study and analysis of legal doctrine – whether in the civil or common law contexts – does not necessarily illuminate or lead to understanding of the operation of markets for business credit and the potential economic effects of reforms such as the Modern Principles. The role of legal elites is, understandably and appropriately, most pronounced in their defence of (and resistance to modifications of) the local legal culture, and especially in relation to significant imbedded legal concepts. Inasmuch as security rights as contemplated by the Modern Principles are proprietary (‘property’ or ‘real’ rights), doctrinal legal concepts such as the roles of ‘title’ are particularly resilient.57 These concepts may collide head-on with the Modern Principles in the process of transplantation (or not). There are other bases for scepticism of positions taken by legal elites toward law reform proposals. Practitioners and academics alike may have incentives to resist change. Practitioners, for example, may benefit professionally (preserving esteem and positions of respect – ‘psychic income’)

adopt to achieve success and satisfaction, they suffer a dual burden: Not only do they reach erroneous conclusions and make unfortunate choices, but their incompetence robs them of the ability to realise it’. J Kruger and D Dunning, ‘Unskilled and Unaware of It: How Difficulties in Recognizing One’s Own Incompetence Lead to Inflated Self-Assessments’ (1999) 77 Journal of Personality and Social Psychology 1121. 52 See ch 7 (China) IV A and V (discussing resistance to revision of Civil Code and conservative attitude of civil law scholars and drafters); ch 13 (Thailand) IV B (discussing resistance to revision of Civil Code and Commercial Code); ch 12 (Taiwan) III B (conflicts with civil law traditions hinders reforms). On the other hand, the need for more flexible systems of secured transactions has led to judicially sanctioned systems of title transfer security in Japan and South Korea. See ch 9 (Japan) III A (ii) (discussing jōto tanpo title transfer security); ch 11 (South Korea), IIB (discussing yangdodambo title transfer security). 53 See authorities cited in n 52 above. 54 See ch 13 (Thailand) V A (discussing resistance to compliance with international standards). 55 See ch 6 (reform in civil law jurisdictions) and ch 15 (reform in common law jurisdictions). 56 Consider reasons proffered for retaining existing systems under Singapore law, such as changes would require a ‘complete overhaul’ and current law ‘works well enough’. See ch 19 (Singapore) VI B and VIII. 57 See ch 13 (Thailand) IV B and V B (i) (discussing the determination of third-party effects and strict standards of identification for property to be transferred); see also IV B (i), (ii), and (iii) below.

Modern Principles of Secured Transactions Law as Legal Transplants 35 and financially from opposing reform and preserving the status quo.58 Imagine a secured transactions ‘regime’ that consists of a complex web of esoteric and highly conceptual doctrinal meanderings, pock-marked with forks in the road, detours, and barricades, the corpus of which is comprehensible only with the ‘benefit’ of circuitous and detail-laden (even pretentious) intellectual histories, which are often imbedded in lengthy reported judicial decisions that somehow manage to reach some results (notwithstanding internal inconsistencies and considerable indeterminacy) while reflecting little consensus.59 Such a regime may enshrine the demand for legal advice at every turn. It would not be a mere coincidence that legal elites in a jurisdiction whose law might be so described would be quite resistant to efforts to adopt the Modern Principles, which would devalue their hard-earned knowledge and experience even though it would create net benefits for the society in general. Compare that scenario to the actual experience with the development of Article 9 in the US. I will be among the first to concede, lament, and assume part of the blame for the statute having grown to be far too complex and detailed. But, ultimately, between the statutory text and the official commentary, it does provide accessible and relatively certain and reliable answers and guidance. But the point to be made here relates to the role and approach of the legal elites. The organised bar, the various other law-reform oriented organisations, and the individual legal experts that have played a significant role in the development and advancement of Article 9 have consistently sought to foster a legal regime that provides clear results, a unitary approach to security devices, and simplified notice filing, while encouraging the use by the business community of standard forms without the need for day-to-day legal intervention. Whether they succeeded perfectly is beside the point. The relevant legal elites sought to reduce the roles of legal experts in the operation, application, and understanding of secured credit transactions.60 Putting aside the self-interest of legal elites, their roles in the law reform process also may reflect the interests of their clients. Of course, their clients are entitled to legal representation in advocating for their interests in the legislative and related processes. But the matter addressed here is the role of the legal elites who purport to be advocating for the public interest in their roles as legal experts. What actually amounts to client advocacy might be mistaken – and sometimes may be intended to be so mistaken – for neutral and objective ‘expert’ opinions. Perhaps even more insidious, legal elites may seek to protect their own professional and financial interests by claiming that they are advocating for a particular interest group, such as unsecured trade creditors. (c) Missing Histories and Tilting at Windmills Advocating for a change in law and offering a critique of current law often may be hindered by an inadequate record supporting the adoption of current law and past (and ongoing) rejection of reforms. Flaws in the relevant reasoning and erroneous factual premises are difficult or 58 This account would be consistent, for example, with the persistence of the complex amalgam of common-law and statutory rules for secured transactions laws in Singapore. See ch 19 (Singapore) VII and VIII (outlining a trenchant critique of current law while observing that major changes are unlikely without a mindset shift). Compare the relative success of the reform in Pakistan and the proposed reform efforts in Bangladesh in an environment of similar English and common-law traditions. See ch 18 (Pakistan) and ch 16 (Bangladesh). 59 The style and structure of this sentence seeks to exemplify the point. 60 I readily confess to some bias in the assessment. This experience with legal elites in the Art 9 context offers a stark contrast to the attitudes and behaviour of the bar in the United States that specialises in real estate law. In general the real estate bar tends to be absorbed with retaining state-by-state idiosyncratic discrepancies in doctrine and practice and, consequently, has been resistant to harmonisation efforts.

36 Charles W Mooney, Jr impossible to assess and criticise in the absence of reliable records of the bases for past decisions and current positions of lawmakers. And rebuttals of the bases for decisions suffer when the relevant evidence is anecdotal and suspect and the attribution to lawmakers is unproven. One of the beauties of the harmonisation process within international organisations (and the uniform law process in the United States) is the availability of reliable evidence of the debates, assumptions, reasoning, and decisions. These inadequacies have been a recurring problem in our investigations on the JBCP. (d) Opposition of Entrenched Interests As with any proposal for a change in law, opposition to adoption of the Modern Principles can be expected from those whose interests align with retaining current law.61 For example, the Modern Principles might be thought to encourage competition from foreign financers and nonbank lenders who might rely on secured lending to compete with local banks, whose ‘knowledge of the territory’ affords a competitive advantage in making unsecured loans. Such local lenders with entrenched market positions may also be concerned about the Modern Principles’ facilitation of the creation and perfection of senior security interests in favour of other, potentially competing lenders. Similarly, sellers and other financers of movables that rely on title reservation transactions, which are effective under existing local law without registration, also may resist and oppose the unified, functional approaches to security rights under which such title-based structures would be made effective against third parties only by registration. The general point here is that financial market participants may view existing legal infrastructures as advantageous and legacy financers with substantial market shares under existing legal regimes may be reluctant to embrace change – even if adoption of the Modern Principles would benefit borrowers and the local economy more generally.62 (e) Sui Generis, Fortuitous, and Hard-to-Classify Factors In some cases the outcome determinative factors in the law reform process may be difficult to characterise, random, or wholly fortuitous. While the concerns addressed here are the impediments to law reforms, obviously such factors also may support the adoption of reforms as well. One or more particularly influential individuals or organisations may take a strong position for or against reforms, which may or may not be based on sound policy arguments.63 Those advocating for changes in law would be well advised to be alert to these influences.

(ii) Impediments to Adoption of Modern Principles and Use of Secured Credit Some factors may present obstacles to formal adoption of the Modern Principles and also may inhibit the extension of secured credit even after enactment of Modern Principles-based laws. 61 See, eg ch 13 (Thailand) IV B (i) (discussing opposition of banks to secured transactions reforms). 62 Entrenched interests also may advocate for retention or adoption of provisions that would inhibit the use of secured credit, such as restrictions on the persons entitled to be secured creditors and restrictions on assignments of receivables. See III B (iv) and (vi) below. 63 I would note, by way of example, my own role in the development of law in the United States concerning intermediated securities. See CW Mooney Jr, ‘The Roles of Individuals in UCC Reform: Is the Uniform Law Process a Potted Plant? The Case of Revised UCC, Article 8’ (2002) 27 Oklahoma City University Law Review 553. Note also the role of David Allan in championing the Australian secured transactions law reform, see D Brown, ‘Australian Secured Transactions Law Reform’ in L Gullifer and O Akseli (eds), Secured Transactions Law Reform: Principles, Policy and Practice (Oxford, Hart Publishing, 2016) 146–47.

Modern Principles of Secured Transactions Law as Legal Transplants 37 (a) Governmental and Regulatory Influences Governmental policies toward credit may have substantial negative (or positive) influences on the adoption of legislation incorporating the Modern Principles and on the extension of secured credit. Prudential regulation of banks that allows a haircut on reserve requirements for secured loans is a prime example.64 In many jurisdictions the unavailability of such favourable treatment for loans secured by movables and receivables – which effectively treats such loans the same as unsecured loans for this purpose – imposes an obstacle to the adoption of the Modern Principles by denying these regulatory incentives. That treatment also discourages the extension of secured credit, whether or not such reform legislation has been enacted.65 Governmental programmes that support small businesses through loan guarantees also may lessen the motivation that might otherwise exist to reform secured transactions law by reducing incentives and to extend secured credit. The reduction of credit risk under such loan guarantee programmes diminishes the benefits to a creditor of taking collateral, especially if the credit risk can be reduced through loan guarantees at a lower cost than extending secured credit.66 On the other hand, adoption of the Modern Principles actually could enhance and complement these guarantee programmes. To the extent that the guaranteed loans would require security through the operation of Modern Principles-based laws, losses arising out of borrower defaults – and the costs of such guarantee programmes – could be reduced. The guarantor could reduce or eliminate its losses to the extent that effective resort to the collateral were available. Moreover, lenders would build capacity through their experiences of extending secured (and guaranteed) loans. Governmental attitudes toward protections for consumers and natural persons more generally also may influence the use of secured credit. An example is a restriction on persons that are eligible to become a debtor or grantor under a secured transactions law or a law applicable to registration of security rights.67 (b) Financing Patterns – Eg, Single, Dominant Lenders versus Multiple Lenders The first-to-register priority rule and the efficacy of broad collateral descriptions (eg, ‘all inventory now owned or hereafter acquired by grantor’) permitted by the Modern Principles makes it possible for a single secured creditor to ‘lock in’ a priority position. This aspect of the Modern Principles regime might cause resistance to its adoption by a jurisdiction in which it is customary for a business borrower to maintain relationships with several lenders of funds. But resistance on that basis would be unjustified. Multiple lenders of funds who might otherwise have equally ranking unsecured claims against a common debtor could, under an inter-creditor agreement, easily share in collateral as secured creditors under a first-to register priority scheme.68 The purchase money security interest exception to the ‘first to file’ priority rule69 also facilitates 64 See, eg G Castellano and M Dubovec, ‘Bridging the Gap: The Regulatory Dimension of Secured Transactions Law Reforms’ (2017) 22 Uniform Law Review 663. 65 Other regulatory treatment also may reduce incentives to take collateral. For example, generous treatment with respect to the classification of bank loans as non-performing loans may reduce a bank’s motivation to treat a loan as in default and to commence enforcement steps. See T Hoshi, ‘The Hidden Risks in Japan’s Financial System’ (National Institute for Research Advancement, December 2011), www.nira.or.jp/pdf/e_opinion4.pdf. 66 See, eg ch 9 (Japan) II; ch 12 (Taiwan) III B (discussing government supported guarantees). 67 See IV B (v) below. 68 For example, the creditors all could be named as secured creditors in the registration or an agent could be named as the secured creditor to hold collateral on behalf of all of the creditors. 69 See ch 3 II A (iii) for a brief account of the purchase money security interest rule. See also ch 4 VII.

38 Charles W Mooney, Jr diversity of financiers, since an acquisition financier can obtain limited super-priority without an inter-creditor priority agreement. Adoption of the Modern Principles need not necessarily lead to the prevalence of a single, dominant secured lender to a borrower. (c) Infrequency of Priority Conflicts In some jurisdictions priority conflicts – such as those involving a grantor’s wrongful creation of security rights in favour or more than one creditor – may be relatively rare.70 This might result from – and reflect – the ethical norms that prevail in the local legal and business cultures. Such circumstances might support the view that a registration system providing for public notice of security rights and a corresponding first-to-register priority rule are not needed. But the relative paucity of outright fraud does not demonstrate that a registration-priority system that provides certainty is not worthwhile and should be rejected. This is especially so if the relevant market lacks a Modern Principles-based secured transactions legal regime and is one in which secured credit does not play a prominent role. Although adoption of the Modern Principles in that jurisdiction might not ‘revolutionise’ the credit markets, that would not of itself justify clinging to a creaky and complicated legal infrastructure that is otherwise problematic and that imposes unnecessary costs on the extension of secured business credit.71 (d) Market Conditions Recall that the principal goals of a secured transactions law incorporating the Modern Principles are the increased availability and reduced costs of credit.72 In a market in which the cost of credit is extremely low and unsecured credit is perceived to be readily available, at first blush adopting the Modern Principles might offer little practical appeal. If the expenses attendant to providing collateral are perceived to be significant, such a change in law would be that much less attractive. And for small loans to SME borrowers, such expenses would cause adoption of the Modern Principles to seem even less appealing. But, of course, a low-interest-rate environment may not always remain such. Moreover, even under such market conditions there presumably would always be some subset of borrowers and situations in which personal property collateral would be necessary or beneficial. Those borrowers and lenders could benefit greatly from laws that follow the Modern Principles. (e) Reliance on Immovable/Real Property Collateral In a jurisdiction in which business loans typically are unsecured or collateralised by immovable (real) property, the impact of this circumstance on prospects for adopting the Modern Principles and for increased reliance on personal property collateral is similar to that of the low-cost, high-accessibility-of-credit market just described. As explained there, however, adoption of the Modern Principles nonetheless could be a beneficial step for such a jurisdiction.

70 See, eg Financial Law Committee, ‘Commentary to Draft Secured Transactions Code’ (City of London Law Society, July 2016) 97, http://www.citysolicitors.org.uk/storage/2016/07/Draft-Secured-Transaction-Code-Commentary-Discussiondraft-July-2016.pdf. 71 See V below. 72 See I above.

Modern Principles of Secured Transactions Law as Legal Transplants 39

(iii) Impediments to the Use of Secured Credit (under Current Legal Systems and Assuming Adoption of Modern Principles) The foregoing discussion considered some circumstances that may discourage extensions of secured credit even under a prevailing Modern Principles-based legal regime. This discussion addresses additional impediments to the use of secured credit. (a) Stigma and Reputational Concerns of Borrowers In some jurisdictions there is a prevailing belief or assumption that obtaining credit secured by personal property creates a stigma; casting doubt on the financial stability of a borrower.73 It sometimes is observed that granting personal property collateral signals a ‘last resort’ for a financially troubled borrower. Doubtless there is some truth to these characterisations in jurisdictions in which observations confirm this correlation in fact. Although troubled firms sometimes (or often) provide personal property collateral, it does not follow that a firm that provides such collateral in fact is financially distressed. At the margin, however, this potential stigma plausibly could dissuade a borrower from obtaining much needed credit if it were conditioned on providing personal property collateral. Further study might shed light on the extent to which this ‘stigma’ concern merely reflects some vague sense of malaise perpetuated through repetition or actually is a material impediment to obtaining credit. (b) Valuation of Movables, Secondary Markets, and Dispositions on Default: Chicken or Egg? Underlying the economic potential of the Modern Principles is the core idea that the value of collateral could be effectively applied toward satisfaction of a secured obligation upon a debtor’s default. Lenders in some markets harbour substantial uncertainty about this key assumption, in particular with respect to movables collateral. For example, some bank lenders report that they lack (in-house) expertise for valuing movables and that, in any case, a thin secondary market for such collateral makes recoveries on default uncertain.74 Some of these lenders have no actual experience with enforcing security rights in movables following a default. It is unsurprising that there would not be a robust secondary market for movables collateral following debtor defaults in jurisdiction in which loans secured by movables are, relatively speaking, infrequently made. That is to say, a thin market may reflect, at least in material part, a thin market for movables-secured loans – thus presenting the ‘chicken or egg’ conundrum. (c) Role of Insolvency Law and Proceedings: Use, Abstinence, Treatment of Secured Claims, Impact on Secured Credit, and Adjustments to Insolvency Laws In a real sense the ‘acid test’ of security rights is the effectiveness of those rights in a debtor’s insolvency proceedings. As a practical matter such effectiveness may be the most important context of perfection (third-party effectiveness) of a security right. But the impact of insolvency effectiveness generally on security rights and of the details of the treatment of security rights in insolvency

73 See 74 See

ch 9 (Japan) VIII B (ii) (in relation to asset-based lending). ch 9 (Japan) VIII B (iii) and (iv). See also ch 20 C (ii).

40 Charles W Mooney, Jr proceedings may extend beyond the actual treatment of actual security rights in actual insolvency proceedings. The potential treatment serves to bolster the credit enhancing attributes of security rights by increasing the availability and lowering the costs of credit – precisely the principal goals of the Modern Principles.75 The treatment of security rights in insolvency proceedings may serve as an effective means of de facto enforcement. Viewed ex ante, this perception supports the credit enhancement function of security rights and encourages extensions of secured credit. For example, in the US financially distressed firms often are the subjects of Chapter 11 reorganisation proceedings. Secured claims generally are honoured76 and secured creditors may proceed with relative confidence that their collateral will be accounted for and dealt with in a value-enhancing manner. Collateral might be sold in a sale of substantially all of a debtor’s assets as a going business. The insolvency proceeding provides a forum and mechanism for the valuation and orderly treatment of secured claims. Secured creditors expect collateral to be available, under court supervision, and subject to rules designed to protect collateral value. In a jurisdiction in which resort to insolvency proceedings is not the norm for a financially distressed business debtor, considerable uncertainty may exist as to the prospective treatment of a secured creditor’s collateral following a debtor’s financial demise.77 When insolvency proceedings are the norm for business financial distress orderly dispositions may contribute to the development or maintenance of a robust secondary market for movables. In contrast to the situation in the US, this seems to be the case in Japan, where the incidence of formal insolvency proceedings for distressed debtors is quite small by comparison.78 A robust market for disposition in insolvency proceedings may, in turn, benefit enforcement through dispositions of collateral outside of insolvency proceedings. Finally, this discussion of insolvency law might well have been included under part IV A ii above,79 inasmuch as the insolvency law and related practices in a State also may represent an impediment to the State’s adoption of the Modern Principles. For example, the ‘strong’ version of security rights under the Modern Principles might be of concern if the State’s insolvency law and practice were such that the combination of the two regimes would erect obstacles to rescue and rehabilitation of distressed debtors. The more appropriate response to that situation would be to combine the adoption of a Modern Principles-based secured transactions law with adjustments in the State’s insolvency laws so as to be more compatible with rehabilitation. (d) Costs of Use and Compliance, Including Complexity Extensions of secured credit will be discouraged by a legal regime for secured transactions that is complex, expensive, and difficult to use.80 Examples of such obstacles are formalities such 75 See UNCITRAL GTE (n 4); Mooney, ‘Enforcement’ (n 14); Mooney, ‘Credit Enhancement’ (n 7). 76 Secured claims might be honoured and respected in a variety of ways, such as by disclaimer or abandonment of collateral to permit enforcement by a creditor outside of an insolvency proceeding, supervised disposition of collateral in an insolvency proceeding, or valuation of collateral and a distribution of value under a plan of reorganisation. 77 See IV A (iii) above (discussing valuation, secondary markets, and dispositions on default). 78 During the January–September 2018 period the number of court filings of business insolvency proceedings in Japan (an average of 685 filings per month) were about 9.13% of the number of filings in the United States (an average of 7,495 per month). Trading Economics, Japan Bankruptcies, https://tradingeconomics.com/japan/bankruptcies; Trading Economics, United States Bankruptcies, https://tradingeconomics.com/united-states/bankruptcies. Compare the relative size of each country’s GDP for 2017, which (in billions of United States $) was 19,390.604 for the United States and $4,872.137 for Japan (about 25.1% of the United States GDP). World Bank, ‘GDP, Current US’, https://data.worldbank. org/indicator/NY.GDP.MKTP.CD?locations=US. 79 Impediments to adoption of Modern Principles and use of Secured Credit. 80 See ch 8 (Indonesia) III B (authorities’ formalistic approach and lack of clarity hinders use of current law), III D (iii) (use of notaries and formalities such as listing values and obligations causes confusion and unnecessary expense); ch 11

Modern Principles of Secured Transactions Law as Legal Transplants 41 as collateral description requirements that are complex and require assistance by legal professionals for perfection and priority of security rights, a public registry that is inconvenient to access and imposes substantial fees for registrations, and regulatory constraints that result in significant expenses for valuations of collateral. Such flaws in the legal and regulatory infrastructure would be substantially ameliorated by the adoption of Modern Principles-based secured transactions laws.

B. Selected Principles This subpart considers several of the Modern Principles as compared to the corresponding treatment (or lack of treatment) under secured transactions laws that persist unreformed or that have been adopted by selected States. It considers the impact on these principles of the various challenges and obstacles to transplantation discussed in Subpart A.

(i) Comprehensive (Functional) Coverage of All Forms of Security Rights The Modern Principles embrace a ‘functional, integrated and comprehensive regime’ for security rights.81 It follows that under the Modern Principles devices such as the retention of title by a seller and a transfer of title by a debtor to a creditor to secure an obligation are treated as security rights. As such, they are subject to the other dimensions of the Modern Principles such as the requirements for creation and perfection and priority rules, discussed next. It is unsurprising that this clash between substance and economic reality, as embraced by the Modern Principles, and entrenched form- and label-based characterisations would trigger shock and resistance from local interests, including legal elites.82 Legal experts are unlikely to enjoy seeing expertise developed over years of experience rendered obsolete (although change also may present new opportunities for the more ambitious and opportunistic). But legal regimes should not exist and persist for the enjoyment and prosperity of legal elites. Adoption of a functional, comprehensive regime for security rights also may attract opposition from those whose practices and business models would be adversely affected or, at least, inconvenienced (in particular by the imposition of a requirement for perfection by registration).83

(ii) Perfection by Registration and Priority Rules – In General The most instrumental of the Modern Principles are the provision for registration in a public registry as the principal method of achieving third-party effectiveness (ie, perfection) and the corresponding first-to-register priority rule. These rules directly confront – and would override – parallel rules typically found in both civil law and common law traditions. For example, pledges of movables typically have required a delivery and assignments of money claims

(South Korea) IV (discussing complexities and costs of registration system including requirement that both parties apply, examination by registrar, and registration requirement upon creation, extinguishment, and other events). 81 UNCITRAL Legislative Guide (n 4) 57; see UNCITRAL Model Law, Arts 1(1) (application of Model Law to security rights) and 2(kk)(i) (definition of ‘security right’). 82 See ch 13 (Thailand) IV B (i) and (ii) (discussing lack of understanding of why the failure to have an integrated system is problematic). 83 See IV B (ii) below.

42 Charles W Mooney, Jr (receivables) generally have required notification to or an acknowledgment by the underlying obligor or other action with respect to the obligor.84 Adoption of a system for public registration of transfers (or notices of transfers) for security as a method of third-party effectiveness is a good first step. But that move would not alone meet the registration and priority standards contemplated by the Modern Principles. For example, if the pre-existing methods of perfection (such as a notification to or acknowledgement by an obligor on receivables) that do not require delivery of actual possession or some other form of public notice are left intact and remain available, and if (under a first-in-time of transfer principle) an earlier transfer made effective under those methods takes priority over a transfer that is later registered, then the registration system falls short of the requirements of the Modern Principles. Under such a structure, for example, a transferee who conducted a search of the registry and found no conflicting registration nonetheless would find its interest subordinated to an earlierin-time (‘secret’) unregistered interest. Such a registration and priority regime fails to satisfy the essential purpose of the perfection and priority rules embodied in the Modern Principles. Yet some states, including Japan and Korea, have quite consciously and purposefully adopted such a regime.85 That adaptation aptly fits the ‘square wheel’ paradigm. Such a square wheel might be characterised as a ‘compromise’ between transplanting the Modern Principles (round wheel) and respect for and reliance solely on traditional methods of effective transfers (skids). To be sure, it is an improvement. This registration alternative, for example, would allow a transferee of a large number of receivables to ensure third-party e ffectiveness (in particular in the transferor’s insolvency proceeding) without the expense and delay of dealing with multiple obligors. The approach also appeases the interests of those parties who wish to achieve third-party effectiveness while avoiding the expense of dealing with the registration system. Moreover, it may not deviate materially from the Modern Principles in practice. For example, as discussed above,86 in a given market priority conflicts arising out of a transferor’s ‘double assignment’ or ‘double financing’ may be so rare that adopting a first-to-register priority rule would not produce material adverse effects. Similarly, the adoption of square wheels (or no wheels) on a tiny island where walking is the principal means of transport may not present a serious practical problem. Stated otherwise, in some cases the adoption of an absurd rule would do little damage. Even so, it would remain an absurd rule.

(iii) Registration (Notice Filing) and Creation: Collateral Descriptions Another pillar of the Modern Principles is the ‘notice filing’ aspect of a registration system. The information to be contained in the registration notice need contain only the basic information concerning a security right sufficient to put a searcher on notice that the secured creditor may have a security right in the relevant asset. In particular, the reference to the collateral in a notice need not be a detailed and specific. As provided in the registry provisions of the Model Law, ‘[a] description that indicates that the encumbered assets consist of all of the grantor’s movable assets, or of all of the grantor’s movable assets within a generic category’ is adequate.87 So, for example, a reference to ‘all inventory now owned or hereafter acquired by grantor’ 84 Although, under the common law, an assignment of receivables is valid even if the debtor is not notified, see ch 15 IV B. 85 This generally describes the situation under Japanese and Korean law. See ch 9 (Japan) V; ch 11 (South Korea) III C (ii). See also ch 17 (India) IV F. 86 See IV A (ii) (c) above. 87 UNCITRAL Model Law, Model Registry Provisions, Art 11.

Modern Principles of Secured Transactions Law as Legal Transplants 43 would be adequate. Such a general description also would be sufficient in a security agreement for purposes of creating a security right under the Model Law.88 This approach has been rejected by secured transactions legislation in some jurisdictions.89 In the case of Japan, one reason given for this rejection is curious. Requiring more specific descriptions for creation and registration of security rights by way of title transfers (jōto tanpo) is seen as a protection from so-called ‘over-collateralization’.90 For registration of assignments of movables and claims, in order for an assignment to cover future, after-acquired property effectively, it is necessary to provide specificity such as by identifying the location of movables or the source of claims.91 Adoption of a standard permitting such broad descriptions would (the argument goes) facilitate the security transfer to a creditor of substantially all of a grantor’s assets. A specificity requirement makes such broad coverage more difficult (but presumably still possible) to achieve. If virtually all of the assets of a grantor were covered by a security transfer, and if the obligation secured were relatively small compared to the value of the collateral, then the excess value of those assets would be essentially unavailable for use as collateral to secure credit from other creditors.92 Alternatively, if no such disparity between a secured obligation and collateral value exists, then it is argued that in some cases there might be virtually no free assets available for satisfaction of claims of other creditors in the case of the grantor’s insolvency. Arguably implicit in this specificity requirement is the assumption that permitting an easily achieved broad coverage for a security transfer that could make the excess value so unavailable would not be in a grantor’s interest. But why should it be assumed that a market failure exists or would exist that would lead a grantor to agree to such a security arrangement that would not be in its interest? Similarly, why should it be assumed that it is necessary to restrict party autonomy by making it more expensive and cumbersome for a grantor to transfer interests in its property as it may choose? Concrete evidence of the reasoning behind the specificity requirement, including answers to the questions just posed, would provide a useful baseline for advancing the debate.93

(iv) Secured Creditor Restrictions An example of an entrenched interest opposition to the Modern Principles may be the adoption or retention of restrictions on the persons eligible to be a secured creditor and to hold security rights. Such restrictions could inhibit the use of a secured transactions law, even if it embraced the Modern Principles. Restricting the persons eligible to receive and hold security rights to entities with market power or that otherwise benefit from extending credit without relying on modern secured transactions laws could have adverse economic consequences. Such restrictions could constrain (or fail to expand) the availability of credit or increase (or fail to reduce) the cost of

88 UNCITRAL Model Law, Art 9(2). 89 See, in relation to Japan, Act on Special Provisions, etc of the Civil Code Concerning the Perfection Requirements for the Assignment of Movables and Claims, Law No 104 of 1998, as amended and renamed by Law No 148 of 2004 (PRAMC). 90 See ch 9 (Japan) VI C. 91 In many cases it is necessary for a creditor to retain a judicial scrivener in order to ensure satisfaction of the description requirements, especially for future (after-acquired) assets. 92 This is so in part because of the relatively weak position of junior creditors under the prevailing title transfer security arrangements in Japan. 93 See IV A (i) (c) above (discussing difficulties in rebutting arguments in favour of statutory treatment in the absence of authoritative evidence of reasoning and policies responsible for its adoption).

44 Charles W Mooney, Jr credit. However, a State may have legitimate interests in regulating and licensing persons engaged in the extension of credit to the public. Whether such limitations on holding security rights are unwise efforts to protect entrenched interests and market positions94 or legitimate exercises of regulatory power would depend on the relevant facts. If the former, then such restrictions would implicitly contradict the underlying goals of the Modern Principles. For example, limiting the extension of secured credit to bank lenders – ie, deposit-taking institutions – would presumably fall outside of the legitimate regulation of the extensions of credit. Whether or not a lender is also licensed as a bank (ie, to take deposits) would not seem to have any bearing on protecting the public in the context of commercial loans.95 But legislation enacted in Thailand is not so restrictive. It limits the use of its secured transactions law to secured creditors that are ‘financial institution[s]’ or other persons or entities specified by ministerial regulations.96 But for present purposes the relevant point is that what might appear to be the exercise of legitimate regulation and supervision by a State might actually amount to the preservation of entrenched market positions that impedes the goals of the Modern Principles.

(v) Secured Debtor Restrictions As discussed above, governmental approaches toward consumer and other natural person debtors may result in restrictions on the types of persons that could be debtors under the relevant secured transactions laws.97 As in the case of restricting eligible secured creditors, this could implicitly contradict the underlying goals of the Modern Principles to increase access to credit.98 Japan’s PRAMC provides for the use of the registration system for the perfection of assignments of title of movables and claims only for assignments made by ‘juridical persons’.99 This relegates assignments by natural persons to reliance on traditional Civil Code methods of third party effectiveness. Many SMEs in Japan and, presumably, in other jurisdictions are owned and operated

94 See IV A (i) (d) above (discussing opposition to reforms by entrenched interests). 95 If under a State’s regulatory structure only banks are licensed to make commercial loans, that might suggest the need for the State to provide for the licensing and regulation of non-bank lenders as a means of increasing the availability of business credit. 96 Business Security Act, s 7. ‘Financial institution’ refers to a financial institution according to the law governing financial institution business, a life-insurance or non-life insurance company, and a bank or a financial institution established under any specific law. ibid, s 3. Under the Ministerial Regulation on Specifying the Types of Lender, the secured party may be a juristic person having the objective to involve in securitisation, a trustee of a trust under the law governing trust for transactions in capital market, a securities firm, a mutual fund, a bondholders’ representative under the law governing securities and exchange, a juristic person operating a derivatives business, an asset management company, and a juristic person having the objective to conduct factoring business. Business Security Act, B.E.2558, B.E.2559 (2016). Moreover, under the Ministerial Regulation on Specifying the Types of Lender under the Business Security Act No 2, B.E.2561 (2018), the secured creditor under the Business Security Act B.E. 2558 may be the Office of the Permanent Secretary of the Industry Ministry dealing with the SMEs Civil Development Fund, a foreign commercial bank dealing with syndicated loans, a juristic person having the objective to involve in hire-purchase or leasing transactions, and a juristic person having the objective to involve in financing transactions. See ch 13 (Thailand) II C. A similar system applies in India (see ch 17 IV A). The Pakistan reformed law is limited in scope to financial institutions or a consortium of financial institutions, as defined in the Financial Institutions (Recovery of Finance) Ordinance, 2001, and does not, therefore, apply to supplier finance. 97 See, eg ch 7 (China) II (discussion of applicability of 2007 law for use by only certain debtors, resulting in fragmented system); the common law system which applied in Brunei before reform (ch 15 II B); IV A (ii) (a) above (discussing governmental and regulatory influences). 98 See IV B (iv) above. 99 PRAMC, Art 1 (providing provisions for ‘perfection requirements for the assignment of movables and claims conducted by juridical persons’. A ‘juridical person’ under Japanese law includes a company organised under the Companies Act. Companies Act, Act No 86 of July 26, 2005, Arts 2(i) (defining ‘Company’) and 3 (company is a juridical person).

Modern Principles of Secured Transactions Law as Legal Transplants 45 by natural persons as sole proprietorships and not as companies or other legal entities. It follows that such restrictions that limit access to the use of secured transactions laws are likely also to limit access to credit, to increase the cost of credit, or both.100

(vi) Free Assignability and Anti-assignment Clauses Another manifestation of entrenched interest resistance to the Modern Principles is the retention of the legal effectiveness of an agreement between an obligor and an obligee on a money claim (receivable) that an assignment by the obligee is not effective.101 Major companies may have sufficient bargaining power to insist that such provisions are included in their supply contracts (as obligors), which relieves them of any responsibility to deal with assignees.102 On the other hand, one might think that bank lenders, who might be interested as prospective assignees, would support the free assignability in accordance with the Modern Principles. But in Japan it may be that major bank lenders oppose free assignability out of concern that their borrowers might otherwise be more likely to assign receivables to other creditors.103 The opposition may be motivated by an interest in preserving their market positions. Notwithstanding this opposition, Japan recently modified its law to provide that such anti-assignment clauses are ineffective to prevent a valid and enforceable assignment.104 However, such anti-assignment provisions remain effective as between the parties, to the end that an assignment would constitute a breach of contract by the assignor. Thus, a significant disincentive remains to assignments of receivables subject to such anti-assignment provisions.

(vii) Enforcement Following Default The powers typically associated with ‘title’ or ‘ownership’ of property lend themselves quite comfortably with the exercise of default remedies in secured transactions. This may explain in part some States’ incentives to retain title-based secured transactions and to resist the comprehensive, functional scope of the Modern Principles. This may be further encouraged by what are perceived as cumbersome procedural requirements for exercise of remedies under statutory schemes for pledges and mortgages. But the Modern Principles embrace robust rights of enforcement. There is no principled reason why resort to a title-based device necessarily would offer stronger remedies (although a creditor’s having ‘title’ may retain a strong intuitive appeal). On the other hand, if the motivation for retaining title-based devices is to insulate a secured creditor from reasonable procedures to preserve any surplus value of collateral (ie, in excess of the secured obligation) for the benefit of the debtor, the Modern Principles simply reject that approach as incoherent and penal.105 100 Note that the UNCITRAL Model Law preserves the protections of parties to transactions for ‘personal, family or household purposes’ under other laws, but does not otherwise contemplate limiting its use by natural persons as debtors or grantors (Art 1(5)). 101 In Pakistan, inclusion in the Financial Institutions (Secured Transactions) Act 2016 of a provision overriding anti-assignment clauses was rejected on the grounds of interference with freedom of contract. See ch 18 (Pakistan) IV F. 102 The policy underlying the free assignability of receivables recognises that the benefits of facilitating such assignments drastically outweigh any risks and burdens of obligors. 103 For a discussion of anti-assignment provisions in Japan, see ch 9 (Japan) IV B (iii). 104 Law No 44 of 2017 (effective April 1, 2020). The new rule will apply to pre-existing contracts. See ch 9 (Japan) IV B (iii). 105 Of course, a title-based security device need not run afoul of such debtor protections. For example, the judicially approved title-transfer security device in Japan (jōto tanpo) recognises a debtor’s entitlement to the surplus value and even recognises the possibility of creating junior title-transfer security rights. See ch 9 (Japan) III A (ii) (a).

46 Charles W Mooney, Jr

C. Some Watsonesque Perspectives The Modern Principles can be transplanted and received well by States that reflect a range of attributes, thus supporting the idea that they are eminently transplantable. But questions remain as to the circumstances under which transplantation fails or is seriously incomplete or deviant. Watson’s Legal Transplants may offer some useful insights as to appropriate areas of investigation and research. In this respect it supports the thesis of this chapter that further understanding of law reform processes in general and in particular those dealing with secured transactions laws would benefit greatly from more rigorous empirical studies. Our current work on the JBCP follows this path and we hope that it will be an exemplar for similar investigations. The experience with transplantation of the Modern Principles provides some support for Watson’s claim that transplantation of legal rules may be ‘socially easy’.106 This is reflected by their assimilation into a variety of legal cultures and societies. But the deviations from the Modern Principles that States have made also evidence Watson’s appreciation that States make reforms to borrowed laws in the transplantation process. This preliminary examination of the transplantation of the Modern Principles may cast some doubt, at least in the present context, on Watson’s claim that adjustments do not conform the States’ particular circumstances (depending, admittedly, on what one considers to be relevant particular circumstances). At least in this context of modern commercial law, the dominant influences of legal elites (broadly including not only the professionals but the legal culture and doctrinal and conceptual influences) and the political power of entrenched interests do appear to take account of a State’s specific situations. But these adjustments to local circumstances (or selective rejections of the Modern Principles) are not necessarily socially beneficial, especially when these two important influences converge. Japan’s ‘square wheel’ adaptation of the registration and priority aspects of the Modern Principles reflects a failure even to incorporate the basic ‘idea’, much less the details, of a firstto-register priority rule.107 But it may well reflect only a ‘split the difference’ compromise among various competing local interests – including legal elites – which a political process failed to resolve in a principled way. Similarly, efforts of commercial lenders to protect entrenched market positions, such as resistance to the effectiveness of anti-assignment provisions, also may reflect an adaptation to the particulars of local circumstances.108 But those ‘particulars’ might be nothing more that the protection of a dominant market position. That is not necessarily a ‘cultural adjustment’ worthy of our applause and respect. Perhaps Watson’s most compelling claim is that virtually all law is borrowed. Yet one might quite plausibly wonder, for example, how the rather complete reception by Holland of Roman law by the 17th century may be relevant to the transplantation of the Modern Principles in the 21st century.109 On the other hand, Watson’s explanation of the more or less fortuitous borrowing of Ulrich Huber’s teachings on conflict of laws in the early development of laws in the United States seems no less apt when considering transplantation of the Modern Principles.110

106 See III above. 107 See IV B (ii) above. 108 See IV B (vi) above. 109 Watson (n 5) 57. 110 ibid 109–10. Watson described how early law in the United States borrowed Huber’s axioms from England, which was influenced by the high regard for Huber in Scotland (through the influence of Lord Mansfield, a Scot), which in turn had been influenced by Dutch law. As Watson explained (ibid 109): ‘What most concerns us here is that, on an issue so vital to the well-being of the United States and its citizens, there was for so long no societal input into the basic principles, and even the judges, as subordinate lawmakers, gave credence to particular foreign authority with no apparent interest in alternative approaches.’

Modern Principles of Secured Transactions Law as Legal Transplants 47 This borrowing appears to have resulted primarily from the availability of the source and not from any similarity or other affinity between the donor(s) and the recipient.111 The borrowing phenomenon invites some interesting reflections on the development of the Modern Principles, and in particular the development of UCC Article 9. To be sure, UCC Article 9 borrowed from ideas developed in the United States and elsewhere concerning secured commercial financing transactions. But it also offered a new, sui generis and holistic approach that has inspired and found its way into the Modern Principles and into the laws of numerous States. UCC Article 9 fundamentally rejected common law ideas about nonpossessory security. It addressed concerns about fraud (and to a lesser extent, ostensible ownership) by offering as an antidote a simple notice-filing system for public notice. It rejected the ‘principle’ that still prevails in some common-law jurisdictions that even if a transaction walks like a duck, quacks like a duck, and looks like a duck, it is a chicken if the parties so name it – eg, title reservation transactions.112 A relatively small group of scholars and practitioners bore the responsibility, and deserves the credit, for the successful emergence of UCC Article 9. It was necessary (not only for Article 9 but for the development of the UCC as a whole) to overcome substantial opposition from powerful circles.113 These efforts benefited from the prevailing uniform law process in the United States, which removed the project from the usual political environment of the legislative processes. Alas, that is a luxury that is not available in most States.

D. Overcoming Obstacles The foregoing discussion of challenges and obstacles to the adoption of Modern Principles and the use of secured credit also provides a roadmap of sorts for steps and strategies for overcoming or reducing these impediments. This subpart identifies examples of positive approaches for overcoming obstacles and advancing the adoption and use.

(i) Capacity Building The need for capacity building was an important theme that emerged from the coordination conferences.114 Efforts directed to developing debtor and creditor capacities to understand and utilise secured transactions could meaningfully address many of the challenges to the adoption of the Modern Principles as well as the effective extensions of secured credit.115 For example, a 111 ibid. 112 See ch 15 IV C. 113 Consider the comments of Professor Grant Gilmore, during the review of the UCC by the New York Law Revision Commission, at a public hearing (2 New York Law Revision Commission, Hearings on the Uniform Commercial Code 1161 (1954)): ‘The memoranda read this morning on behalf of the New York Clearing House … were so riddled with mistakes, inaccuracies, misreadings and misconstructions as to be largely untrustworthy and as to throw grave doubt on the professional competence in this field of those who prepared the memoranda. It cannot be overlooked that these memoranda were submitted to this Commission by representatives of some of the largest banks in New York City, advised presumably by competent counsel. These are harsh words, deliberately chosen, which I shall be prepared to document before you gentlemen tomorrow.’ 114 See IV above. 115 See, eg ch 8 (Indonesia) III A (many stakeholders still do not fully understand the 1999 law so ‘implementation is patchy and rife with issues’); ch 11 (South Korea) IV (ineffectiveness of current secured transactions law resulting from business parties’ unfamiliarity with law, lack of movables valuation techniques and data on valuation, and paucity of expertise on management and maintenance of collateral); ch 13 (Thailand) IV B (i) and (ii) (failure to understand need for an integrated system for secured transactions); ch 14 (Vietnam) IV (International Finance Corporation work with Viet Nam Banks’ Association on capacity building for banking sector).

48 Charles W Mooney, Jr widespread appreciation of the benefits of secured credit could reduce or eliminate the stigma sometimes associated with security.116 Similarly, education and training of credit personnel and the development of secondary markets for movables could address valuation problems that inhibit the development of secured credit markets.117

(ii) Incentives, eg World Bank ‘Doing Business’ Rankings The economic benefits that may result from a State’s adoption of a Modern Principles-based secured transactions law provide tangible incentives for reform. Another, less tangible but important, incentive may arise from a State’s desire to improve a its rankings in the World Bank’s annual Doing Business report.118 In the context of secured transactions law reforms the rankings on the strength of legal rights in connection with getting credit are particularly significant.119 While these rankings have been subjected to considerable (and well-deserved) criticism,120 it is clear enough that improving a State’s ranking has provided a meaningful incentive for reform.121

(iii) Promotion and Coordination Finally, the past and ongoing work of the many organisations and individuals in the implementation of secured transactions law reforms deserve much credit for the progress to date. Many of these were represented at the 2017 and 2018 coordination conferences.122 One hopes that the current efforts to provide enhanced coordination of these efforts will provide even more success in the future.

V. Benefits of Modern Principles: Beyond Credit Enhancement The potential benefits of adopting the Modern Principles extend beyond the prospects for increasing access to and lowering the cost of credit. Indeed, in some markets prevailing conditions, such as exceedingly low interest rates and the prevalence, convenience, and financial rewards of government-sponsored guarantees, might substantially blunt those credit enhancement attributes of a Modern Principles-based secured transactions law. But even in the absence of any demonstrable and measurable macroeconomic impact of credit enhancement, there is much to commend the adoption of such reforms.

116 See IV A (iii) (a) above. 117 See IV A (iii) (b) above. 118 For the most recent report, see World Bank Group, ‘Doing Business 2019’ (2019), www.worldbank.org/content/dam/ doingBusiness/media/Annual-Reports/English/DB2019-report_web-version.pdf. 119 See ibid 95 (‘The strength of legal rights index measures the degree to which collateral and bankruptcy laws protect the rights of borrowers and lenders and thus facilitate lending’). For the rankings in the 2019 report (based on 1 May 2018 data), see World Bank Group, ‘Rankings and Ease of Doing Business Score’, www.doingbusiness.org/en/rankings. 120 See, eg Oakland Institute, ‘It is Time to End the Business Rankings of the World Bank’ (26 January 2018), www.oaklandinstitute.org/it-time-end-business-rankings-world-bank. 121 As reported by the WBG, ‘[s]ince its launch in 2003, Doing Business has inspired more than 3,500 reforms in the 10 areas of business regulation measured by the report’. World Bank Group, ‘Doing Business 2019’ (n 118) vi; see also ch 12 (Taiwan) I, III A and B, IV A (iii) (discussing influence of WBG Doing Business Survey); ch 13 (Thailand) I, V A (same); ch 15 II A (Brunei’s secured transactions law reforms resulted in Brunei moving dramatically up the Doing Business rankings). 122 See IV above.

Modern Principles of Secured Transactions Law as Legal Transplants 49 A Modern Principles-based law offers many laudable attributes – coherence, relative simplicity, certainty, transparency, and user-friendliness. This is especially so when compared to the balkanised taxonomies of security devices under both common-law and civil-law traditions. These attributes reflected by the Modern Principles typically are central aspirations of law reform. Yet these advantages appear to occupy a reduced and subservient status when compared to the more visible and frequently touted goal of economic growth through enhanced access to and lower costs of credit. It is of course quite appropriate to recognise and advocate for the potential economic gains from a Modern Principles-based legal regime. But viewing such law reforms solely from that perspective holds secured transactions law reforms to an unreasonable, indeed unfair, standard.

VI. Conclusion Further investigation of transplantation processes for secured transactions laws (including the Modern Principles) may well reveal the weakness, even incoherence, of arguments supporting the status quo and in opposition to (or favouring deviation from) the Modern Principles. This exposure may overcome resistance that otherwise would be successful absent careful public scrutiny. The harmonisation processes within UNCITRAL, UNIDROIT, and other organisations that have produced the Modern Principles provide some powerful evidence for this prospect. To be sure, the same counter-arguments made (and that continue to be made) in the local law reform processes were heard throughout the harmonisation and modernisation efforts on the international level. Open discussion and frank debates exposed, rebutted, and overcame weak and incoherent positions.123 Maybe – just maybe – reforms of secured transactions laws in some States that reject one or more of the most fundamental of the Modern Principles are appropriate adjustments that will, on balance, promote social welfare. Further investigation and research concerning secured transactions law reforms should, of course, be open to this prospect. But I am profoundly sceptical. It is likely that the arguments that proved to be losers in the work on international harmonisation and modernisation of secured transactions laws are losers still. As we ponder arguments supporting the need for adjustments and deviations from the Modern Principles to accommodate the asserted needs, culture, and particular circumstances of a State considering reforms, we should be mindful of the idea underlying the Modern Principles. The international harmonisation effort reached a consensus that the current laws of many States are inferior, ineffective, and inefficient and should be replaced. Secured transactions laws, like laws in general, are not created equal. Some work better than others. But this scepticism about significant deviations from the Modern Principles also should be tempered in at least two important respects. First, a ‘second best’ approach adopted by a State as a political compromise may nonetheless reflect a substantial improvement over the legal regime that it replaces. And progress sometimes – often I would think – proceeds only incrementally and along a winding path. Perhaps the most important conclusion from Watson’s insights, although not unique, is that the law is perpetually in a state of flux.124

123 A technical term used by some political scientists and others for such poor argumentation and reasoning, described by Merriam-Webster as ‘usually vulgar’, is ‘bullshit’ (defined as ‘nonsense; especially: foolish insolent talk’). Merriam-Webster.com (nd). 124 See, eg Watson (n 5) 96 (transplantation is extremely common; most changes in legal systems result from borrowing).

50 Charles W Mooney, Jr Second, these principles – while here bestowed with the appellation ‘modern’ – are (conservatively) more that 65 years old.125 They have seemingly been stubbornly immune to evolution or modification of a fundamental nature. Even recently emerged significant artifacts of the Modern Principles – the Guide on the Implementation of a Security Rights Registry126 and the UNCITRAL Model Law – appear to be oblivious to the emerging Fintech127 advances, other than embracing 20th century legacy technology for registries.128 But one hopes that the energy and imagination that infused the processes that developed and implemented the Modern Principles will emerge and inspire further evolution and adjustments to these principles. Recent publications that address registries offer some encouragement in this respect.129

125 This dates the Modern Principles (perhaps arbitrarily, but not unreasonably) from the 1952 Official Text of the UCC. 126 UNCITRAL, ‘Guide on the Implementation of a Security Rights Registry’ (2013) (Registry Guide), uncitral.un.org/ sites/uncitral.un.org/files/media-documents/uncitral/en/security-rights-registry-guide-e.pdf. 127 See G Walker, ‘Financial Technology Law – A New Beginning And A New Future’ (2017) 50 International Lawyer 137: ‘FinTech has emerged as a powerful new market force as a result of the coming together of a number of disconnected trends. Significant advances have occurred in the areas of computer and digital technology, the Internet, mobile telecommunications as well as economics and finance, which have transformed traditional areas of study and created important potential new business structures and operations.’ 128 ‘Registry Guide’ (n 126) 31–33. 129 See, eg CW Mooney Jr, ‘Fintech and Secured Transactions Systems of the Future’ (2018) 81 Law and Contemporary Problems 1; T Rodríguez de las Heras Ballell, ‘Digital Technology-Based Solutions for Enhanced Effectiveness of Secured Transactions Law: The Road To Perfection?’ (2018) 81 Law and Contemporary Problems 21; see also CG Bradley, ‘Disrupting Secured Transactions’ (2019) 56 Houston Law Review 965, papers.ssrn.com/sol3/papers.cfm?abstract_id=3275263.

3 Personal Property Securities Law Reform in Developed Jurisdictions ANTHONY DUGGAN

I. Introduction The focus of this chapter is on personal property securities law reform, with particular reference to the position in Canada as compared with the United States and Australia. In Canada, there have been few meaningful reforms over the past decade or more.1 The situation is particularly acute in Ontario, which has the oldest of the provincial Personal Property Security Acts (PPSAs) and a register based on outdated technology.2 In Canada, there are three main obstacles to timely PPSA law reform: (1) the challenges posed by Canada’s federal system to co-ordinating law reform efforts across the country; (2) the absence of an expert body to oversee the legislation and make recommendations for change;3 and (3) the lack of funding for register upgrades. The chapter will identify and assess recent steps taken to address some of these problems. The chapter will also compare Canada with Australia in relation to the three concerns. It will be shown that Australia has effectively sidestepped the first problem and has at least partially addressed the second problem by enacting its PPSA at the federal level. It also seems to have avoided the third problem through its use of a funding model that allows for register upgrades to be paid for out of registration and search fees. So far as the first and second problems are concerned, Canada also stands in contrast to the United States, where there is a Permanent Editorial Board appointed by the National Conference of Commissioners on Uniform State Laws (NCCUSL) and the American Law Institute (ALI). The Permanent Editorial Board oversees the Uniform Commercial Code (UCC) and is charged with maintaining uniformity between the States and monitoring the need for modernisation and other improvements.4

1 Subject to the Ontario conflict of laws initiative discussed in part II B below and the developments discussed in part III A. 2 Personal Property Security Act RSO 1990, c P-10 (Ontario PPSA). 3 The Uniform Law Conference of Canada is charged with promoting uniform provincial laws but, as explained in part III below, the ULCC has undertaken no meaningful PPSA-related work since the early 2000s. 4 The Uniform Commercial Code (UCC) is a model law developed under the auspices of NCCUSL and the ALI. As a result of NCCUSL’s and the ALI’s efforts, the code has been adopted as law in all the US states. UCC, Art 9 deals with secured transactions; it is the US equivalent of, and pre-cursor to, the Canadian provincial PPSAs and the Australian and New Zealand PPSAs: Personal Property Securities Act 2009 (Cth) and Personal Property Securities Act 1999 (NZ). See generally P Winship, ‘An Historical Overview of UCC Article 9’ in L Gullifer and O Akseli (eds), Secured Transactions Law Reform: Principles, Policy and Practice (Oxford, Hart Publishing, 2016) 21.

52 Anthony Duggan The chapter is structured as follows. Part II uses selected examples to explore the federal system’s impact on personal property security law in Canada with particular reference to: (1) the lack of harmonisation between the Ontario PPSA and the PPSAs in the other provinces; and (2) the lack of co-ordination between recent reform initiatives in Ontario and elsewhere. The Canadian position in both these respects is then contrasted with the United States and Australia. Part III discusses the arrangements for ongoing oversight of the PPSAs in (1) Canada, and (2) Australia, contrasting both with the US position. Part IV looks at the lack of funding in Canada for register upgrades, with particular reference to Ontario, before going on to describe the quite different funding arrangements Australia has in place. Part V is the conclusion.

II. Federal System Challenges A. Current Law (i) Overview5 The spread of personal property security law reform across Canada occurred incrementally from the mid-1960s to the early 2000s, resulting in some significant variations, particularly as between the Ontario PPSA and the PPSAs in the other provinces and territories. In 1967, Ontario became the first province to enact a PPSA, based loosely on the US UCC Article 9.6 Saskatchewan followed suit in 1980 with a statute similar in some respects to the Ontario version, but different in others.7 Subsequently, the Western provinces co-operated in the development of a model law which in due course became the basis for largely uniform PPSAs first in the Western provinces and later in the maritimes.8 Ontario never joined this project and in 1989 it enacted its own substantially revised PPSA without taking inter-provincial harmonisation into account.9 More recently, efforts have been made to bring the Ontario PPSA more closely into line with the other provinces, but these developments have been piecemeal and there are still significant differences between Ontario and elsewhere. A selection of the more important differences is discussed below. The lack of harmonisation between Ontario and the other provinces is an undeniable shortcoming in Canada’s secured transactions laws and it stands in sharp contrast to the outcome achieved in the United States under the auspices of NCCUSL and the ALI. The position in Canada is due partly to the historical factors mentioned above and partly to the absence of a national oversight body like NCCUSL and the ALI (see further Part III below).

5 For a fuller historical account of PPS law reform in Canada, see RCC Cuming, C Walsh and RJ Wood, Personal Property Security Law, 2nd edn (Toronto, Irwin Publishing, 2012) 64–70; A Duggan, Secured Transactions in Personal Property: Cases, Text and Materials, 7th edn (Toronto, Emond Publishing, 2018) 18–22; JS Ziegel, DL Denomme and A Duggan, Ontario Personal Property Security Act: Commentary and Analysis, 3rd edn (Toronto, LexisNexis, 2020) 1–13; C Walsh, ‘Transplanting Article 9: The Canadian PPSA Experience’ in Gullifer and Akseli (n 4) 49. 6 Personal Property Security Act, SO 1967. But the Act was not proclaimed to commence until 1976. The delay was due mainly to difficulties encountered in the development of a computerised registry. 7 Personal Property Security Act, SS 1979–80, c P-6.1. 8 Including Saskatchewan, which re-enacted its PPSA in 1990: Personal Property Security Act, SS 1990, c P-6.2 (Saskatchewan PPSA). In the text, ‘Western provinces’ is shorthand for: Alberta, British Columbia, Manitoba, Saskatchewan and the three territories (Northwest Territories, Nunavut and Yukon). ‘Maritime provinces’ refers to: New Brunswick, Newfoundland and Labrador, Nova Scotia and Prince Edward Island. 9 Ontario PPSA (n 2).

Personal Property Securities Law Reform in Developed Jurisdictions 53

(ii) Registration and Search Logic One of the most significant differences between Ontario and the other provinces is that the Ontario personal property securities (PPS) register is based on an exact match registration and search system, whereas all the other registries use a close similar match system. Under an exact match system, even a minor discrepancy between the debtor’s name against which a security interest is registered and the name a searcher uses when conducting a search of the register will prevent the search from retrieving the registration. Fairbanx Corp v Royal Bank of Canada (Fairbanx)10 dramatically illustrates the implications. Under Ontario law, if the debtor is a corporation, the correct name for registration and search purposes is the name that appears in the debtor’s documents of incorporation. In Fairbanx, the debtor’s name, as it appeared in its documents of incorporation, was ‘Friction Tecnology Consultants Inc’, but it carried on business under the name ‘Friction Technology Consultants Inc’. Fairbanx, a secured party, registered a financing statement using the second spelling. The Royal Bank subsequently carried out a search using the second, incorrect spelling and the search returned Fairbanx’s registration. The bank later conducted another search, this time using the first, correct spelling and this time the search did not return the registration. Ontario PPSA, section 46(4) provides that a registration is invalidated by a materially misleading error in the financing statement. In Fairbanx, the court held, consistently with earlier cases, that in the PPSA context, an error is materially misleading if it makes the registration unsearchable against the correct search criterion.11 On that basis, Fairbanx’s registration was invalid, with the result that its security interest was unperfected. The close similar match system in the other provinces is more forgiving of registration errors. Under a close similar match system, as the name implies, a search will return any registration against a name that either exactly or closely matches the name the searcher uses. Under a close similar match system, a search may return entries against various closely matching debtor names, leaving the searcher with the further task of identifying the particular entry that is relevant to its inquiry. The main cost of a close similar match system is that it potentially means more work for searchers, but the benefit is that it reduces registration risks. The Ontario view is that the costs of moving to a close similar match system outweigh the benefits, while the other provinces think the opposite. Both positions are tenable, but from a register user’s perspective, it would have been better if one or other view had prevailed because, as matters currently stand, register users must adjust their practices from province to province to take account of the different systems.

(iii) Inventory Financier versus Accounts Receivable Financier Consider the following example. Example 1. On Date 1, SP1 takes a security interest in Debtor’s present and after-acquired accounts and registers a financing statement. On Date 2, SP2 makes Debtor a loan to finance the purchase of inventory. On Date 3, Debtor makes sales to various customers on 90 day terms. While the accounts are still outstanding, Debtor defaults against SP1 and SP2. SP1 claims the accounts as part of its original collateral. SP2 claims the accounts as proceeds of inventory.

10 2010 ONCA 385. 11 In this connection, the case confirms earlier decisions holding that the test for whether a materially misleading error is an objective one: the question is whether a reasonable searcher would likely be misled by the error (typically, by not being able to discover the registration), regardless of whether anyone was actually misled. In Fairbanx, the bank was not misled because it happened to discover the registration regardless of the error, but the bank’s knowledge was irrelevant to the court’s conclusion.

54 Anthony Duggan SP2 holds a purchase-money security interest (pmsi).12 Subject to some restrictions, all the PPSAs give a pmsi-holder priority over an earlier perfected security interest.13 But special rules apply where the earlier security interest is in accounts, as in Example 1, and the Canadian provinces have divided on what the special rules should say. Most provinces follow the Article 9 lead in saying that, in a case like Example 1, the pmsi super-priority rule does not apply and the outcome is determined instead by the general priority rule of first to register.14 This approach has been justified as follows: If a secured party is approached by a potential customer seeking inventory financing, he will conduct a search of the registry to determine whether or not any priority claims to the potential customer’s accounts have been registered. If the search reveals a prior claim, the inventory financer must decide whether or not he would be adequately secured without having as collateral the accounts which are proceeds of his inventory. The decision that the accounts are necessary may, but need not, lead to the conclusion that the potential customer must be turned away. The accounts financer may be prepared to execute a subordination agreement giving the inventory financer priority to the accounts which are proceeds of his inventory. In any event, if priority is given to the accounts financer, the inventory financer is in a position to take measures to avoid loss to anyone simply by refusing to deal with the person seeking further credit.15

By contrast, the rule in Ontario and the maritime provinces is that the inventory financier’s pmsi has super-priority provided that: (1) its security interest was perfected when the debtor obtained possession of the inventory; and (2) the inventory financier gives the accounts financier notice of its pmsi, again before the debtor obtains possession of the inventory.16 The purpose of the prior notice requirement is to allow the accounts financier to make informed decisions about whether to make further advances on the security of the debtor’s accounts. The thinking is that this measure gives the accounts financier sufficient protection and there is no need to take the further step of depriving the inventory financier of its pmsi super-priority.17 But the approach has been criticised on the following grounds: Consider where [this option] would leave the accounts financer who was first to file. Unless and until he had been notified of the inventory claimant, he would, of course, be entitled to rely on his own firstfiled position. Suppose, however, that [the option] were to be adopted … [The account financer’s] only recourse would be to break off his accounts financing [and he may suffer loss as a consequence]. In the first place, he might have been relying on accounts subsequently arising to restore a collateral ratio which he had temporarily allowed to go below standard, for example, a temporary over-advance to enable the debtor to buy peak inventory. Worse than that, until liquidation of his accounts collateral acquired before the notice, he would find himself in a daytime version of the account financer’s worst nightmare – split financing of accounts on an indirect collection basis. The debtor would have to transfer some collections to one financer, with Solomon-like decisions as to which financer was entitled to collections where part of a single running account of an account debtor had been assigned in one direction and part in the other direction. Finally, the financer would have to forgo the profits from financing on a contract which he might have entered into originally with considerable risk, only to find it now ‘creamed off ’ by another financer who stepped in after the credit stability of the debtor has been improved.18 12 A purchase money security interest is a security interest in collateral that: (a) secures payment of the collateral purchase price; or (b) secures a loan given to enable the debtor to acquire the collateral: see, eg Ontario PPSA, s 1(1). 13 See, eg Ontario PPSA, s 33. 14 See, eg Saskatchewan PPSA, s 34(6). 15 RCC Cuming, ‘Second Generation Personal Property Security Legislation in Canada’ (1981–82) 46 Saskatchewan Law Review 5, 38–39. 16 See, eg Ontario PPSA, s 33(1). 17 See Cuming et al (n 5) 70. 18 H Kripke, ‘Suggestions for Clarifying Article 9: Intangibles, Proceeds and Priorities’ (1966) 41 New York University Law Review 687, 718.

Personal Property Securities Law Reform in Developed Jurisdictions 55 Ontario adopted its current position in 2006. Prior to that, the Ontario rule was that the inventory financier’s super-priority was not subject to any prior notice requirement. In making the switch, Ontario appears to have overlooked the point made in the above-quoted passage. The oversight is unfortunate because if Ontario had gone with the Western provinces and Article 9 approach instead, the maritime provinces may also have come into line and uniformity would have been achieved. As it is, these developments provide another example of the lack of co-ordination between Ontario and other provinces on key aspects of personal property security law reform.

(iv) Perfection by Possession A further example can be found in the rules governing perfection of a security interest by taking possession of the collateral. In Ontario, the statute states expressly that an otherwise unperfected security interest becomes perfected if the secured party repossesses the collateral.19 The Manitoba PPSA takes the same approach,20 but in the other provinces, the rule is the opposite, namely that repossession does not perfect a security interest. The Ontario and Manitoba approach is based on the view that the function of possession is to give third parties notice of a security interest and, from this perspective, it makes no difference how the secured party happened to obtain possession.21 The approach in the other provinces is based on a number of considerations, including concerns that allowing repossession to perfect a security interest: (1) may encourage ‘precipitate action and potential breaches of the peace’; (2) compromises the PPSA’s publicity objective by weakening the secured party’s incentive to perfect earlier rather than later; and (3) may promote litigation over what constitutes possession for perfection purposes.22 The following example illustrates the implications of these opposing positions. Example 2. On Date 1, SP takes a security interest in Debtor’s tractor, but it fails to register a financing statement. On Date 2, Debtor defaults against SP and SP repossesses the tractor. On Date 3, Debtor becomes bankrupt.

In all provinces, the rule is that an unperfected security interest is ineffective against the debtor’s trustee in bankruptcy.23 In Ontario and Manitoba, since SP’s security interest is perfected on Date 3, it prevails over the trustee and is enforceable in Debtor’s bankruptcy. By contrast, in the other provinces, the security interest remains unperfected and so SP is reduced to the status of an unsecured creditor in the bankruptcy. The Bankruptcy and Insolvency Act24 is a federal statute with the result that, for the most part, stakeholders’ entitlements do not vary from province to province. But in cases like Example 3, this variable does affect SP’s rights relative to the rights of Debtor’s unsecured creditors and in this sense, the divergent PPSA approaches run counter to the objectives that underpin the national bankruptcy regime.

(v) Continuity of Perfection Consider the following case. Example 3. On Date 1, SP1 takes a security interest in Debtor’s printing press and registers a financing statement. On Date 2, SP2 takes a security interest in the same printing press and registers a financing

19 Ontario

PPSA, s 22(1). Property Security Act CCSM, c P-35, s 24(1). 21 Cuming et al (n 5) 310. 22 ibid. 23 See, eg Ontario PPSA, s 20(1)(b). 24 RSC 1985, c B-3. 20 Personal

56 Anthony Duggan statement. On Date 3, SP1’s registration is accidentally discharged and so its security interest becomes unperfected. On Date 4, SP3 takes a security interest in the printing press and registers a financing statement. On Date 5, SP1 reperfects its security interest by registering a new financing statement. On Date 6, Debtor defaults and SP1, SP2 and SP3 all claim the printing press.

In Ontario, the governing provision is section 30(6), which provides as follows: Where a security interest that has been perfected by registration becomes unperfected and is again perfected by registration, the security interest shall be deemed to have been continuously perfected from the time of first perfection except that if a person acquires rights in all or part of the collateral during the period when the security interest was unperfected, the registration shall not be effective as against the person who acquired the rights during such period.

Applying the first part of this provision to the facts of Example 3, SP1 has priority over SP2. The justification for this outcome is that SP1’s security interest was still perfected on Date 2, when SP2 transacted with Debtor, and so SP2 would not have been prejudiced by SP1’s later loss of perfection. Applying the second part of the provision, SP3 has priority over SP1. The justification for this outcome is that SP3 acquired its security interest while SP1’s security interest was unperfected and therefore unsearchable in the register. In summary, SP1 has priority over SP2, while SP3 has priority over SP1. As between SP2 and SP3, the ordinary priority rules in section 30(1) apply; specifically, priority turns on the order of registration. Applying this rule to the facts of Example 3, SP2 has priority over SP3. So the end result is a circular priorities system: SP1 has priority over SP2; SP2 has priority over SP3; and SP3 has priority over SP1. The corresponding provision in the other provinces is drafted with the aim of minimising the circular priorities risk. The main difference is that, in the other provinces, there is a 30-day limit on the protection the first part of the provision gives parties such as SP1 in Example 3. More specifically, the provision states that SP1 must re-register within 30 days after its registration lapse in order to preserve its priority status. Applying this provision to the facts of Example 3, if Date 5 is more than 30 days after Date 3, Date 1 ceases to be SP1’s priority point and Date 5 becomes the new priority point. On that basis, SP2 and SP3 both have priority over SP1 and since the priorities between SP2 and SP3 are unaffected, there is no circularity.25 Both versions of the provision have the same purpose, namely, to reduce the risk to parties like SP1 of accidental registration lapses. But the provisions compromise the integrity of the register because SP1’s security interest is unsearchable during the period it is unperfected. This potentially increases transactions costs for parties like SP3 who are likely to have contracted with Debtor in ignorance of SP1’s security interest. The provisions address this concern by subordinating SP1 to SP3 but, in doing so, they potentially lead to circular priority outcomes which, in turn, entail litigation costs. The Ontario provision gives greater protection to SP1, but it creates a higher risk of litigation costs. By contrast, the provision in the other provinces minimises the risk of litigation but at the expense of reduced protection for parties like SP1. In summary, there is an underlying policy conflict on which Ontario is at odds with the other provinces for no obviously good reason and apparently without regard to the benefits of harmonisation.

25 To be clear, the provision minimises the circularity priorities problem, but does not eliminate it altogether. Specifically, there would still be a circular priorities issue in Example 3, if Date 5 is 30 days or less after Date 3.

Personal Property Securities Law Reform in Developed Jurisdictions 57

(vi) Licences as Collateral26 A question that has been much litigated, particularly in Ontario, is whether a statutory licence qualifies as personal property for the purposes of the PPSA. The following example illustrates the context in which the issue typically arises. Example 4. Debtor runs a commercial fishing business and holds a fishing licence from the relevant government authority. SP makes a loan to Debtor and takes a security interest in all Debtor’s present and after-acquired personal property. Debtor ends up in financial difficulty and SP appoints a receiver. The receiver is keen to sell Debtor’s business on a going-concern basis because this will bring in a higher return than the piecemeal sale of Debtor’s assets. But the business is worthless without the licence.

Whether the receiver can transfer the licence as part of the sale depends on whether SP’s security interest extends to the licence. This question, in turn, depends on whether the licence is ‘personal property’ within the meaning of the security agreement and the statute. The Ontario PPSA defines ‘personal property’ to mean ‘chattel paper, documents of title, goods, instruments, intangibles, money and investment property’.27 There is a similar provision in all the other provincial and territory PPSAs. Each of these expressions is in turn defined. A statutory licence does not fit the definition of goods, chattel paper, investment property, document of title, instrument or money. But it may fall under the catch-all definition of ‘intangible’, which reads as follows: ‘“Intangible” means all personal property, including choses in action, that is not goods, chattel paper, documents of title, instruments, money or investment property.’28 The question, therefore, is whether a statutory licence qualifies as personal property. In Saulnier v RBC (Saulnier),11 the Supreme Court of Canada held that a fishing licence is personal property for the purposes of the Nova Scotia PPSA and the federal bankruptcy laws because it is analogous to a profit a prendre. A profit a prendre is an established property right which gives the right-holder entry onto the right-giver’s land for the purpose of collecting and removing commodities situated on the land (eg, trees, stones, minerals, game, etc). In Saulnier, the court held that a fishing licence was not, strictly speaking, a profit a prendre, but it was sufficiently similar to justify concluding that, like a profit a prendre, it was property. In the course of its judgment, the court identified strong policy reasons for treating a fishing licence as property in the PPSA context: A commercial fisher with a ramshackle boat and a licence to fish is much better off financially than a fisher with a great boat tied up at the wharf and no licence. Financial institutions looking for readily marketable loan collateral want to snap up licences issued under the federal Regulations, which in the case of the lobster fishery can have a dockside value that fluctuates up to a half million dollars or more. Fishers want to offer as much collateral as they can to obtain the loans needed to acquire the equipment to enable them to put to sea.29

In short, if a fishing licence qualifies as property, it can be used as collateral which, in turn, facilitates access to credit. It is commonly thought that allowing a security interest to be taken in a statutory licence might interfere with the licensing authority’s control over who may hold the licence and that 26 This section is adapted from part II(5) of the ‘Report to the Canadian Conference on Personal Property Security Law on Proposals for Changes to the Personal Property Security Acts’ (prepared by a Working Group of the Canadian Conference on Personal Property Security Law (CCPPSL) and ratified at the CCPPSL Annual Meeting in Edmonton, Alberta, 21–23 June 2017) (CCPPSL Report). Available on CanLII at httpsa://www.canlii.org/en/ommentary/reports/273/. 27 See, eg Ontario PPSA, s 1(1). 28 ibid s 1(1). 29 2008 SCC 58 [13].

58 Anthony Duggan this, in turn, might compromise the public policy underlying the licence regime. But the court dispelled this concern, pointing out that the PPSA gives the secured party no greater rights than the debtor himself had (nemo dat quod non habet). The debtor holds the licence subject to the licensing authority’s discretion as provided by the licensing statute and, likewise, the debtor’s right to transfer the licence is subject to the authority’s discretion. Therefore, the secured party’s rights to hold and transfer the licence are also at the authority’s discretion. In other words, the secured party steps into the shoes of the debtor and takes the licence ‘warts and all’.30 The ‘warts and all’ concept has two particular implications in the PPSA context: (1) a security interest in a statutory licence does not interfere with the licensing authority’s discretion and so there is no threat to public policy; and (2) when a secured party is negotiating for a security interest in a licence, it must take account of the risk that the licensing authority might exercise its discretion contrary to the secured party’s interests, for example, by blocking a proposed future sale of the licence, or by cancelling or refusing to renew the licence. On all these fronts, the secured party is as vulnerable as the debtor/licensee and it must make a commercial decision about whether to assume the risk. It is hard to fault the court’s policy analysis in Saulnier but, unfortunately, its statement of the law is open to question. The problem is that while the profit a prendre analogy may be easy enough to draw in the case of a fishing licence, because a fishing licence gives the licensee rights of entry and expropriation, not all licences have this characteristic. For example, the analogy between a taxi licence and a profit a prendre would be harder to draw and the same point could be made about nursing home licences and milk or tobacco quotas. These types of licence, like a fishing licence, may represent major commercial assets and potentially valuable loan collateral, but the reasoning in Saulnier invites the conclusion that they are not personal property. A contractual licence is a form of agreement under which licensor A gives licensee B permission to use A’s property. Licensing is a common method for the sharing of intellectual property rights (patents, copyrights, trademarks, and the like). In form, a contractual licence is a promise by A to B that B may use A’s property for the duration of the agreement. The licence may contain a provision prohibiting B from assigning its rights or, alternatively, stipulating that B may not assign its rights without A’s consent. Can B use the licence as collateral? As in the case of a statutory licence, the answer depends on whether a contractual licence is ‘personal property’ within the meaning of the PPSA. Saulnier was concerned with statutory licences, but the case has implications for contractual licences as well. In Saulnier, the court remarked that ‘a simple licence [probably could not] itself be considered property at common law’. But it went on to say that ‘if not property in the common law, a fishing licence is unquestionably a major commercial asset’.31 The same is true of a contractual licence such as an intellectual property licence. It ought to follow that if a fishing licence can be used as collateral (subject to the ‘warts and all’ limitation), so too can an intellectual property licence. If the licence agreement provides that the licensee may not transfer its entitlement without the licensor’s consent, the secured party would be subject to the same limitation. Therefore, if it wanted to enforce its security interest by selling the licence, it would first have to seek the licensor’s approval. On the other hand, if the licence agreement absolutely prohibited transfer of the licence, the secured party would obtain no rights in the licence at all unless, perhaps, it was able to negotiate with the licensor for a waiver of the prohibition. The problem is that the

30 ibid 31 ibid

[50]. [23].

Personal Property Securities Law Reform in Developed Jurisdictions 59 Saulnier profit a prendre analogy does not work for intellectual property licences and the like and so, despite the policy arguments, these licences may not qualify as property after all. Two provinces, Saskatchewan and British Columbia, have amended their PPSAs in the wake of Saulnier to make it clear that licences are personal property for the purposes of the statute and that, subject to certain restrictions, they may be used as collateral.32 The Ontario Bar Association has twice recommended similar reforms in that province, but on both occasions the government failed to respond.33 The issue appears not to have been considered in any of the other provinces. In summary, the provincial responses to this important issue have been piecemeal.

B. Law Reform The lack of co-ordination between Ontario and the other provinces that is evident in the PPSAs as they currently stand has played out also in recent law reform initiatives. Perhaps the most striking example is the Ontario-initiated proposal to amend the PPSA conflict of laws provisions so that they align more closely with Revised Article 9.34 The PPSA choice of law rules vary, depending on the nature of the collateral. For example, where the collateral is goods or other tangible property, issues relating to the validity and perfection of a security interest are governed by the laws of the jurisdiction where the collateral is located when the security interest attaches.35 On the other hand, in the case of intangible collateral, such as accounts, and also in the case of highly mobile tangible collateral, such as motor vehicles, the applicable law is the law of the jurisdiction where the debtor is located when the security interest attaches.36 In most provinces, the rules for determining the debtor’s location refer to the following: (1) the debtor’s place of business; (2) if the debtor has no place of business, the debtor’s principal residence; and (3) if the debtor has a place of business in more than one jurisdiction, the place of the debtor’s chief executive office.37 This was also the rule in Ontario until 2015 when amendments enacted in 2006 were proclaimed to commence.

32 Saskatchewan PPSA, s 2(w) (‘intangible’), (z) (‘licence’); Personal Property Security Act, RSBC 1996, c 357, s 1(1), ‘intangible’, ‘licence’. The Saskatchewan provisions were further amended in 2019 to implement recommendations made in the CCPPSL Report. The amendments came into effect on 22 June 2020. 33 For details, see A Duggan, ‘Current Issues in Secured Transactions Law in Canada: An Ontario Perspective’ in Gullifer and Akseli (n 4) 100–01. 34 Limitations of space preclude discussion of other examples. But one more instance might be briefly mentioned. All the PPSAs provide that if the collateral is a motor vehicle and the debtor is a consumer, the financing statement must include both the debtor’s name and the vehicle identification number (VIN): see, eg Minister’s Order Under the Personal Property Security Act, s 3(1) (Ontario). The purpose is to give third parties the option of searching against either the debtor’s name or the VIN. All PPSAs also provide that a materially (seriously) misleading error invalidates a financing statement and the courts have held that the test is whether an error would prevent a searcher from discovering the registration using the correct search criterion: see Part (a)(ii). The CCPPSL Report recommends a new provision to say that an error in the debtor’s name invalidates a registration, even if the VIN is correct. The thinking is that searchers should have the option of choosing between the two kinds of search and a debtor’s name error forecloses that choice. The CCPPSL Report became available in June 2017. In December 2017, without reference to the CCPPSL Report, Ontario enacted a provision saying precisely the opposite, namely that a correctly stated VIN does cure a debtor name error: Cutting Unnecessary Red Tape Act 2017, SO 2017, c 20, sch 9, s 12, enacting new PPSA, ss 46.1–46.3. The thinking, in part, is that a reasonable searcher would conduct both kinds of search and a VIN search would turn up the registration even if a debtor’s name search did not. In this connection the amendments codify the Ontario Court of Appeal’s decision in Re Lambert (1994) 20 OR (3d) 108. Ontario has been at loggerheads with the other provinces over this issue since Re Lambert was decided, but there is a good case for saying that the provinces did not try hard enough to reach agreement. 35 See, eg Ontario PPSA, s 5(1). 36 ibid s 7(1). 37 See, eg Saskatchewan PPSA, s 7(1).

60 Anthony Duggan The new Ontario provisions provide, in part, that a debtor is located: (1) if the debtor is an individual, in the jurisdiction where the debtor’s principal residence is located; (2) if the debtor is a corporation incorporated in a province, in the province of incorporation; and (3) if the debtor is a corporation incorporated federally, in the jurisdiction where the debtor’s head office is located, as set out in its documents of incorporation or by-laws.38 The main purposes of the amendment were to reduce uncertainty and also to align the Ontario choice of law provisions more closely with Revised Article 9. Under the old provisions, it may have been difficult for a third party to determine whether the debtor carried on business and, if so, the location of the business. The meaning of the reference to the debtor’s ‘chief executive office’ was also indeterminate. The new provisions aim to avoid litigation over such issues by substituting a set of bright-line tests which are easy for parties to apply and courts to adjudicate.39 As mentioned above, the new Ontario provisions were enacted in 2006, but proclamation was delayed to give other provinces the opportunity of enacting parallel reforms. Saskatchewan and British Columbia did so,40 but they also delayed proclamation to give the other provinces time to come on board. Nearly ten years passed with no signs of action from the other provinces. Finally, in late 2015, Ontario proclaimed its new provisions. A modified version of the Saskatchewan amendments was enacted in 2019 and proclaimed on 22 June 2020, but the British Columbia amendments remain unproclaimed.41 The bottom line is that the Ontario and Saskatchewan debtor location provisions are currently out of line with the provisions in the other provinces while the Saskatchewan provisions, as proclaimed in 2020, depart from the Ontario model in a number of respects. Example 5 illustrates the implications of this situation. Example 5. Debtor runs a retailing business. It is incorporated in Ontario; its largest retail outlets are in Toronto, Ontario; its chief executive office is in Vancouver, British Columbia. On Date 1, SP1 takes a security interest in all Debtor’s present and after-acquired personal property and registers a financing statement in British Columbia. On Date 2, SP2 takes a security interest in Debtor’s present and afteracquired accounts and registers a financing statement in Ontario. On Date 3, Debtor defaults against SP1 and SP2 and they both claim Debtor’s outstanding accounts.

Under the new Ontario choice of law provisions, Ontario law governs the dispute because: (1) the disputed collateral is accounts; (2) the applicable choice of law rule for accounts is the debtor’s location; and (3) Debtor’s location is Ontario, its province of incorporation. SP1’s British Columbia registration perfects its security interest in British Columbia, but not Ontario. On the other hand, SP2’s security interest is perfected in Ontario. Ontario PPSA, section 20(1)(a)(i) provides that an unperfected security interest is subordinate to a perfected security interest in the same collateral. The result is that, if the case is litigated in Ontario, SP2 has priority. But if the case is litigated in British Columbia, the British Columbia PPSA choice of law provisions apply. As in Ontario, the disputed collateral being accounts, these provisions apply the debtor’s location rule but, in British Columbia, Debtor’s location is determined by the location of its chief executive office, not its province of incorporation. On this basis, British Columbia law governs the dispute and, since SP1’s security interest is perfected in British Columbia while SP2’s

38 Ontario PPSA, s 7(3). 39 For a fuller account and critical analysis of the Ontario reforms, see CCPPSL Report (n 26) part I (12); Proposals for PPSA Changes (n 26) part X. 40 An Act to Amend the Personal Property Security Act, 1993, Bill 102, 2009, ss 5 and 6 (Saskatchewan); Finance Statutes Amendment Act, Bill 6, 2010, ss 43–47 (B C). 41 See Personal Property Security Amendment Act, 2019, SS 2019, c 15. The purpose of the 2019 modifications was to implement recommendations made in the CCPPSL Report.

Personal Property Securities Law Reform in Developed Jurisdictions 61 is not, SP1 has priority. In short, the outcome of the dispute varies depending on the choice of forum. Ontario was alive to this prospect at the time it enacted its new provisions and that explains why it delayed proclamation for as long as it could.42 But, as explained above, to date Saskatchewan has been the only province to respond. There is a coda to this sad story, which further demonstrates the lack of inter-provincial co-ordination in PPS law reform. The Ontario amendments included a transitional provision which, following enactment, was found to contain an error.43 The CCPPSL Report incorporates a draft new transitional provision correcting the error. In the meantime, Ontario has enacted its own new transitional provision, without reference to the CCPPSL Report.44 The upshot is that there are two versions of the transitional provision currently in play and provinces planning to change their location of debtor rules will have to choose between them. The potential for differences between the transitional provisions from province to province has the same implications as in Example 5, for the duration of the transitional period.

C. The US and Australia (i) The US As in Canada, secured transactions law in the United States is a state (provincial) responsibility. But in contrast to Canada, United States secured transactions laws are largely uniform due to the joint efforts of NCCUSL and the ALI in drafting, promoting and overseeing the UCC. These bodies and their work are discussed a little more fully in Part 3, below. For now, it is sufficient to note three features of their work that have been key to the achievement and maintenance of uniform secured transactions laws. First, they developed the UCC, including Article 9 on secured transactions, as a model law with a view to adoption by State legislatures. This resulted in a high degree of co-ordination in the drafting of the original text. Second, they mounted a highly successful political effort to have States adopt the model law resulting, over time, in universal take-up. Third, they established a Permanent Editorial Board to limit non-uniform amendments and to oversee and co-ordinate revisions. The first Official Text of the UCC was published in 1952. Since then, there have been three major revisions in 1972, 1999 (the 1999 Official Text is commonly known as ‘Revised Article 9’) and 2010. In each case, the work was done under the supervision of the Permanent Editorial Board, with drafts being subject to approval by the ALI and NCCUSL. The process enabled the recruitment of top experts to the project and it facilitated stakeholder inputs. As in the case of the original Official Text, the result was substantial stakeholder and legislature buy-in (by 2001, all States had adopted Revised Article 9).45 This picture stands in stark contrast to the position in Canada where, as explained earlier, there was a lack of co-ordination between Ontario in particular and the other provinces in the enactment of the original laws. The problem has persisted and it continues to hamper efforts to achieve greater harmonisation and also substantive reforms.

42 In Ontario, statutory provisions are automatically repealed if they are not proclaimed within 10 years of enactment: Legislation Act 2006, SO 2006, c 21, sch F, s 10.1. 43 Ontario PPSA, s 7.2. The details of the error are unimportant for present purposes. 44 Cutting Unnecessary Red Tape Act 2017, SO 2017, c 20, sch 9, s 9. 45 For a fuller account, see Winship (n 4).

62 Anthony Duggan

(ii) Australia As in Canada and the United States, secured transactions law is largely a State responsibility. But there is provision in the Australian constitution for the States to refer powers to the Commonwealth,46 and in the early days of the reform process, the PPSA lawmakers managed to persuade the States to refer all powers necessary for the Commonwealth to enact a comprehensive PPSA and establish a national register. The result is that there is only one PPSA for the whole of Australia and so the challenges Canada and the United States face in achieving and maintaining uniform laws do not arise in Australia. Moreover, in Australia, there is only one PPS register, in contrast to the multiple provincial (state) registers in Canada and the United States. This eliminates the need for multiple registrations and searches and, as such, it means substantial transaction cost savings for register users which, in turn, should be reflected in the cost and availability of credit. An outcome like this would be a pipe-dream in Canada. While the two federal systems are similar in many respects, the dynamics are quite different. In Australia, there is a strong tendency towards centralisation of powers. This is particularly evident in the commercial law area, where the Commonwealth has taken over from the States in areas such as corporations law, securities regulation and consumer protection, as well as secured transactions. By contrast, there is no doubt that the Canadian provinces would strongly resist any similar takeover attempt by the federal government. Canada’s inability to establish a national securities regulator despite years of persistent effort is proof enough of this point.47

III. Oversight A. Canada NCUSSL’s counterpart in Canada is the Uniform Law Conference of Canada (ULCC). The ULCC was established in 1918 on the recommendation of the Canadian Bar Association. It comprises federal and provincial government representatives and its primary objective is to promote uniform provincial laws. According to a note on its website, however, it has been hampered by a ‘lack of funds for legal research, the delegates often being too busy with their regular work to undertake research in depth’.48 In 1998, the ULCC adopted a Commercial Law Strategy, ‘a project to modernise and harmonise key elements of commercial law in Canada’.49 Since 2005, the Strategy has continued as part of the work of the ULCC’s Civil Section. At its 1970 annual meeting, the Canadian Bar Association adopted a Model Uniform Personal Property Security Act. The ULCC endorsed a revised version of this model in 1982, under the name Uniform Personal Property Security Act and the text is available on its website. But the model was never adopted and, despite the Commercial Law Strategy, the ULCC has undertaken no meaningful PPSA-related work since the early 2000s. Personal property security law is not on the Civil 46 Commonwealth of Australia Constitution, s 51(xxxvii). 47 For the history, see Expert Panel on Securities Regulation, Creating an Advantage in Global Capital Markets: Final Report and Recommendations (Ottawa, Department of Finance, 2009); Reference re Securities Act [2011] 3 SCR 837. Canada has the dubious distinction of being the only G20 country not to have a national securities regulator: D Moulton, ‘Financial Experts Divided on New National Securities Regulator’, The Lawyer’s Daily (27 October 2017), www.thelawyersdaily.ca/articles/4883/financial-experts-divided-on-new-national-securities-regulator. 48 ‘Historical Note’ [22], www.ulcc.ca/en/about-us-en-gb-1/history-of-the-conference. 49 ibid [30].

Personal Property Securities Law Reform in Developed Jurisdictions 63 Section’s list of current topics. No doubt, part of the reason for this is the lack of resources referred to on the ULCC website, but its lack of success on the PPSA front stands in sharp contrast to NCCUSL and the ALI’s achievements in the United States. The Canadian Conference on Personal Property Security Law (CCPPSL) is another body that has had some involvement in personal property security law reform. The CCPPSL comprises representatives of all the provincial and territory PPS registry offices. It also includes a number of academic members who work in the PPS field. The CCPPSL meets annually. In recent years, its agenda has tended to focus on registration issues, but at its 2015 meeting, it voted to set up a Working Group to suggest PPSA amendments and improvements. The Working Group comprised the six CCPPSL academic members and a British Columbia government representative. The group held regular tele-conferences over the following twelve months and drafted a report that was presented to the CCPPSL at its 2017 meeting.50 The report makes 22 proposals for reform, all of which the CCPPSL ratified. The report has been referred to all the provincial and territory governments. Saskatchewan enacted legislation in 2019 adopting all the Report’s recommendations while, also in 2019, Ontario adopted the Report’s recommendations on electronic chattel paper.51 To date, none of the other provinces has taken any action on the Report. The CCPPSL’s main challenge in taking on law reform projects is the familiar lack of resources. The body has no funds for law reform work and no formal mandate from governments to engage in such activity. The 2017 Report came about only because the Working Group members were prepared to volunteer their time and resources. There was no money for travel and so all meetings had to be by tele-conference. Resources are also lacking for promoting the Report’s recommendations to governments. No doubt this is one reason why so far the Report has apparently not gained much traction. In 2015, the Ontario government made a renewed commitment to business law reform in general and PPS law reform in particular.52 In 2016, the government established a Business Law Advisory Council (BLAC) to review the province’s corporate and commercial laws and to provide advice on reform priorities.53 BLAC released its first report later that year.54 The report contained a number of PPSA reform proposals, mostly minor, some of which became law in November 2017.55 BLAC is yet to develop a track record in the promotion of more wide-ranging reforms. In this connection, BLAC suffers from at least two limitations. First, its focus is on Ontario law and its concern with other provincial laws is at best secondary. This suggests that harmonisation may not be a top priority. Secondly, BLAC’s mandate spans commercial law at large and is not limited to the PPSA in particular. This suggests that the PPSA may be in competition with other issues for both the Council’s attention and favourable government responses.

50 CCPPSL Report (n 26). 51 See Personal Property Security Amendment Act, 2019, SS 2019, c 15; Protecting What Matters Most (Budget Measures) Act, 2019, SO 2019, c 7, sch 49. 52 See ‘Business Law Agenda: Priority Findings and Recommendations Report’ (Government of Ontario, 2015). 53 Following a change of government, the council was renamed the Business Law Modernization and Burden Reduction Council, effective January 2019. 54 Business Law Advisory Council, ‘Report to the Minister of Government and Consumer Services’ (draft version released 2016; final version released February 2017) (BLAC Report 2017). 55 Cutting Unnecessary Red Tape Act 2017, SO 2017, c 20, sch 9. The one major recommendation in the BLAC Report 2017 was for amendments to facilitate security interests in cash collateral. But this proposal has been on the table for some years and, for political reasons, the government has been slow to adopt it. See Duggan (n 33) 101–06. In subsequent, unpublished, reports, the Council has also recommended amendments to clarify the provisions governing the effect of financing statement errors (see n 34) and to adopt the CCPPSL’s proposals to facilitate security interests in electronic chattel paper (see n 51). Both proposals have been adopted.

64 Anthony Duggan

B. United States As discussed above, the ALI and NCCUSL were the joint promoters of the Uniform Commercial Code and they have continuing responsibility for its oversight. The ALI was established in 1923 to promote the clarification and simplification of United States common law and its adaptation to changing social needs. Members include law professors, practitioners, judges and other legal professionals. The ALI is best known for its restatements of the common law, but it also publishes model codes and other law reform proposals. NCCUSL, also known as the Uniform Law Commission, was established in 1892 with the aim of promoting uniform State laws. It is made up of approximately 350 commissioners appointed by each State. All its members are lawyers. NCCUSL is the equivalent of the ULCC in Canada, but it is vastly better resourced. This has enabled it, along with the ALI, to establish and maintain a Permanent Editorial Board to promote uniformity and to monitor the law for any needed improvements. The scale of the NCCUSL enterprise can be seen in the work that went into the drafting of the original UCC and its various revisions.56 NCCUSL’s processes are set up to facilitate the co-option of top experts to its projects, comprehensive dialogue with stakeholders and the promotion of its proposals to governments. Moreover, its work is extraordinarily rigorous. For example, as Peter Winship describes, the work on what was to become Revised Article 9 proceeded in three stages from 1990 through to 1999.57 At the first stage (1990–1992), the Permanent Editorial Board appointed a study group to consider the need for amendments. The study group was tasked with examining Article 9 section by section and also broad policy analysis. At the second stage (1993–1998), on the study group’s recommendation, a drafting committee was appointed and, as Winship reports: [W]ork began promptly. Between November 1993 and March 1998, the committee met 14 times. The annual meetings of NCCUSL reviewed drafts in 1995, 1996 and 1997. The Council of the ALI reviewed drafts in those same years, while the reporters made informational reports to the general ALI membership at the annual meetings in this same period. ALI members with a particular interest in the project constituted a Members Consultative Group and the reporters, the chair and some members of the drafting committee met with the group three times between 1994 and 1996. At the same time, ABA committees, especially the Uniform Commercial Code Committee of the Section of Business Law, prepared reports and monitored the progress of the drafting committee.58

At the third stage (1993–1998), the drafting committee ‘reviewed scrupulously the study group’s recommendation and the draft texts prepared by the two reporters. The committee accepted most recommendations.’59 ‘The ALI and NCCUSL approved the official text in 1998 and the official text with comments in 1999.’60 This is not how law reform is done in Canada or, for that matter, probably anywhere else in the world. Most countries simply cannot afford to tackle law reform projects at this level of intensity. But it does not follow that there is nothing for other countries to learn from the United States approach. On the contrary, it should be possible to construct a scaled-down version of the ALI-NCCUSL operation to meet the needs of less well-resourced jurisdictions. Canada appeared to be heading down this path when it established the ULCC. A revitalisation of the ULCC’s

56 For

an account of these projects, see Winship (n 4). 40–45. 58 ibid 42. 59 ibid 44. 60 ibid 45. 57 ibid

Personal Property Securities Law Reform in Developed Jurisdictions 65 involvement on the PPSA front, coupled with some additional government funding might be a good first step on the road to recovery.

C. Australia The Australian PPSA was enacted in 2009 and commenced operation on 30 January 2012. There is no equivalent in Australia to NCCUSL and the ALI and, at the time of drafting, there was not much local expertise on PPSA/ Article 9-style secured transactions laws. Not surprisingly in these circumstances, the legislation had many shortcomings and these quickly became evident once it commenced operation. Fortunately, the lawmakers were persuaded to include a provision for mandatory review of the statute after three years of operation.61 The review was announced on 14 April 2014 and Bruce Whittaker, a Melbourne lawyer, was put in charge. The final report was delivered on 27 February 2015 and tabled in Parliament on 18 March 2015.62 The final report is 530 pages long and makes 349 recommendations for improving the statute and the register. The report has been under consideration by the Attorney-General’s Department for the past five years, and a draft Bill, giving effect to the Report’s recommendations, was due for release in 2020 but has not yet appeared. One positive feature of the Australian experience is that, as discussed earlier, by enacting a federal PPSA, the lawmakers avoided the difficulties of achieving and maintaining uniform laws. This means that at least so far as the PPSA is concerned, there is no need for a body like NCCUSL to ensure uniformity (although Australia would have benefited from having some sort of expert body to help get the legislation right in the first place).63 Furthermore, in the short-term, at any rate, there is no need for a body to monitor the law for possible modernisation and improvement because the Statutory Review has only recently completed just such a task. But the PPSA, like Article 9, should be kept under regular review and there is no standing body in Australia tasked with that function. The Statutory Review was an ad hoc exercise and the reviewer’s function was spent once he submitted his report. In this connection, Australia might want to consider including a new mandatory review provision in the forthcoming draft bill, with the aim of entrenching a regular review process. An alternative possibility might be to establish a body, along the lines of Ontario’s Business Law Advisory Council, to keep the PPSA under review and report to the government from time on the need, if any, for updates and improvements.

IV. Register Upgrades All the Canadian provincial PPS registers are computerised, giving register users direct access to the registry database. In the four Atlantic provinces and Yukon and Nunavut, registrations and searches can only be done electronically. Elsewhere, apart from Ontario, users have the option of submitting registrations and search requests in paper form. In Ontario, since 2006 the system

61 Australian PPSA, s 343. 62 B Whittaker, Review of the Personal Property Security Act 2009: Final Report (Commonwealth of Australia, 2015), www.ag.gov.au (Statutory Review: Final Report). 63 There was a consultative group set up to advise the government during the drafting process. But there is no public record of the advice the group provided or the extent of the government’s reliance on the group’s advice.

66 Anthony Duggan has been entirely electronic for registrations,64 but search results are still produced on paper. The BLAC Report 2017 describes the Ontario system as follows:65 [D]ata is sent to the computer data base by registrants using electronic means. The data is stored electronically. When a search is ordered the data is printed on paper which is either picked up by the searcher or mailed to the searcher. Many parties then scan these searches to turn them back into digital form for storage and further retrieval if necessary.

One of the advantages of computerisation is that it saves transaction costs: it is much quicker and easier for parties to register and search electronically than it is to complete and lodge paper forms, particularly where there is no registry office close by. But these savings are not being fully realised in Ontario, owing to the continued use of paper search results as described above. In the BLAC Report’s words, ‘[the existing registry system] is causing overhead costs to both the Province and users of the system by not being fully digital in its operations and processes’.66 A related problem the report identifies is that the Ontario technology is badly outdated and is in urgent need of modernisation to bring it in line with developments in the other provinces. But to date, the government has not been prepared to commit funding to this project. The lack of funding for technological improvements also creates an obstacle to substantive law reforms that happen to affect the computer system. For example, in 2006 the government adopted in principle an Ontario Bar Association recommendation to amend the collateral description requirements for financing statements but the measure has never been implemented because it would require changing the software and, apparently, the money for this is not available. The BLAC Report 2017 goes on to make a number of recommendations for modernising the register, including elimination of paper searches and implementation of the 2006 collateral description proposal. But recommendations for upgrading the register are pointless unless the funding problem is addressed, and the Report does not mention the funding problem. The problem is that the PPS register is funded by appropriations from the government’s central budget and so it competes for priority with other claims on the government for money. The benefits of an enhanced PPS register may not be immediately obvious and it is safe to say that they are not uppermost in the minds of voters at large. This makes PPS registry enhancement a hard case to sell in the competition for scarce government funds. The position in Australia is quite different. The Australian PPS registry operates on a costrecovery basis. Gavin McCosker and Peter Edwards describe the Australian funding model as follows:67 [The] model is based on the Australian Government’s cost recovery guidelines. These guidelines require that the cost of service must match the cost of delivery, taking into account depreciation of the asset. AFSA [the Australian Financial Security Authority] is required to review fee levels regularly based on regular analysis of its costs through preparation of a Cost Recovery Implementation Statement. This analysis is used to inform a ministerial determination setting PPSR fees. The last review of that type led to PPSR-related fees being reduced by 15%. All revenue obtained through fees is received and administered directly by AFSA. This provides AFSA with a means to operate the PPSR with a much greater level

64 OPPSA, s 46; Ministers Order, s 2. 65 BLAC Report 2017 (n 56) 13. 66 ibid. 67 G McCosker and P Edwards, ‘Responsibility or Control? Choosing the Right Digital Operating Model for Registry Services’ (unpublished 2016, copy on file with the author) 14–15 (emphasis added). At the time this paper was written, McCosker and Edwards were the Australian PPS Registrar and Assistant Registrar, respectively. McCosker is still the Registrar, as well as now being the Chief Operating Officer of the Australian Financial Security Authority (AFSA); Edwards is now the National Manager, Client Services at AFSA.

Personal Property Securities Law Reform in Developed Jurisdictions 67 of flexibility – with appropriate approvals – than if it relied on an appropriation-based funding model. Specifically it enables AFSA to make planning and investment decisions outside of the usual competitive budget bidding process within government.

The main advantages of this model are that: (1) the PPS register is, in effect, self-funding, with the result that register enhancements and upgrades are not dependent on government appropriations; and (2) the registry office is able to offer a substantially wider range of client services than is possible under an appropriations model. In the first connection, it is not going too far too say that the appropriations model has proved to be a recipe for paralysis in the Ontario PPSA context, whereas the Australian model offers the flexibility for dealing with register improvements more or less as a matter of course. In the second connection, McCosker and Edwards say this:68 [there are] other key considerations that we believe are important to an effective register, regardless of which operational model is adopted. The first of these is user centred design – or UX. As outlined by the first of the Digital Service Standards established by the Australian Digital Transformation Agency in 2016 (and supported by similar standards around the world), government cannot be the arbiter of what clients need without having asked and understood how and what users want. Therefore, stakeholder engagement is necessary to build trusted relationships with stakeholders to understand how they interact with the register. This assists in identifying and removing unnecessary barriers and streamlining processes to deliver business and consumer benefits. Given the symbiotic relationship (evidenced by the incentives the private sector has in interacting with the register as listed above), stakeholders generally wish to work in a manner to ensure continuity and availability of the services. Building a trusted relationship also assists in managing the response should unplanned events arise. At AFSA, approximately every six months we meet with a broad cross-section of our stakeholders, representative of all sectors across the economy. We do not meet unless we have a meaningful agenda and we expect stakeholders to actively participate in the discussion and be representative of their respective industries. This has proven to be a very effective model to test ideas, drive an innovation agenda and discuss issues openly that cut across industries. It has enabled us to identify blind spots on our part while building awareness among stakeholders of the competing demands we must manage as a government agency. Through this process of stakeholder engagement, we have been able to address emerging risks before they become issues. For stakeholders, we have been able to deal with a range of complicated matters in a manner that is efficient for both them and us – even if that involves us telling stakeholders at an early stage that we won’t be able to do something which they suggest.

The picture this passage paints is a far cry from the level of service the Ontario registry is currently able to offer register users. Due predominantly to funding constraints, the Ontario registry is supplier-driven, not client-driven and there is not the capacity for taking account of and responding to register users’ needs and concerns in the way the Australian registry office does. To be blunt, the Ontario registry’s model of service delivery is stuck in the 1970s and it has failed to keep pace with the international best practices referred to in the passage quoted above.

V. Conclusion The focus of this chapter has been predominantly on Canada, with some reference also to the United States and Australia. These countries all have federal systems of government with secured transactions law being primarily a matter of state (provincial) responsibility. Each country has

68 ibid

19–20 (emphasis added).

68 Anthony Duggan responded differently to the challenges of achieving and maintaining uniform laws within a federal system. In the United States, NCCUSL and the ALI and have been given responsibility for oversight of the Uniform Commercial Code, with the objects of: (1) achieving and maintaining uniformity between state laws; (2) keeping the laws up to date; and (3) promoting any other necessary amendments. This approach is highly resource-intensive and it is perhaps not surprising that Canada’s ULCC, though modeled on NCCUSL, appears to have faltered in its oversight of the provincial PPSAs. As a result, secured transactions law reform in Canada is spasmodic and uncoordinated. For its part, Australia has effectively side-stepped the harmonisation problem by having the states transfer powers to the Commonwealth government to facilitate the enactment of a federal PPSA and the establishment of a national register. Of course, these are all issues specific to federal systems and so they do not directly relate to PPS reforms in countries with unitary systems of government. But there are still lessons other countries can learn from studying the Canadian, United States and Australian experiences. First, there must be sufficient local expertise to assist with the drafting of the initial legislation. Otherwise, countries should consider adopting a model law or engaging outside expertise to help with the drafting.69 Australia took neither course and, as a result, it ended up with a PPSA which, though loosely based on the Canadian model, was riddled with mistakes.70 It is now in the course of a protracted and costly revision aimed at getting its PPSA right. Secondly, experience in all three countries shows that business practices and policy thinking do not stand still and so in all PPSA jurisdictions there should be some arrangements in place for keeping the legislation up to date. NCCUSL and the ALI’s Permanent Editorial Board is one possible model. An alternative approach would be to provide for mandatory reviews of the legislation from time to time, along the lines of the Australian model. Thirdly, as the Ontario experience graphically demonstrates, it is critical to have funding arrangements in place to: (1) ensure the registry technology is kept up to date; (2) facilitate substantive amendments which impact the register; and (3) allow for stakeholder engagement as part of the development of a client-focused culture in the registry office. Again, there are lessons to be learned in this connection from the Australian approach.

69 For example, New Zealand used the Saskatchewan PPSA as its model. The UNCITRAL Model Law on Secured Transactions is another alternative. 70 Limitations of space preclude discussion of the details, but see A Duggan and D Brown, Australian Personal Property Securities Law, 1st edn (Australia, LexisNexis, 2012) ch 17 for a short summary of key defects in the statute (not r eproduced in the 2nd edn) and, importantly, the Statutory Review: Final Report (n 64).

4 Secured Transactions Law Reform in Asia and Access to Finance: What can the UNCITRAL Model Law on Secured Transactions Offer? N ORKUN AKSELI

I. Introduction The availability of credit and the consequent need to modernise collateral laws are important factors in improving access to finance for micro and small businesses. The ability to give security influences both the cost of credit and the availability of credit. This argument is equally applicable for both developed and developing economies. Since the 1990s, many jurisdictions have embarked upon modernisation of secured transactions laws.1 Some of these modernisation activities have evolved from within domestic legal systems (as a result of autopoietic evolution of law)2 intended either to increase a country’s credit rating,3 or to emulate the successful implementation of secured transactions reform by a neighbouring country.4 Some modernisation activities have instead been recommended by international financial institutions, as where a national government invites assistance to modernise its activities or a country goes through austerity measures to meet the conditions of finance offered by international financial institutions.5 The reason is that predictable laws on security rights are said to be critical in increasing investment and credit extension decisions; particularly, laws that permit non-possessory security rights enable small and medium businesses to have access to credit with better terms, including long term maturities and lower interest rates.6 Thus, modernisation activities have focused upon the main pillars of secured credit law regimes such as creation, third party effectiveness, priority and enforcement

1 For an analysis of law reforms see, eg L Gullifer and O Aksel (eds), Secured Transactions Law Reform: Principles, Policies and Practice (Oxford, Hart Publishing, 2016). 2 For autopoiesis in law see G Tuebner, Law as an Autopoietic System (Oxford, Blackwell, 1993). 3 For the World Bank’s Doing Business Report in 2019, see www.worldbank.org/content/dam/doingBusiness/media/ Annual-Reports/English/DB2019-report_web-version.pdf. 4 Examples of these can be experienced in African jurisdictions. 5 This was particularly the case in financial crises in the 1990s and post-2008. 6 See R Mann, ‘Explaining the Pattern of Secured Credit’ (1997) 110 Harvard Law Review 625; T Beck, A Demirguc-Kunt and R Levine, ‘SMEs, Growth and Poverty’, NBER Working Paper Series 11224 (2005), www.nber.org/ papers/w11224.pdf.

70 N Orkun Akseli of security interests which enable taking non-possessory security rights in an efficient manner. These modernisation activities enable a debtor to keep possession of the collateral whilst making repayments to the creditor. This type of modern secured transactions regime requires a number of changes to traditional secured credit regimes. Typical problems in cross border transactions arise in relation to the creation of security rights in a simple and cost effective way, achieving third party effectiveness of a security right by registration or other efficient methods, predictable and simple priority of security rights and efficient enforcement of security rights. Such modernisation reforms are best coordinated with insolvency law reforms,7 which have an accompanying role in the facilitation of access to credit for small businesses and entrepreneurialism. A significant number of international instruments have been drafted to achieve effective secured credit regimes by internationally mandated standard setting organisations and international financial institutions. Some of these are the European Bank for Reconstruction and Development (EBRD) Model Law on Secured Transactions, Organisation of American States (OAS) Inter-American Model Law on Secured Transactions, the World Bank/IFC Secured Transactions and Collateral Registries Toolkit, the UNIDROIT International Factoring Convention and the various instruments of the United Nations Commission for International Trade Law (UNCITRAL) on secured transactions law. In particular, since the mid-1990s, the UNCITRAL has been leading the efforts in the creation of international instruments (conventions, legislative guides, model laws and practice guides) through work on influential instruments including the United Nations Convention on the Assignment of Receivables in International Trade, the UNCITRAL Legislative Guide on Secured Transactions (Legislative Guide), the UNCITRAL Model Law on Secured Transactions (Model Law) and the UNCITRAL Practice Guide on Secured Transactions. Among these instruments, the Model Law, supported by a Guide to Enactment,8 will be particularly influential in the implementation of the key principles and fundamental policies of the Legislative Guide. The Model Law is based on the recommendations of the Legislative Guide as well as the Legislative Guide’s Supplement on Security Rights in Intellectual Property, the UNCITRAL Guide on the Implementation of a Security Rights Registry, and the United Nations Convention on the Assignment of Receivables in International Trade. This chapter will discuss the key objectives and fundamental policies of the Model Law as well as its provisions in enabling small businesses in emerging markets to have inclusive finance. These will be centred on creation of a security interest, perfection of a security interest, priority of a security interest, registry provisions, the enforcement of security interests and the conflict of laws.

II. Key Objectives and Fundamental Policies of the UNCITRAL Model Law Cross border disputes involving secured lending transactions often occur in four critical stages of a security interest. These stages are creation of a security interest, third party effectiveness of

7 For the UNCITRAL Legislative Guide on Insolvency Law see www.uncitral.org/pdf/english/texts/insolven/05-80722_ Ebook.pdf. 8 For the text of the Model Law see www.uncitral.org/pdf/english/texts/security/MLST2016.pdf and for the text of the Guide to Enactment see www.uncitral.org/pdf/english/texts/security/MLST_Guide_to_enactment_E.pdf.

Secured Transactions Law Reform in Asia and Access to Finance 71 a created security interest (perfection), priority of a security interest and the enforcement of a security interest. The Model Law’s key objectives and fundamental principles aim to respond to these stages by providing the executive and legislative branches of governments that are considering reform with a broad policy framework. The UNCITRAL observed that ‘[t]he fundamental justification for secured transactions law lies in the premise that the total net wealth of an economy will increase if more secured credit is available as a complement to unsecured credit’.9 Key objectives and fundamental policies are significant statements that could assist legislators in the interpretation of the Model Law.10 The Model Law and its policy framework is useful both to countries that do not have efficient secured credit regimes and to those that already have such regimes but are considering modernising them to respond to dynamic lending market practices. Key policies encompass principles that illustrate the philosophy of facilitation of credit with which a secured transactions regime must be in harmony. In other words, they strategise how credit can be facilitated under various aspects of secured transactions law. Facilitation of credit is the rationale of all international initiatives which can be described as enabling lenders and borrowers to operate in a legal environment where both parties to a loan transaction can ascertain the consequences of their transaction and thus the lender does not include the risk premium in the interest rate and lends with longer maturities.11 High interest rates and short term maturities deter borrowers from expanding their businesses. International instruments aim to reduce the cost of credit in cross border credit transactions and modernise domestic laws by providing harmonised and predictable rules which are beneficial for both parties to a loan transaction.12 Particular areas of concern that lead international instruments to facilitate credit can be grouped into a number of areas. These are allowing debtors to use the full value inherent in their assets to support credit; enabling parties to obtain security rights in a simple and efficient manner; providing for equal treatment of diverse sources of credit and of diverse forms of secured transactions; validating non-possessory security rights in all types of assets; enhancing certainty and transparency by providing for registration of a notice in a general security rights registry; establishing clear and predictable priority rules; facilitating efficient enforcement of a secured creditor’s rights; allowing parties maximum flexibility to negotiate the terms of their security agreement; balancing the interests of persons affected by a secured transaction; and harmonising secured transactions laws, including conflict-of-laws rules. The Model Law, similar to the key objective and fundamental principles of the Legislative Guide, aims to increase the availability of credit at affordable rates by providing predictable and efficient secured transactions law rules.13 This is fundamental to the growth of the economy.14 The Model Law’s (and the Legislative Guide’s) key objectives have been drawn on and developed from the earlier international secured transactions texts and reports drafted by the EBRD, 9 UNCITRAL Legislative Guide on Secured Transactions, para 46 (Legislative Guide); see also Mann (n 6) 683, where he concludes that secured credit ‘[enhances] the borrower’s ability to give a credible commitment to refrain from excessive future borrowing and by limiting the borrower’s ability to engage in conduct that lessens the likelihood of payment’. 10 Guide to Enactment, para 18; see also A/CN.9/WG.VI/WP.66, paras 44 and 45. 11 H Fleisig and N de la Peña, ‘SMEs and Collateral’, CEAL Issues Brief No 3 (2002); N de la Peña, ‘Challenges in Implementing Secured Transactions Reform in Latin America’ in F Dahan and J Simpson (eds), Secured Transactions Reform and Access to Credit (Cheltenham, Edward Elgar, 2008) 236, 241, where Latin American businesses face with high interest rates. 12 See, eg the Preamble of the Receivables Convention. 13 This is based on the Legislative Guide, rec 1(a). 14 For the economic efficiency arguments related to harmonisation and unification activities see generally LE Ribstein and BH Kobayashi, ‘An Economic Analysis of Uniform States Laws’ (1996) 25 Journal of Legal Studies 131; R Levine, ‘Finance and Growth: Theory and Evidence’, NBER Working Paper 10766 (2004).

72 N Orkun Akseli OAS, the World Bank and the IMF.15 Both texts lead to a unitary, functional and comprehensive approach.16 The promotion of low-cost credit by enhancing the availability of secured credit is the primary objective of the Model Law. A secured credit law should enable debtors and creditors to benefit from the certainty and predictability provided by modern rules which offer competition among different types of lenders, debtors and transactions. These rules will provide benefits from the access to credit which would otherwise not be available.17 The most significant policy is the promotion of low-cost credit by facilitating access to secured credit. Arguably, this is the very reason why international instruments are prepared. If secured credit is available at a reasonable cost, debtors, creditors and the economy can benefit. Predictable and clear rules are necessary where parties can establish certainty about the consequences of their transactions. International instruments achieve this principle with their clear rules aimed to facilitate the access to low-cost credit in cross border assignments, loan transactions for specific equipment and to create models for countries to modernise their domestic credit and security laws. One of the concerns in promotion of low-cost credit is that domestic laws are generally fragmented or poor, and thus do not achieve the necessary protection for secured creditors to lower their interest rates and lend with high maturities. Under the Cape Town Convention, facilitation of credit is a key objective, where creditors are intended to be given greater confidence in credit extension decisions which will reduce borrowing costs and enable debtors to access to low-cost credit.18 In both the UN Assignment of Receivables Convention and the UNIDROIT Factoring Convention, this policy is reflected in provisions which provide greater predictability in cross border assignment transactions.19 The Model Law intends to establish ‘a basic system on which more sophisticated rules can be developed’.20 It has a permissive attitude towards the secured transactions regime. A similar approach is reflected under the Guide’s comprehensive scope which has developed into different initiatives, including the Model Law.

III. Scope and General Provisions of the Model Law Both the Legislative Guide and the Model Law’s scopes of application are broad.21 They both have accepted the unitary, functional and comprehensive approach to secured transactions. 15 Legislative Guide, para 47. 16 For a discussion of these see Legislative Guide, rec 1 and paras 60–72; SV Bazinas and NO Akseli (eds), International and Comparative Secured Transactions Law (Oxford, Hart Publishing, 2017). 17 Also for the objectives of a simple and modern secured transactions law see R Calnan, ‘What Makes a Good Law of Security?’ in F Dahan (ed), Research Handbook in Secured Lending in Commercial Transactions (Cheltenham, Edward Elgar, 2015). 18 See generally R Goode, Convention on International Interests in Mobile equipment and Protocol Thereto on Matters Specific to Aircraft Equipment Official Commentary (Rome, UNIDROIT, 2008) 14. 19 See also the Preamble of the Receivables Conventions, para 5, where adoption of uniform rules would promote the availability of capital and credit at more affordable rates and facilitate international trade. The Factoring Convention’s Preamble also indicates the importance of international factoring in the development of international trade and that uniform rules would enable facilitation of international factoring. 20 Legislative Guide, Introduction, v. Here, the EBRD Model Law on Secured Transactions (1994) is used as a metaphor which has been used as a basic system in law reforms. See F Dahan and J Simpson, ‘The European Bank for Reconstruction and Development’s Secured Transactions Project: A Model Law and Ten Core Principles for a Modern Secured Transactions Law in Countries of Central and Eastern Europe (and elsewhere!)’ in Dahan and J Simpson (n 11) 98, 100. 21 However, it is important to note that the Model Law has some significant differences from the Legislative Guide. The Model Law is the only text that governs security interests in non-intermediated securities (shares and bonds that are not held in a securities account). The Model Law does not govern security interests in letters of credit. The Model Law does not govern security interests in attachments to movable or immovable property. See Guide to Enactment, paras 32–34.

Secured Transactions Law Reform in Asia and Access to Finance 73 The Model Law, similar to Personal Property Security Acts (PPSAs) and Article 9 of the US Uniform Commercial Code (UCC Article 9), uses the unitary term ‘security right’ which encompasses different security devices under one term. The Model Law, by adopting a functional approach, applies to all types of rights in movable property that parties create consensually, by agreement, which secure the payment or performance of an obligation. That suggests that the Model Law applies to, for example, a transfer of title for security purposes, a retention-of-title sale or a financial lease which, under English Law, are not regarded as traditional security rights but rather treated as quasi-security rights. The Model Law has a comprehensive approach in that the security right secures all types of obligation, which may be present or future, determined or determinable; encumbers assets described specifically or generally, or even all of the assets of a grantor, which may be present and future, including a changing pool of assets, and may be created or acquired by any legal or natural person, including a consumer, subject to consumer protection law.22 One point of comparison with English law suggests that only companies can create floating charges under Companies Act 2006 Part 25, whereas an unincorporated entity cannot, as the Bills of Sale Act requires all the assets to be described specifically, and the grantor to be the true owner of the asset at the time of creation.23 Fixed charges over chattels can be created by unincorporated entities, just as by companies. The underlying idea of having a unitary, functional and comprehensive approach in an international standard setting text is to eliminate the inherent problem of fragmentation in national laws. Secured transactions law, unlike sales law, is at the crossroads of the law of contracts, consumer law, insolvency law and the law of property, which are deeply rooted in the traditional domestic rules of legal cultures.24 Traditional roots of secured transactions law are considered to be the resistance point in modernisation or reform activities. These factors contribute to the difficulty of elimination of fragmentation which is a barrier before practical considerations of taking security. Taking security has economic functions. One takes security to secure the performance or the payment of an obligation. When there are multiple security devices governed by multiple statutes and only certain sections of businesses can utilise the granting of security, one can argue that the law of secured transactions is not fulfilling its main function of making low cost credit available.25 The Model Law’s unitary, functional and comprehensive approach is followed by modern secured transactions legislation.26 It can also be argued that this approach has the potential to achieve harmonised modernisation in the law reform activities in various jurisdictions as there will be conceptual harmony in the creation, perfection, priority and enforcement of security interests. The Model Law protects consumers because its rules cannot affect the rights of consumers under national consumer protection laws where transactions are made for personal, family

22 Legislative Guide, rec 2; Model Law, Art 1. 23 The Bills of Sale Act 1878 applies for assignments by individuals and requires a complex registration process. 24 RCC Cuming, ‘The Internationalization of Secured Financing Law: The Spreading Influence of the Concepts UCC Article 9 and its Progeny’ in R Cranston (ed), Making Commercial Law Essays in Honour of Roy Goode (Oxford, Clarendon Press, 1997) 499, arguing that the law of secured transactions ‘is perceived as embodying cultural attitudes and public policy choices that vary greatly among states’. 25 Low cost credit here is used to indicate the low interest rate that lenders charge. When parties to a loan transaction can ascertain the consequences of their contract, the lender may not include the risk premium which otherwise protects the lender from defaults, and lend with longer maturities. N de la Peña (n 11). 26 See, eg Australia PPSA, www.comlaw.gov.au/Details/C2012C00151; New Zealand PPSA, www.legislation.govt.nz/act/ public/1999/0126/latest/DLM45900.html; Saskatchewan PPSA, www.publications.gov.sk.ca/details.cfm?p=803; Ontario PPSA, www.ontario.ca/laws/statute/90p10.

74 N Orkun Akseli or household purposes.27 The unitary, functional and comprehensive approach of the Model Law does not recharacterise title finance devices (such as retention of title, financial leases) but keeps them under the scope of the Model Law for creation, third-party effectiveness, priority and enforcement purposes. Furthermore, acquisition secured creditors (retention of title sellers, financial lessees or asset-based lenders) are protected by way of a special priority over general financiers/non-acquisition secured creditors if their interest is registered within the stipulated grace period.28 The Model Law allows party autonomy under Article 3 whereby parties may derogate from or vary provisions of the Model Law with the exception of provisions dealing with the general standards of conduct (Article 4), the requirements for the creation of a valid security agreement (Article 6) and the description of the encumbered assets (Article 9), the obligation of a person in possession of an encumbered asset to exercise reasonable care (Article 53), the obligation of a secured creditor to return an encumbered asset (Article 54), the exercise of post default rights in the enforcement context (Article 72(3)), and the conflict-of-laws rules (Articles 85–107). The Model Law has both general and asset specific rules for creation, third party effectiveness, priority and enforcement of security interests. It can be argued that this provides flexibility and clarity to legislators as well as future practitioners.

IV. Creation of Security Interests (Attachment) The Model Law uses the term ‘creation’ as opposed to ‘attachment’.29 Parties should be able create security interests in a simple and efficient manner.30 This is particularly important to reduce the cost of credit. Also, in a cross border financing setting, certainty and predictability in the creation of security interests potentially leads to the reduction of risk premiums. Both the Legislative Guide and the Model Law simplify the creation of security interests. A security right under the Legislative Guide and the Model Law is a property right (as opposed to a personal right) in movable assets created by agreement (as opposed to statutory or judgment rights). A security agreement will create a security interest provided that the grantor has rights in the asset to be encumbered or the power to encumber it.31 As the Model Law applies to security devices such as outright assignment of receivables and financial lease, the grantor may have the power to create security in favour of other secured creditors.32 Creation has inter partes effect. A security interest fastens onto the asset so as to give the creditor rights in rem against the debtor himself, but not necessarily against third parties. Until that security interest is perfected, it will not be effective against third parties. Therefore, creation is also a necessary element of priority. The grantor has the right to use its future assets as collateral too. These future assets are those assets on which the grantor acquires rights or the power to encumber after the time of the conclusion of the security agreement. In this case, the security interest is created at that later time.33 27 Legislative Guide, rec 2(b); Model Law, Art 1(5). 28 Legislative Guide, recs 180 and 182; Model Law, Arts 38 and 39. See also, eg UCC, Art 9 §9-324; NZPPSA, ss 73–74. 29 eg UCC, Art 9; NZPPSA. 30 Legislative Guide, rec 1(c). 31 For a comparison see, eg UCC, Art 9-203(a): ‘A security interest attaches to collateral when it becomes enforceable against the debtor, with respect to the collateral, unless an agreement expressly postpones the time of attachment’. 32 Guide to Enactment, paras 83–85. 33 Legislative Guide, recs 13–14; Model Law, Art 6(2). The Guide to Enactment reads as follows: ‘security agreement may provide for the creation of a security right in future assets (ie assets produced or acquired by the grantor after the conclusion of the security agreement; … However, the security right is created in the future assets only when the grantor

Secured Transactions Law Reform in Asia and Access to Finance 75 As part of creation, the security agreement should indicate the intention of the parties, identify them, and describe the secured obligation and the encumbered assets ‘in a manner that reasonably allows their identification’.34 With regards to the form of the security agreement, the Model Law and the Legislative Guide provide flexible approaches. The security agreement may either be in writing or oral. If the parties orally agree to create a security interest, the secured creditor needs to be in possession of the encumbered asset.35 Otherwise, for evidentiary purposes and to protect the rights of the secured creditor while the encumbered assets are with the grantor (grantor in possession) it is recommended that the security agreement should be in writing (including electronic communication). The contents of the agreement are kept to a minimum. Intentions of the grantor and the secured creditor to create a security interest as well as the grantor’s signature (which can be an electronic signature) are necessary. Additionally, the secured obligation and the encumbered asset must be described and the maximum amount for which the security right may be enforced needs to be stated.36 Security should be taken on any asset with economic value to secure any obligation. Therefore, the Model Law allows the creation of security interests over any type of obligation, present or future, determined or determinable, conditional or unconditional, fixed or fluctuating.37 A security right may encumber any type of movable asset, a part of or an undivided right in a movable asset, a generic category of movable assets, and all of a grantor’s movable assets.38 The debtor should be allowed to dispose of the assets, such as its inventory, free of charge in the ordinary course of business. The modern secured transactions rules allow this by enabling the creation of security interests in all assets of the business by a single agreement which covers both the future and the existing assets.39 A security interest automatically extends to any identifiable proceeds of the encumbered assets as well as the identifiable proceeds of the proceeds.40 This is particularly important to protect the interests of the secured creditor. This is because ‘a grantor could effectively deprive a secured creditor of its security by disposing of the encumbered assets either to a person who would take free of the security right or to a person from whom those assets could not easily be recovered’.41 Both the Legislative Guide and the Model Law accept that the grantor has freedom to assign or create a security interest over the underlying receivable notwithstanding any contractual acquires rights in them or the power to encumber them’ (para 87). See also Holroyd v Marshall (1862) 10 HLC 191; Tailby v Official Receiver (1888) 13 App Cas 523; UCC, Art 9, §9-204; NZPPSA, ss 43–44. 34 Legislative Guide, rec 14(d); Model Law, Art 9. The Guide to Enactment states that the generic description can be ‘all inventory’ or ‘all receivables’ (para 96). 35 Legislative Guide, rec 15; Model Law, Arts 6(3) and (4). Under UCC, Art 9-203(b), the requirements are slightly different: a security interest is enforceable against the debtor and third parties with respect to the collateral only if: (1) value has been given; (2) the debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party; and (3) one of the following conditions is met: (A) the debtor has authenticated a security agreement that provides a description of the collateral and, if the security interest covers timber to be cut, a description of the land concerned; (B) the collateral is not a certificated security and is in the possession of the secured party under s 9-313 pursuant to the debtor’s security agreement; (C) the collateral is a certificated security in registered form and the security certificate has been delivered to the secured party under s 8-301 pursuant to the debtor’s security agreement; or (D) the collateral is deposit accounts, electronic chattel paper, investment property or letter-of-credit rights, and the secured party has control under s 9-104, 9-105, 9-106 or 9-107 pursuant to the debtor’s security agreement. 36 This last requirement might be helpful to facilitate subordinate lending. 37 Legislative Guide, rec 16; Model Law, Art 7. 38 Model Law, Art 8. 39 Legislative Guide, ch II, paras 63–69. 40 Proceeds is defined under the Model Law, Art 2(bb) as follows: ‘“Proceeds” means whatever is received in respect of an encumbered asset, including what is received as a result of a sale or other transfer, lease, licence or collection of an encumbered asset, civil and natural fruits, insurance proceeds, claims arising from defects in, damage to or loss of an encumbered asset, and proceeds of proceeds.’ 41 Guide to Enactment, para 97.

76 N Orkun Akseli limitations. Contractual limitations (anti-assignment clauses) are ineffective and cannot invalidate a validly created security interest in a receivable or other intangible asset, negotiable instrument or right to payment of funds credited to a bank account.42 The grantor may be sued by the debtor of the underlying receivable for breaching the contract, but the debtor of the underlying receivable may not avoid the underlying contract or hold the secured creditor liable for claims against the grantor. The secured creditor’s knowledge of the agreement between the grantor and the debtor is irrelevant.43 A security right in a receivable, other intangible asset or in a negotiable instrument automatically has the benefit of any personal or property right that secures or supports payment or other performance of those types of asset.44 The overarching aim of this rule is that ‘if the receivable is not paid, the secured creditor may seek payment from the guarantor or enforce the security right in accordance with the relevant law and the terms of the guarantee or the security right’.45 Also Article 16 of the Model Law provides that a security interest in a negotiable document extends to the tangible assets covered by the document, provided that the issuer is in possession of the goods at the time of the creation of the security interest.46 If a secured creditor has a security right in a tangible asset with respect to which intellectual property, such as software, is used, the creditor does not acquire a security right in the intellectual property, unless the copyrighted material is specifically included in the description of the encumbered asset.47

V. Third Party Effectiveness of Security Interests (Perfection) Similar to the Legislative Guide, the Model Law separates creation from third party effectiveness. Therefore, an additional step needs to be taken in order make a validly created security interest effective against third parties. These third parties include other secured creditors, buyers of the encumbered assets, judgement creditors and the insolvency administrator. While creation may not necessarily be known by third parties, with the additional step (such as registration in a general rights registry, possession or registration in a specialised registry), transparency is also achieved. This is because third parties will be put on notice with the performance of the additional step.48 Registration in a publicly accessible registry is an important method as it provides a neutral, cost and time efficient method of ascertaining the rights and positions of other creditors (or potential creditors) of the grantor. It is also instrumental in enabling potential creditors

42 Legislative Guide, rec 24; Model Law, Art 13. This is also the case in many modern secured transactions laws: UCC, Art 9 §9-406(d), 408(a). Under English law, the enactment of the Small Business Enterprise and Employment Act 2015 and its accompanying Business Contract Terms (Restrictions on Assignment of Receivables) Regulations 2018 renders anti-assignment clauses ineffective to the extent they are used in contracts with small businesses. See also O Akseli, ‘Contractual Prohibitions on Assignment of Receivables: An English and UN Perspective’ [2009] Journal of Business Law 650; H Beale, L Gullifer and S Paterson, ‘A Case for Interfering with Freedom of Contract? An Empirically Informed Study of Bans on Assignment’ [2016] Journal of Business Law 203. 43 Model Law, Art 13(2); UN Convention on the Assignment of Receivables in International Trade, Art 9. 44 Legislative Guide, rec 25; UN Convention on the Assignment of Receivables in International Trade Art 10; Model Law, Art 14. 45 Guide to Enactment, para 116. There are slight differences between Model Law, Art 14 and Legislative Guide, recs 25(g) and 25(h), as well as UN Convention on the Assignment of Receivables in International Trade, Art 10(6). 46 Legislative Guide, rec 28; Model Law, Art 16. 47 Legislative Guide, rec 243; Model Law, Art 17. 48 Legislative Guide, rec 1(c) and (f).

Secured Transactions Law Reform in Asia and Access to Finance 77 in deciding whether to lend or not.49 Achieving third party effectiveness in PPSA and UCC Article 9 systems is known as perfection.50 As mentioned above, a security right created will become effective against third parties if a notice with respect to the security right is registered in the general security rights registry. However, modern principles stipulate that registration of such a notice does not create a security right and is not necessary for the creation of a security right. Therefore, the registry system is (a) a method by which an existing or future security right in a grantor’s existing or future assets may be made effective against third parties; (b) a basis for priority rules that depend on the time when third party effectiveness of a security right is achieved by virtue of registration, and (c) an objective source of information (as it is publicly and electronically accessible) for third parties dealing with a grantor’s assets as to whether the assets may be encumbered by a security right. The registry system should provide simple, time and cost efficient, user friendly and publicly accessible registration and search. Under different systems, registration can either be done on a notice basis51 where registration can be made in advance of creation, or on a transaction filing52 basis where the security right needs to be created first before registering it. PPSA and UCC Article 9 type systems treat filing as a priority point whereas the English system treats filing as only perfection requirement. The Model Law treats all security devices achieving the same economic purpose (securing the payment or performance of an obligation) equally and enables debtors to use the full value of their assets to obtain credit. Therefore, title finance devices such as retention of title, financial leasing, and conditional sales are all combined under the registration scheme.53 Combining these title devices under the registration scheme provides a comprehensive coverage of multiple security devices and eliminates the formalistic treatment that they may be given in different jurisdictions. The Model Law’s primary methods of achieving third party effectiveness (Article 18) is based on the Legislative Guide recommendations 32 and 37. According to this article, primary methods of achieving third party effectiveness are registration in a publicly accessible registry and possession. Additionally, Articles 25 and 27 of the Model Law provide for third party effectiveness by the conclusion of a control agreement for security rights in rights to payment of funds credited to a bank account and in non-intermediated securities. There may be different approaches in various legal systems to achieve third party effectiveness of security interests. The Model Law recommends separate actions known as dual acts (creation plus an act to achieve third party effectiveness). If a national system treats security interests to be effective against all the creditors of the grantor from the time of its creation, this will still be compatible under the Model Law system so long as priority is tied to the time of the registration or other third party

49 See also Law Commission, Registration of Security Interests: Company Charges and Property other than Land (Law Com CP No 164, 2002); Law Commission, Company Security Interests (Law Com CP No 176, 2004); Secured Transactions, Collateral Registries and Movable Asset-Based Financing Knowledge Guide (The World Bank Group, November 2019). 50 eg UCC, Art 9, Part 3; NZPPSA, Part 4; Ontario PPSA, Part III. 51 PPSA and UCC Art 9 systems have notice based registration where filing can be done in advance and only single filing is required for all transactions between the same parties involving the same class of collateral. 52 The English perfection system is based on transaction filing whereby validly created security agreement is filed to achieve third party effectiveness. Advance filing is not possible. The secured creditor needs to file the agreement within 21-days after the creation of the security interest. Under the EBRD Model Law on Secured Transactions (1994) this period is 30 days whereby a registered charge is created by entering into a charging instrument and registration of that instrument at the Registry (Art 8). 53 Legislative Guide, rec 1(b) and (d).

78 N Orkun Akseli effectiveness act.54 As long as the priority of a security interest is connected to the time of registration (or any other act to achieve third party effectiveness) in those systems as it is under the Model Law, this will make these systems compatible with the model suggested by the Model Law. As with other parts of the Model Law, there are asset specific rules in achieving third party effectiveness. The general method of achieving third party effectiveness applies to all types of assets. The Model Law also recognises control or possession as other methods of achieving third party effectiveness. Third party effectiveness may be achieved in a right to payment of funds credited to a bank account by the transfer of the bank account to the secured creditor, the creation of a security interest in favour of the depositary bank or the conclusion of a control agreement.55 In the case of a negotiable instrument or a negotiable document, transfer of possession of the instrument or the document to the secured creditor is necessary for perfection.56 With regards to uncertificated non-intermediated securities, third party effectiveness is achieved by notation in the books maintained by the issuer or conclusion of a control agreement between the issuer, the secured creditor and the grantor whereby the issuer agrees to follow instructions from the secured creditor.57 Third party effectiveness of a security interest on proceeds (cash, receivables, negotiable instruments or rights to payment of funds credited to a bank account) may be achieved automatically upon the creation of the security interest without any further act.58

VI. The Registration System For the Model Law to be fully functional and to achieve its purposes a registry system needs to be established. The Model Law provides a set of rules with regards to the establishment and the necessary mechanism of the Registry system.59 This is a useful guidance to the legislators together with the other works of the UNCITRAL.60 Unlike the EBRD Model Law,61 registration under the UNCITRAL Model Law is not necessary for the creation of a security interest.62 As long as there is a validly created security interest according to Article 6 of the Model Law, third party effectiveness can be achieved by registering a simple notice in the Registry. There are two types of general registries: debtor based and asset based. General registries are normally debtor based where security interests created by the debtor are shown registered under the name of the debtor or his/her trading name. But Cape Town Convention’s registries under its protocols (aircraft, MAC, railway rolling stock, space objects) are asset-based registries which contain all registrable interests but for that it is necessary to have the unique identification/serial number of the asset. Thus a generic description is not possible. It is also not possible to register after acquired property in asset based registries as unique identification is necessary.

54 Legislative Guide, ch II, para 4 and ch III, para 8. For example under the Turkish Non-Possessory Pledge Act creation of a security interest and registration in the registry takes place at the same time, which is the time when priority starts. But, under the EBRD Model Law, time of creation determines priority (Art 17). 55 Legislative Guide, rec 49; Model Law, Art 25. 56 Legislative Guide, recs 37 and 51–53; Model Law, Arts 16 and 26. 57 Model Law, Arts 2(g) and 27. 58 Legislative Guide, rec 39; Model Law, Arts 10 and 19(1). 59 Model Law, Art 28. 60 UNCITRAL Guide on the Implementation of a Security Rights Registry (2013); Legislative Guide. 61 EBRD Model Law, Art 8. 62 Legislative Guide, rec 34; Model Law, Arts 6(1) and 18(1).

Secured Transactions Law Reform in Asia and Access to Finance 79 There are two types of registration systems: transactions/documents or notice based. Transactions based registration is used in England whereby the validly created security transaction needs to be registered in the Companies House within 21 days in order to achieve perfection. Therefore, advance or notice filing is not possible as the copy of the transaction needs to be uploaded on the registration system. On the other hand, notice registration is widely used in modern secured transactions regimes (including the UCC Article 9 and the PPSAs) and have been supported by the Legislative Guide and the Cape Town Convention on International Interests in Mobile Equipment.63 It is possible to have an advance registration64 under notice registration system whereby a limited amount of information is registered in advance of creation of the security interest. This information includes the identifier and address of the grantor and the secured creditor, a description of the encumbered assets and the period of effectiveness of the registration and the maximum amount for which the security interest may be enforced.65 The significance of having a notice registration system with the advantage of advance registration is that registration system inherently provides notice to third parties of the existence of a potential secured creditor before the creation as well as an important knowledge and warning source to determine whether some assets of the grantor may be encumbered by an earlier security interest. It is also under UCC Article 9 and PPSA systems a priority point. This simplifies the registration process by reducing the administrative burden, delays and costs. It also minimises the risk of error and liability on the part of registrar as well as the secured creditor.66 Furthermore, for confidentiality reasons and in order to minimise the risk of financiers/lenders searching competitor secured creditors (who may register their representatives),67 the registry provides that the search can only be done by searching the name/identifier of the grantor or the registration number.68 The encumbered assets must be described in an initial or amendment notice in a manner that reasonably allows their identification, this can be generic (description that indicates that the encumbered assets consist of all of the grantor’s movable assets) or specific (all of the grantor’s movable assets within a generic category).69 It depends on the type of collateral (mobile equipment and intellectual property (IP) versus inventory) as to how encumbered assets will be described in the notice (ie whether a serial number is feasible). Searching and indexing will be done either through identifier of the grantor or registration number of the initial notice. Indexing with the grantor’s name is more beneficial and simple in that a single registration can cover a changing pool of assets and after acquired property. 63 Legislative Guide, ch IV, para 14. 64 Model Law Registry Provisions, Art 4. 65 Legislative Guide, rec 57; Model Law Registry Provisions, Art 9. 66 Legislative Guide, ch IV, paras 10–14. In relation to the possible use of blockchain based registry system see, eg C Mooney, ‘Fintech and Secured Transactions Systems of the Future’ (2018) 81 Law & Contemporary Problems 1, arguing that blockchain based registry system might be best suited for private registries as opposed to public ones. 67 Legislative Guide, rec 57(a); Model Law Registry Provisions, Arts 9(2) and 10. Legislative Guide, para 30 explains this as follows: ‘In the interest of efficiency, some States explicitly allow a registrant to identify the secured creditor in the registered notice according to the name of a trustee, agent or other representative. This approach facilitates, for example, syndicated loan arrangements since only the lead bank or its nominee need be identified as the secured creditor of record. The rights of third parties are not prejudiced so long as the person identified as the secured creditor on the notice is in fact authorised to act on behalf of the actual secured creditor in any communication or dispute connected to the security right to which the registration relates. After all, the key reason for requiring the secured creditor to be identified in a registered notice is to enable searchers to find out whom to contact in order to obtain further information about possible security rights encumbering identified assets of the grantor. This approach also has the incidental benefit of further addressing the concern about protecting confidential business information of secured creditors. As it facilitates secured financing without prejudicing the grantor or third parties [both the Guide and the Model Law support this approach].’ 68 Legislative Guide, recs 54(h) and 58–60; Model Law Registry Provisions, Art 22. For the rationale of this approach see Legislative Guide, ch IV, paras 29 and 30. 69 Legislative Guide, rec 63; Model Law Registry Provisions, Art 11.

80 N Orkun Akseli The question as to whether a new registration is required in order for the security interest to be effective against third parties when the encumbered asset is transferred has been dealt with under the Model Law. Three options have been provided to the enacting state which will choose one of them when implementing the provisions. According to Article 26 of the Model Law Registry provisions, states will choose either registration of a new notice, or registration of a new notice within a certain period after the secured creditor acquires knowledge of the transfer, or no registration of a new notice (this is the practice in the transfer of IP).70 In the case of amendment or cancellation of a notice and whether the secured creditor’s authorisation is required, the Model Law Registry provisions provide different options.71 It is possible that the Registrar may make errors and their liability may be in question. Therefore, there should be rules for the correction of these errors. The Model Law Registry provisions address these issues with a number of options under Article 31 of the Registry provisions.72

VII. Priority of Security Interests Obtaining priority is an expectation for the secured creditor. Secured credit is a bargain.73 In return for a priority position in case of insolvency of the grantor/debtor, it is a fair bargain that the secured creditor extends credit with low interest rates and takes collateral as security. There should be clear and simple rules to ascertain priority. Achieving priority is a key objective of both the Legislative Guide,74 and the Model Law whereby the law should provide clear rules between competing claimants (secured creditors and asset-based lenders alike) having rights on the same encumbered asset.75 The Model Law provides that in a conflict between two security interests in the same asset, the first perfected one by registration or otherwise has priority.76 In relation to priority conflicts between security interests granted by different grantors such as the initial grantor and a transferee/buyer of the encumbered asset, priority will be determined according to the time when third party effectiveness was achieved, provided that the initial secured creditor registers an amendment notice adding the buyer as a new grantor within a short period of time after the sale or after the secured creditor acquires knowledge of the transfer.77 The short period of time is left to the enacting states to be determined in each national case. Under Article 34, a buyer of an encumbered asset takes the asset subject to the security interest, with the exception of situations that have to do with the good faith acquisition of an encumbered asset, or where a secured creditor authorises the sale or its acquisition in the seller’s ordinary course of business. Subject to the insolvency law of the enacting state, a security interest preserves the third party effectiveness and priority that it had before the commencement of the insolvency proceedings.78 The priority position of preferential claims is left to the

70 Model Law Registry Provisions, Art 26, options A–C. 71 Model Law Registry Provisions, Art 24. 72 Model Law Registry Provisions, Arts 31–32. 73 See, eg Mann (n 6); O Akseli, International Secured Transactions Law: Facilitation of Credit and International Conventions and Instruments (Abingdon, Routledge, 2011); G McCormack, Secured Credit under English and American Law (Cambridge, Cambridge University Press, 2004). See also special issues in (1997) 82 Cornell Law Review. 74 Legislative Guide, rec 1(g). 75 Model Law, Art 2(e). 76 Model Law, Art 29. 77 Model Law, Art 30; Model Law Registry Provisions, Art 26, option A(2)(a) or B(2)(a). 78 Model Law, Art 35.

Secured Transactions Law Reform in Asia and Access to Finance 81 enacting states.79 The priority of a judgement creditor who has enforced its right before a security interest became effective against third parties has priority over that security interest.80 In the case of a competition between a non-acquisition secured creditor and an acquisition secured creditor (asset based lender) that has registered a notice within a short period of time after delivery of the goods, the acquisition secured creditor has priority as of the time of delivery of the goods, not the time of registration.81 Priority among competing acquisition security interests is determined on the basis of the general rules under Article 29.82 and there are different options where there is a question of whether super priority continues over proceeds of the encumbered assets that are subject to the acquisition security right.83 In relation to this point, Article 10 of the Model Law provides that a secured creditor automatically has a security right in the identifiable proceeds of that asset. Article 19 provides that a security right is effective against third parties if the conditions stipulated for perfection are met. Article 32 provides that the priority of a security right in proceeds that is effective against third parties under Article 19 has the same priority of the security right in the original encumbered asset. Thus a security right in proceeds of assets subject to an acquisition security right would have the same super priority as the security right in the original encumbered asset. Article 41, however, limits the application of Article 32 by restricting the super priority to the proceeds of only certain types of asset subject to an acquisition security right (option A) or by not extending the super priority to the proceeds at all (option B).84 Perfection of a security interest in a negotiable instrument by possession has priority over a security interest in the same instrument made effective against third parties by registration. Giving priority to possession over registration is important to preserve the negotiable nature of negotiable instruments.85 In order to achieve priority with regards to rights to payment of funds credited to a bank account, Article 47 of the Model Law provides a number of rules depending on the perfection method. According to this rule, the ranking will be as follows: the transferee of the account, the depositary bank, a secured creditor with a control agreement, in the case of several control agreements, the secured creditor with the earlier control agreement, the secured creditor that registered a notice. The depositary bank’s rights of set-off under Article 47(5) have priority over any security interest, except one made effective against third parties by the secured creditor becoming the account holder. With regards to money, Article 48 which is based on Legislative Guide recommendation 106 provides that a transferee that obtains possession of money that is subject to a security right acquires its rights free of the security right, unless that person has actual knowledge (Article 2(r)) that the transfer violates the rights of the secured creditor under the security agreement. The rationale is to preserve the negotiability of money.86 In the same token, to preserve the negotiability of negotiable instruments, if the tangible assets are covered by a negotiable instrument and this is perfected by possession of the document, that secured creditor will have priority over a competing security interest perfected by registration or possession of the assets covered by the document.87 Possession is again given priority in another set of assets that can be used

79 Legislative

Guide, ch V, paras 90–93; Model Law, Art 36. Law, Art 37. 81 Model Law, Art 38. See, eg stlrp.files.wordpress.com/2017/01/raczynska-asset-finance-2.pdf. 82 Model Law, Art 39. 83 Legislative Guide, rec 185; Model Law, Art 41. 84 Guide to Enactment, para 336. See, eg stlrp.files.wordpress.com/2017/01/sheehan-priorities.pdf. 85 Legislative Guide, recs 101–02; Model Law, Art 46(1). See also Guide to Enactment, para 349. 86 Guide to Enactment, para 357. 87 Legislative Guide, recs 108–09; Model Law, Art 49. 80 Model

82 N Orkun Akseli as collateral.88 In the case of non-intermediated securities, under Article 51, a security interest in certificated non-intermediated securities perfected by possession of the certificate has priority over a security interest perfected by registration. In the case of uncertificated non-intermediated securities, the priority will depend on the method of perfection. Accordingly, notation in the books of the issuer has a better priority over any other method and a control agreement has a priority over any other method except notation in the books of the issuer. The question as to whether the buyer of encumbered non-intermediated securities acquires its rights free of or subject to the security interest (Article 51(5)) will depend on the law governing transfers of securities of the enacting state.89

VIII. Enforcement of Security Interests Efficient and effective enforcement mechanisms are significant in the credit decision making. Secured creditors would like to have confidence in the enforcement system that they will be able to satisfy their claims. Delays or excessive costs in the enforcement of security interests will be likely to affect the availability and the cost of credit.90 Furthermore, as enforcement mechanisms are embedded into national systems and are not international and also judicial enforcement regimes cannot be easily harmonised at the international level, there is a need to establish neutral concepts and mechanisms to enforce debts. The Model Law’s approach in this regard is that enforcement before a court or other authority is left to national laws. It recommends expedited proceedings.91 These include extra-judicial enforcement mechanisms or out-of- court or selfhelp remedies mechanisms. These provide safety mechanisms both for the grantor and secured creditor as well as other parties with interests in the encumbered asset. The Model Law provides that the enforcing secured creditor must act in good faith and in a commercially reasonable manner. Commercially reasonable manner is an important concept which obliges the secured creditor to avoid selling the encumbered assets in a remote location or outside the relevant market.92 The grantor is protected against the secured creditor by the provisions that the grantor may not waive the general standard of conduct even under undue pressure.93 The Model Law enables the parties to waive certain rights related to enforcement only after default, not at the time of the negotiation of the security agreement. This is an important protection mechanism for the grantor as the grantor may waive her rights during the negotiation stage in order to obtain credit from the secured creditor but this would put the grantor into an unconscionable position.94 The Model Law further protects the grantor in the absence of a court intervention. The enforcing secured creditor cannot obtain possession of the encumbered assets out of court, unless all of the following are satisfied: (a) the grantor has consented in the security

88 Guide to Enactment, para 362, where it is indicated that non-intermediated securities are outside the scope of the Legislative Guide. 89 Guide to Enactment, para 366. 90 Legislative Guide, ch VIII, para 6. 91 For the use of ADR in the enforcement of security interests see, eg O Akseli, ‘Mediation in Disputes Arising in the Context of Enforcement of Security Interests’ (2017) 22 Uniform Law Review 747. 92 Model Law, Art 4 provides, ‘A person must exercise its rights and perform its obligations under this Law in good faith and in a commercially reasonable manner’. 93 Model Law, Art 4. 94 Model Law, Art 72(3).

Secured Transactions Law Reform in Asia and Access to Finance 83 agreement to the secured creditor obtaining possession of the encumbered assets out of court; (b) the secured creditor gives the grantor and any person in possession of the encumbered assets notice of default and of the secured creditor’s intent to obtain possession (extra-judicial repossession); and (c) at the time of repossession, the grantor and any person in possession of the encumbered asset does not object.95 The secured creditor needs to provide to the grantor and any person in possession of the encumbered asset of a notice of default with her intention to dispose of the encumbered assets out of court. However, this notice needs to be given in advance and provided in a commercially reasonable manner and in good faith.96 The grantor and any other person in possession of the encumbered asset will be given a written proposal by the secured creditor to acquire the encumbered assets in satisfaction of the secured obligation.97 The grantor and any person in possession of the encumbered asset is also protected in the case of the distribution of proceeds from the disposition of encumbered assets out of court.98 The Model Law provides that the enforcing secured creditor must apply the net proceeds (after deducting the reasonable costs of enforcement) to the secured obligation.99 If the net proceeds of disposition are insufficient to satisfy the obligation secured by the security right of the enforcing secured creditor the debtor remains personally obliged to pay the deficiency. If there is a surplus, this must be paid to the grantor or to other creditors announced during the enforcement proceedings, or be deposited with a competent judicial or other authority.100 The buyer acquires the encumbered assets free of any security interests that are subordinate to the security interest of the enforcing secured creditor, but subject to any security interests with priority over the security interest of the enforcing secured creditor.101 A lessee or licensee is entitled to the benefit of the lease or licence during its term except as against creditors with rights that have priority over the right of the enforcing secured creditor.102 With regards to collection of payments, the Model Law recommends that after default, the secured creditor with a security right in a receivable, negotiable instrument, right to payment of funds credited to a bank account or non-intermediated security is entitled to collect payment from the debtor of the receivable, obligor under the negotiable instrument, deposit-taking institution or issuer of the non-intermediated security.103

IX. Conflict of Laws in Secured Transactions The Model Law contains conflict-of-laws rules in order to supplement its substantive rules. This is particularly important to ascertain applicable laws in the creation, perfection, priority and enforcement of security interests on cross border movable property.

95 Model

Law, Art 77(2). to Enactment, para 441. 97 Model Law, Art 80. 98 Model Law, Art 79. 99 Model Law, Art 79(2)(a). 100 Model Law, Art 79(2)(c); Guide to Enactment, paras 451–54. 101 Model Law, Art 81(3). 102 Model Law, Art 81(4). 103 Model Law, Art 82(1). 96 Guide

84 N Orkun Akseli The law applicable to the creation, third-party effectiveness and priority of a security interest in a tangible asset is the law of the state in which the asset is located (lex situs).104 If the asset is covered by a negotiable document, the applicable law will be the location of the document.105 The Model Law provides some exceptions to the lex situs rule. If the security interest is created over the mobile goods crossing borders, then the most logical law will be the law of the grantor. This is because there is only one grantor of the security interest and it is the most ascertainable one (Article 85(3)). The law applicable to a security interest in goods in transit or export goods is the law of the state of destination, provided that the goods reach their destination within a short period of time (Article 85(4)). In the case of enforcement related disputes in a tangible asset, the law of the state in which enforcement takes place will be applicable (Article 88). The law applicable to security interests in intangible assets is similar to the UN Convention on the Assignment of Receivables Convention whereby the law of the grantor’s location will apply (Article 86). The exceptions to this rule are receivables related to immovable property, bank accounts, assets subject to registration, letters of credit, proceeds and intellectual property (Articles 87, 97–100). The location of the grantor is important in ascertaining the applicable law. It is defined by reference to the grantor’s place of business. If the grantor has multiple places of business it will be the place where the grantor has its central administration (Article 90). The fact the law is subject to the grantor’s place of business is logical as it is the most determinable law and it leads to one law only. Furthermore, it is the law of the state in which the main insolvency proceeding with respect to the grantor will most likely be commenced.106 In relation to the asset specific rules, if there is a security interest in a right to payment of funds credited to a bank account, there are two options. The applicable law can either be the law of the state in which the bank with which the account is maintained has its place of business, or the law applicable is the law stated in the account agreement.107 If the asset is an intellectual property right, the law applicable to the creation, effectiveness against third parties and priority of a security interest in intellectual property is the law of the state in which the intellectual property is protected (Article 99(1)). However, a security interest in intellectual property may be created and perfected (and may well be enforced) under the law of the state of the grantor’s location, other than against a secured creditor, transferee or licensee (eg an insolvency administrator) (Article 99(2) and (3)). As with other sections, the Model Law, different from the Legislative Guide, provides a rule on the law applicable to security interests in non-intermediated equity and debt securities. According to Article 100(1), the applicable law to the creation, perfection, priority and enforcement of a security interest on a non-intermediated equity securities (ie shares in capital) will be the law of the place where the issuer is constituted (that is the law where the issuer is incorporated). On the other hand, in the case of non-intermediated debt securities, this law will be the law governing the securities (ie generally the law chosen by the parties) (Article 100(2)).108

104 Model

Law, Art 85(1). Law, Art 85(2). 106 Guide to Enactment, para 489. 107 Model Law, Art 97. 108 Guide to Enactment, paras 515–24. 105 Model

Secured Transactions Law Reform in Asia and Access to Finance 85

X. Conclusion The work of the UNCITRAL as the internationally mandated organisation in the harmonisation and modernisation of law has influenced law reforms around the world. The Legislative Guide, the Model Law on Secured Transactions and other texts including the IP Supplement, and the Registry Guide, have become the main reference tools for law reform activities. These tools are useful for both developing and developed economies alike. Secured transactions law is for the debtors to ascertain their rights clearly against secured creditors and other third parties, and the Model Law with its accessible and clear rules, achieves just that.

86

5 Secured Transactions Reform in East Asia: Progress and Challenges ELAINE MACEACHERN1

I. Introduction The review of secured transactions reform in East Asia contained in this chapter is informed by the author’s experience in that field over the past twenty years. During that time, she has worked extensively with the World Bank Group (WBG) and other development partners in the South East Asia, as well as in Sub-Saharan Africa and in the Caribbean regions, under Common, Civil and Islamic law regimes. She has participated in the design, development and implementation of secured transaction reform projects and registry systems globally as a lead subject matter expert and as a regular contributor to the ongoing Financial Inclusion development agenda of Association of South East Asian Nations (ASEAN) and Asia Pacific Economic Cooperation (APEC) Financial Infrastructure Development Network (FIDN) working groups, as well as the United Nations Commission for International Trade Law (UNCITRAL) (Asia chapter). This extensive practical involvement in legislative and institutional reform process involving various alternative legal, operational and governance models has provided a unique opportunity to witness firsthand the implementation challenges and successes through various frameworks as a means to support the development of financial stability, inclusion and access to finance for the micro, small and medium sized enterprise (MSME) sector.

A. Background Over the last 20 years, steady progress has been made in reforming legal and institutional frameworks for secured transactions in the ASEAN economies. However much remains to be done to reach the reform objectives set out by policy makers in the region. Vietnam was an early reformer, starting in 1999,2 and chartered a path for the other two Mekong countries

1 I am an employee of the World Bank Group, Financial Inclusion, Infrastructure and Access team; the contents of this text represent my understanding and opinions only and should not be understood in any way as reflecting the official or unofficial views or policies of the WBG. Needless to say, I am solely responsible for all errors, inaccuracies and omissions. 2 See ch 14 (Vietnam).

88 Elaine MacEachern (namely, Lao PDR and Cambodia) to follow some years later. However, the larger economies in the region, Thailand, Indonesia, Philippines, Malaysia, have been taking somewhat longer to adopt a modern secured transactions regime. This, in the view of the author, is mainly due to a lack of political will from the public-sector side and a lack of any real pressure from various financial market players on the private sector side. This chapter explores the trajectory of these reforms in terms of the progress and challenges faced thus far. The concept of introducing Secured Transactions Reform for economic development in the East Asia3 region was first introduced by the Asian Development Bank (ADB) and United States Agency for International Development (USAID) in 1999 in support of Vietnam’s socioeconomic, National Development Plan 1986: the ‘Doi Moi’ or ‘renovation’ initiative. The goal of this initiative was to move from a centrally planned economy to a more open market-based system. The reform of the financial sector through the adoption of modern legal/regulatory and institutional policy reforms was viewed as a tool to assist in opening the market, and in creating business expansion opportunities for small and medium size companies and entrepreneurs, but also large corporates. There is strong analytical and empirical evidence to support the correlation between secured transactions reform, financial market development and economic growth.4 Without access to finance, entrepreneurs and businesses alike are limited in their ability to grow their business, expand into new products and service offerings, and take advantage of new technologies, import/export arrangements and business opportunities. All these lead to more job creation and economic development opportunities for all. It is within this socioeconomic development context, and with the support of the International Development Institutions5 (IFIs), that secured transactions law reform as an economic development tool has taken root in East Asia. Since the early introduction of these economic reforms in the late 1990s and the early 2000s in Vietnam, IFIs, through various funding mechanisms, have expanded their budgetary support for secured transactions reform to other countries within the East Asia region. The three smallest Mekong countries, Vietnam, Cambodia and Lao PDR, were the earliest reformers in the East Asia region, with reforms dating from 2001–05. The Greater Mekong, which included China,6 Myanmar and Thailand,7 reformed their law after 2007 with technical assistance support from WBG, ADB and various other multi-lateral institutions. In the decade since, ADB has led the reforms in the Pacific Islands,8 while the remaining reforms in the East Asian economies have been largely championed by the WBG,9 through

3 East Asia in the context of this chapter refers to the following economies: Vietnam, Cambodia, Lao PDR, Indonesia, Philippines, Malaysia, Thailand. 4 See P Holden and V Prokopenko, ‘Financial Development and Poverty Alleviation: Issues and Policy Implications for Developing and Transition Countries’, IMF Working Paper 01/160 (Washington, DC, International Monetary Fund, 2001), www.imf.org/external/pubs/ft/wp/2001/wp01160.pdf; M Ayyagari, A Demirgic-Kunt and V Maksimovic, ‘How Important are Financing Constraints? The Role of Finance in the Business Environment’ (2008) 22 World Bank Economic Review 483. The latter paper analyses surveys of businesses to discover the impact of the business environment on growth. The authors find that access to finance is one of the most important determinants of the growth rates of businesses, along with crime and political instability. 5 ADB, WBG, USAID, AusAid, Canadian International Development Agency (CIDA), United Kingdom Department for International Development (DFID) and other multi-lateral donors. 6 See ch 7 (China). 7 See ch 13 (Thailand). 8 P Holden et al, ‘Unlocking Finance for Growth – Secured Transactions Reform in the Pacific Economies’ (Asian Development Bank, 2014), www.adb.org/sites/default/files/publication/42904/unlocking-finance-growth-pacific-islandeconomies.pdf. The reforms in the Pacific Islands were in the following countries: Federated States of Micronesia (2006), Marshall Islands (2007), Vanuatu (2008) Solomon Islands (2008), Tonga (2010), Papua New Guinea (2011), Palau (2012), Samoa (2013). 9 WBG Advisory Projects 2019: Vietnam, Cambodia, Lao PDR, Indonesia, Philippines, Myanmar, Thailand, Malaysia.

Secured Transactions Reform in East Asia: Progress and Challenges 89 multilateral donor support, and in partnership with other development partners and regional bodies such as ASEAN and APEC. The mandates of these regional organisations are to promote political and economic cooperation, integration and regional stability. Both ASEAN and APEC have played convening roles for senior policy makers and have in recent years added credit infrastructure10 reforms as a topic on their semi-annual agendas. These convening bodies have helped to broaden and raise the awareness for secured transactions reforms beyond the least developed economies in the region to the more developed economies in the region such as Indonesia, Philippines,11 Brunei Darussalam, Malaysia, and Thailand. The majority of these larger upper middle-income countries do not qualify fully for IFI and donor technical and financial assistance.

B. The Legal Background The East Asia region consists of common, civil and Islamic legal regimes and, in some cases, a country will have a hybrid of legal frameworks originating from past foreign occupation. To a large extent the legislation had not been modernised in decades. The legislation is often antiquated, outdated, fragmented and, when enacted, did not contemplate the use of technology as a service delivery model for public registry services nor the fact that new types of assets could be used as collateral, eg smart contracts, digital assets, and so on The secured transactions reforms were championed by various multilateral institutions, both to stimulate the economy and to repair what had become an incoherent and inefficient legal framework for taking, registering and enforcing a consensual security interest in movable property. The reforms in the region attempt to replace disjointed complex legislative and judicial rules with a single comprehensive statutory regime complemented by a single comprehensive registry system based on international best practices as cited by WBG, UNCITRAL and others.12 The deficiencies in the old laws led to the reforms which consisted of, in some cases, the passage of a myriad of new Acts and subordinate legislation in a jurisdiction. This response created certain problems, stemming from the fact that the reform (in some cases) was not coordinated with other complimentary reforms in other legislation, such as Companies Law, Insolvency Law, Contract, Civil and Commercial Codes. The pre-existing legislation was frequently too restrictive and did not allow for certain types of commercial transactions to exist, with the result that the secured transactions legal reforms were less effective than they might otherwise have been. Moreover, the lack of complimentary reform led to a myriad of conflicting laws, which often combined with the lack of transitional provisions and, in some cases, a complete lack of implementation of consequential amendments to the pre-existing legislation. An example of this phenomenon is the Civil Code in Cambodia, which for a number of years contained provisions on enforcement which conflicted with the rules in the Secured Transactions Law 2007. Another example is the case of Vietnam, which in the past two years is finally codifying its secured transactions legal framework in the Civil Code, close to twenty years after having initiated the reform in 1999. This process consists of the repeal of various Decrees, Decisions, and Circulars, into one unified chapter on Secured Transactions in the newly revised

10 Credit Infrastructure in this context means: Secured Transactions and Collateral Registries, Insolvency, and Credit Reporting Systems. 11 For discussion of the part played by APEC in the reform in the Philippines, see ch 10 (Philippines) I B. 12 For discussion of these best practices as modern principles of secured transactions law, see ch 2.

90 Elaine MacEachern Civil Code. The reformed legislation in Lao PDR consisted of a standalone Secured Transactions Decree enacted in 2011, plus Regulations for the Management of Security Interests on Movable Property, which were brought in in 2012 to support the movable property registry system implemented in 2013. Laos has subsequently repealed the Decree in 2019 and replaced it with new chapter within the Civil Code, Part VI 2017. According to the Doing Business 2020 – Strength of Legal Rights index,13 it appears some key legal principles are not found in the new revised chapter contained in the Code. In all common and civil law legal systems, decades and, in some cases, centuries of a more ad hoc response to commercial demands for an ever-expanding range of assets to secure loans and purchase credit produced inevitable fragmentation in the legal doctrine and theory. The legislative reform process is a journey and an evolutionary process, and the East Asia region should not be expected to get it right the first-time around. This is particularly true given the development complexity of the economies and the cultural, social, economic and political influences that drive these reforms, both internally and externally. Lao PDR is an example of where good progress was made in 2011–13 only to slip backward in 2019.

C. The Purpose of this Chapter This chapter does not attempt to compare these jurisdictional legal frameworks with each other, nor does it attempt to analyse the legal frameworks and their legal principles against international best practices, found in the UNCITRAL Model Law or the WBG’s Flagship Standards Report: The Principles for Effective Insolvency and Creditor/Debtor Rights Systems.14 Such analysis is to be found in other chapters in this book. The intent of this chapter is to highlight the need for continued collaboration amongst, and by, international financial institutions, development partners, financial regulators, donors, regional policy makers, public sector institutions, politicians, academics and regional convening bodies such as the ASEAN Secretariat and APEC. This cooperation and collaboration is crucial for the overall success of reforms to take root and to build the knowledge and capacity within both public and private sectors over time. The legal concepts presented in this text to a large extent are new to many legislative drafters, authorities, policy makers and influencers, and thus there is a myriad of implementation challenges reformers must overcome. While the challenges are great, so is the untapped economic potential in the East Asian region.

II. Financial Inclusion, Stability and Access Whilst secured transactions law reform can be viewed as an economic development policy by facilitating financial inclusion, stability and access to finance, access to credit varies from one jurisdiction to another, and constrained access to credit remains among the most significant limitations on private sector growth in many economies. More than half of private enterprises in emerging markets have no access to credit. The number of businesses that use loans to finance investments in the developing world is half the number of those operating in countries of

13 See ch 1 III C (ii). 14 World Bank, ‘Principles for Effective Insolvency and Creditor/Debtor Rights System’ (2015), https://documents.worldbank.org/curated/en/557581467990960136/Principles-for-effective-insolvency-and-creditor-debtor-rights-systems.

Secured Transactions Reform in East Asia: Progress and Challenges 91 the OECD.15 The World Bank Enterprise Surveys revealed that 14 percent of enterprises consider access to finance as a major constraint while the value of the collateral needed for a loan as a percentage of the loan amount is 299.7 per cent.16 Furthermore, recent reports showed that, among the 65 million enterprises surveyed, the unmet demand for credit was $5.2 trillion a year.17 In the East Asia region, it was measured at estimated $2 billion a year.18 It is within the socio-economic context of financial inclusion, stability and access that governments are beginning to prioritise and invest in secured transactions reform as an economic development policy objective with the aim of providing greater opportunities for the micro, small, medium enterprises, with special focus on women-owned enterprises. This results in job creation, economic growth and poverty alleviation.

III. Implementation Challenges However, implementing a complex piece of commercial law such as a secured transactions statute, which has an impact on other pieces of legislation and, within the context of larger political influences, on vested interests and existing legacy practices does not come without its implementation challenges. The paragraphs that follow discuss the multitude of challenges that policy reformers and change agents within government, external development partners, and the private sector face. While not intended to be exhaustive or extensively elaborated, they are presented to highlight the fact that, while international experts with good intentions deliberate on nuances of the legal provisions and their importance, for implementers on the ground, there are at times sacrifices made to get the legal reform passed. These trade-offs often come at the expense of incorporating best practice legal principles.

A. The Importance of National Development Plans and Public Sector Champions The need for political will and strong, credible public sector champions, such as Central Bank Governors, Minsters of Finance, Commerce, Industry and Trade, and SME Development Agencies, with a long-term economic development view is a critical success factor for secured transaction reform. This is because secured transactions is a technically complex area of law and not necessarily easily articulated by politicians to the electorate. Reform in this area is not easily communicated to most people and, moreover, disrupt current business practices. The longevity of the project means that politicians of the day will not be likely to see the result during their term in office. These factors mean that anchoring the reform in the national development plan is critical.19

15 See World Bank Group Enterprise Surveys at www.enterprisesurveys.org. 16 World Bank, ‘Credit Reporting Knowledge Guide 2019 (English)’ (2019), https://documents.worldbank.org/curated/ en/262691559115855583/Credit-Reporting-Knowledge-Guide-2019. 17 See H Fleisig, M Safavian and N De La Pena, ‘Reforming Collateral Laws to Expand Access to Finance (English)’ (World Bank, 2006), https://documents.worldbank.org/curated/en/734741468160489873/Reforming-collateral-lawsto-expand-access-to-finance. 18 See www.enterprisesurveys.org/en/data/exploretopics/finance. 19 See, eg the operation of the FIDN in the Philippines; see ch 10 (Philippines) I B.

92 Elaine MacEachern In countries where a National Development Strategy and Action Plan has identified secured transactions reforms as a key priority area of financial sector reform this action ensures the reform is anchored in a long-term country development strategy. Once identified in a National Development Plan the human and financial resources are then allocated and the reform is fully funded and supported throughout the life cycle of the project. It would be highly unusual for the reform to be removed from the strategy regardless of a change in the political environment. Another key factor in the success of the reforms is the identification of the appropriate public sector champion, to lead the reform through the various stages of legislative drafting, cabinet and Parliamentary enactment resulting in implementation and adoption by key stakeholder groups. In the East Asia region, reforms have largely been championed by Ministries of Finance, Commerce or Justice or by the Central Bank. It is through the National Development Strategy mechanism that a specific secured transactions policy framework document is developed and through this mechanism a technical working group can be established. The key policy objectives of the reform are laid out and consensus around the key legal principles can be agreed by all relevant stakeholders in the reform process in the framework document.20 In East Asian countries where there have been strong public sector champions, the legislative reform roadmap or framework document has typically been drawn up as a result of extensive public consultation and input by all relevant public and private sector institutions through technical working committee. Essentially, the policy framework provides the legislative drafting instructions to the drafting committee which is often a subset of the technical work group. While this consultative process can take considerably longer in the Asian context than elsewhere, particularly due to the cultural approach of reaching a majority consensus before proceeding, it has been observed in the cases where this approach has been adopted that the success rate for the reform is much higher and has sustained itself over time. For example, countries such as Vietnam,21 the Philippines,22 Indonesia23 and Malaysia24 have all identified secured transactions law reform as a key priority area in their respective National Development Plans or as part of the WB Doing Business Reforms. Comparatively, Lao PDR and Cambodia have not identified the reform in a strategy document. While Philippines, Indonesia, Thailand and Malaysia have been late adopters of modern secured transactions reforms (only starting in 2012, 2013, 2015 and 2017 respectively) they nonetheless have anchored the reform in the national policy agenda and there is a demonstrated political will from the top down for the reform, led by strong public sector institutions. In the case of Vietnam, it is the Ministry of Justice, whereby they created a specific agency to implement the reform, National Registration Agency for Secured Transactions.25 Indonesian reform was led by the Ministry of Law and Human Rights, Director General of Legal Services26 was the responsible line department for the Fiducia Security reform whereas in the Philippines there is a joint effort between Department of Finance,27 the Central Bank of the Philippines (Bankko Sentral NG Pilipinas)28 and the Ministry of Justice, Land Registration Authority.29 Thailand’s efforts are led by the Ministry of Finance,30 the Fiscal Policy Office and, to a lesser

20 For

a description of this process in practice, see ch 10 (Philippines) I B. National Development Plan. Development Plan of Philippines. 23 National Development Plan of Indonesia. 24 National Development Plan of Malaysia. 25 See https://dktructuyen.moj.gov.vn/home.html?___store=default&___from_store=Vietnam. 26 See www.kemenkumham.go.id. 27 See www.dof.gov.ph. 28 See www.bsp.gov.ph. 29 See www.lra.gov.ph. 30 See www2.mof.go.th. 21 Vietnam

22 National

Secured Transactions Reform in East Asia: Progress and Challenges 93 degree, the Ministry of Commerce and the Department of Business Development,31 while in Malaysia, the Ministry of Commerce, and the Companies Registry32 has led the reform with support from Bank Negara Malaysia.33 It should be mentioned that the Central Bank of Myanmar34 has identified credit infrastructure reforms as one of many key priority areas as the economy opens up. From the WBG perspective, credit infrastructure consists of three main pillars: secured transactions and collateral registries, credit bureaus and insolvency. Myanmar have chosen to implement credit reporting as a key priority area to be followed by introduction of a new law on secured transactions in 2020, if capacity within the institution permits. In the economies where reform is not linked to the development agenda, but, instead, implemented as a stand-alone reform, the success rate has been limited, such as in the cases of Lao PDR and Cambodia mentioned above. In the absence of the reform being anchored in a countries long term development strategy, there are usually very limited resources assigned to the reform, both financial and institutional resources, and before and after implementation. Having dedicated resources becomes c ritically important from a long-term sustainability perspective. While the Cambodia and Lao PDR secured transaction registries have been operational for more than 10 years and 6 years respectively, neither country has fully committed to the ongoing operational and capacity building needs of the reform. This can be compared to Vietnam, who created the National Secured Transactions Registration Agency (NRAST)35 in 2001 under the Ministry of Justice, and have over the past 15+ years continually devoted resources from external and internal sources to build the capacity of both NRAST and the private sector to develop a movables based lending industry.36 The reported statistics from these registries are evidence that sustained commitment over the long term is a key success factor in ensuring that the reform remains aligned to the overall policy objectives of economic development. For the newer reforming countries, such as Indonesia and Thailand, the registry statistics show very little incremental growth over the past 3 years, but operationally the registries are quite robust. What is lacking is the focus on capacity building in the private sector in order to develop a movables-based lending industry.37 For Philippines and Malaysia, who do not have registries just yet, only time will tell. However, all indications show a dedicated commitment by the current leadership to embrace the reform and implement the necessary best practices for sustained success.

B. Coordination Among Reformers and between Different Statutes There are two particular areas in which extreme care is needed to avoid problematic issues for reforming countries. The first is the need for a coordinated approach among policy makers and donors. This is discussed below. The second is the need for an acute awareness of how other legal and institutional reforms will impact on the secured transactions legal regime. This impact usually manifests itself in several ways, and often results in provisions in the new secured transactions law conflicting with provisions in other legal statutes. Examples of such statutes

31 See

www.moc.go.th/index.php/moc-english.html. www.ssm.com.my/Pages/Home.aspx. www.bnm.gov.my. 34 See www.cbm.gov.mm. 35 See https://dktructuyen.moj.gov.vn/home.html?___store=default&___from_store=Vietnam. 36 See, eg the description of the development of the online registry in Vietnam in ch 14 III A. 37 See ch 13 (Thailand) VII. 32 See 33 See

94 Elaine MacEachern are Civil & Commercial Codes, Bankruptcy and Company legislation, and statutes on Contract law, IP law, and Securities law. Thus, in some cases a new secured transactions law is implemented, while the necessary consequential amendments and/or transition provisions are either not included in the reform package or are not implemented at the same time. The obvious ramifications of this are evident38 and typically result in low uptake of the new legal framework by the private sector because of the legal uncertainty that is created. There are also cases where the reforms have an impact on vested interests in the existing legacy systems, particularly on the registry side. A consequence of this can be that old paper-based systems are left in place alongside new notice-based systems, or, in some cases, dual registration is required. As one of the key objectives of the reform is to both provide legal certainty to the creditor and to reduce the cost of credit to the borrower, the lack of coordination, awareness, cooperation, and in some cases outright mishandling of the reform because no one wants to make the difficult decision to close an existing registry service can cause confusion in the marketplace. An example of this situation of dual registration is the Thai Business Security Act (BSA) 2015, where there remains a need to register a security interest in machinery in both the DBD Registry and the Machinery Registry. The BSA did not repeal the registration provisions in the Plant and Machinery Act and, as a result, a creditor must register/search in both at the cost of the borrower. For countries which are recipients of donor funds from one of the many multilateral institutions, there is also the issue of lack of coordination among the donor community and national policy makers. In some cases, this results in a lack of consensus on the type of secured transactions regime that should be implemented. Since the recipient country is not always familiar enough with the technical subject matter of secured transactions law reform, that country is likely to have to make decisions on changes in policy direction on the advice of an international expert who may have their own specific policy views, thus influencing the outcome. A simple example of this is when a policy decision is required as to the fees that should be charged for all types of registry services, namely registration, amendment, discharge and search. There are competing schools of thought on this issue. One view is that the Registry should charge a fee for a search of the registry, and another is that it should be a free service. In the absence of conducting a proper business case, registry fees are determined ad hoc in an attempt to achieve operational sustainability, but often, in reality, the administrator of the system is left trying to cover its annual operating costs from fees generated from the system. In the least developed economies where the need for the reform is greatest for the private sector, the government administrators of the new systems have no dedicated operational budget to continue with the much needed capacity building efforts. They are affected daily by electricity shortages, lack of internet connectivity, and lack of a budget for technology upgrades, as well as other operational challenges. The strategic determination of the fee schedule plays a critical part in incentivising the system administrator to take on the registry duty responsibly while balancing the cost of delivering the service and providing valuable information to the lending community to assess, manage and mitigate lending risk. The broader question regarding fees is not about the actual fee itself for each service provided. Instead, the determination of the appropriate fee structure needs to be put in the context of the overall financial inclusion agenda and the discussion about access to finance. Another more contentious policy discussion is often around the question of whether nonbank financial institutions, who offer finance in ways other than straight secured loans, should

38 See

ch 20 III A (i) (b).

Secured Transactions Reform in East Asia: Progress and Challenges 95 be included in the scope of the legal framework. There are those who would prefer that nonbank financial institutions, for example, financial lessors, are included in the secured transactions legal framework. Following on that, there are those who believe provisions covering purchase money security interests and/or acquisition financing should not be included in the scope of the legislation,39 despite the benefits of visibility that such inclusion brings, particularly where there is the danger of fraud.40 Sometimes these key provisions are left out, because of the views of the lead legislative expert or because the legislative drafting committee is heavily influenced by one particular stakeholder group. The recipient jurisdiction, depending upon how conversant they are in the subject matter, may not fully appreciate the implication of this exclusion. However, this policy choice is likely to result in the reform having limited development impact on the economy of the recipient country.

C. Capacity Building As discussed above, this area of law is both technically complex and requires a new way of thinking about how to address the financing needs of the MSME sector in the emerging market and developing economies. Securing financing with movable collateral is a risky business, particularly when financing a business in the MSME segment. MSMEs are viewed by lenders as high risk, having little valuable collateral and lacking financial responsibility. In the absence of a credit reporting system there is very little reliable information for a lender to determine the level of risk they are willing to take on. This results in the commercial banking sector having a lack of appetite to lend to these types of borrower unless they have immovable property to offer or they have established themselves as a premium client, meaning they have a long-standing relationship with the financial institution.41 A modern secured transactions legal framework on its own is not enough to stimulate creditors to lend to perceived risky borrowers. The supporting eco-system that creates a vibrant movables-based lending industry is dependent upon the capacity of the country to develop out the supporting ecosystem needed to support the industry, eg valuation expertise, secondary markets, sound judiciary, to facilitate and mitigate the lending risk for this type of asset class. In this regard, building capacity at multiple levels is essential and requires long-term planning. Secured transaction reforms are multi-phased in nature, with Phase 1 focusing on creating the legal and institutional framework. This typically takes 3–5 years or more to finalise, depending upon the Parliamentary agenda. Phase 2 consists of ensuring that the key stakeholders are building their internal knowledge base, changing lending behaviour, and introducing new financial services and products. Phase 2 generally takes 3 years or more to develop the market. During Phase 3, there is a move into market deepening, with new players enter the financing market and competition increases. Providers of services which assist with, and add value to, secured transactions also enter the market, such as collateral managers and valuation experts. New insurance

39 The framing of this debate by focusing on the types of interests included in the legislation, rather than the types of financial institutions who provide the relevant credit, is a feature of the legal literature in the area of secured transactions law reform: see ch 2 IV B (i); ch 6; ch 15; ch 20 IV A. However, in some countries, reform is limited to particular types of lenders (typically regulated financial institutions), so that the reform is coordinated with the regulatory agenda: see ch 13 (Thailand) II C; ch 17 (India) IV A and VII A (i); ch 18 (Pakistan) IV A. cf ch 2 IV B (iv). 40 See, further, ch 2 IV B (i) and (ii). 41 See L Gullifer and I Tirado, ‘Financing Micro-businesses and the UNCITRAL Model Law on Secured Transactions’ (2017) 22 Uniform Law Review 642.

96 Elaine MacEachern products also enter the market, and secondary markets, critical for effective enforcement, are established. Phase 3 is likely to take about 3–4 years. In relation to countries considered in this book, Vietnam is in Phase 3, Lao and Cambodia are in Phase 2, while Philippines, Indonesia and Myanmar are at the Phase 1 stage. Capacity building is a long-term process and can take many forms depending on the constituency. Capacity building is required at the public sector/institutional level, so that the reforms continue to be championed and to ensure they remain a priority of government. Capacity building and knowledge awareness activities are also required to educate the public about their legal rights and responsibilities as responsible borrowers. It is hugely important to build the capacity of the private sector lending institutions, so they understand the benefits of the reform and how they can leverage the new legal framework not only to assess and mitigate their risk, but also develop new types of lending products. This often requires a change in lending attitudes and behaviour, particularly by the conventional banks. It is usually less of a problem for the nonbank financial institutions who have already been lending to MSMEs and who have developed the necessary policies, procedures and tools to assess, manage and mitigate the risk of providing MSMEs with finance collateralised by movables.

D. APEC/ASEAN – Regional Cohesion on Legal Reform The Association of Southeast Asian Nations (ASEAN)42 and the Asia Pacific Economic Cooperation (APEC)43 are regional forums dedicated to accelerating economic growth, and work on matters of common interest in their respective economic fields. The organisations work collaboratively on matters related to reducing structural and regulatory barriers for cross-border trade and investment, with a focus on creating an environment to enable MSMEs to carry on business. As its work relates to credit infrastructure (credit reporting and secured transactions), APEC/ABAC44 have specifically established a secured transactions law Financial Infrastructure Development Network working group (FIDN) to identify areas for harmonisation and collaboration.45 FIDN has been meeting bi-annually to track the progress of secured transactions reforms in the region. This forum creates an opportunity for regional policy makers and private sector stakeholders to meet and discuss regulatory and implementation challenges, to share lessons learned, to track progress and to develop networking relationships with the intent that, over time, the reforms will support overall economic integration.

IV. The Role of Law Schools While secured transaction law reform has been taking place in East Asia Pacific for close to two decades now, and, often, there will be many local legislative experts on the drafting committees who come either from academia or from the public and private sectors, this new area of law has made only a limited appearance within the curriculum of the local law schools. Until the subject

42 See

https://asean.org/asean/about-asean. apec.org. 44 ABAC is the private-sector arm of the Asia-Pacific Economic Cooperation. See www2.abaconline.org. 45 See ch 10 (Philippines) I B. 43 See

Secured Transactions Reform in East Asia: Progress and Challenges 97 matter has found its way into a course offered by law schools, there will remain limited uptake and engagement by corporate legal counsel within financial institutions, or by local legal practitioners. This, in turn, limits their ability and incentive to introduce and structure new financing facilities on behalf of their clients, unless they are influenced by association with their international counterparts. One of the issues that reformers face in a number of jurisdictions is a significant variation in the range of the knowledge of key stakeholders. This is particularly evident within the judiciary. While introducing secured transactions law to members of the judiciary46 it is apparent that some participants may have considerable experience in this field: either through their legal practice prior to appointment to the Bench, or from the fact that they sit in a specialised commercial court. Others have no familiarity with the legislation or the concepts as they may rotate to various Courts within the Court system. Therefore, the role of continuing legal education is a crucial element among the legal profession. There is a need to have a somewhat coordinated approach, starting at the law school level and continuing throughout the career of those lawyers specialising in the area of commercial law. There needs to be particular emphasis on both secured transactions and insolvency, as the two are intertwined and are crucial elements for the MSME sector.

V. Conclusion Secured transactions legislation and collateral registries can have a dramatic impact on economic development. Collateral provides the basis for free-flowing credit markets, reducing the potential losses lenders face from non-payment. While land and buildings are widely accepted as collateral for loans, the use of movable collateral (such as inventory, accounts receivables, crops and equipment) is restricted because many countries do not have functioning legislation and registries to govern secured transactions. Reforming the framework for movable collateral lending allows businesses (particularly MSMEs) to leverage their assets for capital for investment and growth. Secured transactions registries increase the availability of credit and reduce the cost of credit. The challenge secured transactions reformers face is that the reform is often viewed as purely a legal and/or a technology reform and does not get the political support and recognition it deserves. While there are a number of policy interventions that need to compliment the secured transactions law in order to have the desired policy impact, it should be considered as one pillar of an overall reform of the financial sector aimed at stimulating economic development, financial inclusion, stability and diversification.

46 As part of the capacity building component of the reform, education and training is often provided to members of the judiciary. It is usually during these sessions that trainers learn of the background of the participant, eg they are a specialised constitutional judge or family court judge. While it is important that members of the judiciary have an interest in any new law introduced, it is unlikely a secured transactions case will be presented to them while on the Bench in this Court.

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part ii Civil Law Jurisdictions

100

6 Secured Transactions Law Reform in Civil Law Jurisdictions: Challenging Tradition, Facing Reality, and Embracing Modernity TERESA RODRÍGUEZ DE LAS HERAS BALLELL

I. Mapping Secured Transactions Reform in Civil Law Jurisdictions: Challenges and Opportunities A. Introduction Modern economies are heavily dependent on credit markets. Access to finance under reasonable conditions and funding availability constitute critical factors for economic growth, job creation, social cohesion, and innovation policies in contemporary societies. Concurrently, the development of a credit-stimulus environment strongly relies on a sound, reliable, and efficient secured transactions system. Security rights constitute forceful legal solutions1 harnessed to repair2 credit market imperfections.3 Accordingly, a modern secured transactions law would facilitate 1 HW Fleisig, ‘The Economics of Collateral and of Collateral Reform’ in F Dahan and J Simpson (eds), Secured Transactions Reform and Access to Credit (Cheltenham, Edward Elgar, 2008) 81–109; N De La Peña, ‘Reforming the Legal Framework for Security Interests in Mobile Property’ (1999) 2 Uniform Law Review 347; A Schwartz, ‘Security Interests and Bankruptcy Priorities: A Review of Current Theories’ (1981) 10 Journal of Legal Studies 1; JH Scott, ‘Bankruptcy Secured Debt and Optimal Capital Structure’ (1977) 32 Journal of Finance 1. 2 Even if some critical stances challenge the secured transactions system on a distributive basis, question the accuracy of market signaling or warn of the risk of discrimination against unsecured creditors, it is a commonplace assumption that secured transactions repair credit market failures – see an analysis of such concerns and reticent positions in SL Harris and CW Mooney Jr, ‘A Property-Based Theory of Security Interests: Taking Debtors’ Choices Seriously’ (1994) 80 Virginia Law Review 2021. Firstly, as the creditor replaces the need for reliable information about the debtor’s solvency and the viability of the project with the direct valuation of the collateral. Secondly, for the collateral offers to the creditor a route for credit recovery alternative to the project success. Accordingly, credit conditions improve and adverse selection impact diminishes. Thirdly, because the exposure to inadequate use of funds or excessive risk taking is prevented by the value of the collateral. H Bester, ‘The Role of Collateral in Credit Markets with Imperfect Information’ (1987) 31 European Economic Review 887; Y-S Chan and G Kanatas, ‘Asymmetric Valuations and the Role of Collateral in Loan Agreements’ (1985) 17 Journal of Money, Credit and Banking 84; K Igawa and G Kanatas, ‘Asymmetric Information, Collateral, and Moral Hazard’ (1990) 25 Journal of Financial and Quantitative Analysis 469. 3 D Demeza and DC Webb, ‘Too Much Investment: A Problem of Asymmetric Information’ (1987) 102 Quarterly Journal of Economics 281; JE Stiglitz and A Weiss, ‘Credit Rationing in Markets with Imperfect Information’ (1981) 71 American Economic Review 393.

102 Teresa Rodríguez de las Heras Ballell access to credit, mitigate risk exposure, improve financing conditions,4 and reduce transactions costs.5 Such is the rationale behind the close attention paid in last few decades to the modernisation of secured transactions laws and the extensive and intensive harmonising movement led by international and regional organisations of the rules on security interests. The completion and successful implementation of several international initiatives have laid the foundations of a common legal framework for security interests in international transactions. Further, these inspire reform and modernisation of domestic legislation under the sound underpinning of a set of modern principles of secured transactions law.6 The process of implementing these international instruments in national legal contexts and the adoption of reforms and modernising projects in domestic jurisdictions aimed to align national rules with international modern principles in this area of the law are fraught with difficulties. Institutional, political, and procedural hurdles have to be overcome in the reform process. Conceptual and substantive obstacles can also arise in the attempt to accommodate international modern principles and legal solutions in domestic legal systems. Secured transactions law reform particularly faces some layers of complexity for several reasons. Different legal traditions and national jurisdictions have had appreciably divergent legal responses and regulatory approaches to proprietary rights and security interests throughout history. The harmonisation path in this legal realm appears to be tortuous. Likewise, rules on secured transactions interweave with procedural laws, insolvency legislation, registry regulations, rules concerning public notaries, and the dispute resolution legal framework in an intricate domestic legal system. The feasibility of reform and the effectiveness of the expected outcomes could be undermined by inconsistency with other parts of the system or incompatibility between reformed components and pre-reform pieces of the system that render the legal machinery inoperative in practice. In such situations, where the pre-existing legal system greatly differs in concepts, principles, practices, or legal solutions from the inspiring international models, modernising efforts often collide with impeding inertia on the part of institutions or market actors. This could lead to path-dependency responses rather than really transformative solutions, and a probable ‘rejection’ response from the recipient against what is perceived as a ‘legal transplant’.

B. Civil Law Challenges In general terms, and despite the existence of certain nuances that cannot be ignored, an overall assessment of international initiatives to modernise and harmonise rules on security interests immediately reveals that the route taken to formulate the modern principles of secured transactions laws departs from the ‘load bearing’ lines traditionally supporting legal structures that apply to secured transactions in civil law jurisdictions. The mere reference to civil law jurisdictions as a compact category7 may seem to be a conspicuous simplification that relinquishes the internal variety of national systems, the plurality of sub-models, and the undeniable disparities among the jurisdictions falling under the general category. However, this enables common distinctive

4 B Kozolchyk, ‘Secured Lending and Its Poverty Reduction Effect’ (2007) 42 Texas International Law Journal 727. 5 A Saunders et al, ‘The Economic Implications of International Secured Transactions Law Reform: A Case Study’ (1999) 20 University of Pennsylvania Journal of International Economic Law 309. 6 For discussion of these principles, see ch 2. 7 PR Wood, Comparative Law of Security Interests and Title Finance, 2nd edn (London, Sweet & Maxwell, 2017) 6. World jurisdictions are classified in three legal families: Anglo-American common law group, Napoleonic group, and Roman-Germanic group.

Secured Transactions Law Reform in Civil Law Jurisdictions 103 features pertaining to civil law jurisdictions in the ambit of secured transactions to be identified8 and reasonably employed in a comparative analysis. Therefore, considering the previous remarks, civil law jurisdictions will be treated for the purposes of this chapter as a single category, and country-specific regimes will only be referred to where these are relevant and appropriate for the analysis. This simplified confrontation of models of civil law systems, traditional systems for security interests in civil law jurisdictions and current international standards and principles of secured transactions law, will allow us to trace the challenges and unveil the opportunities for reform in civil law jurisdictions in pursuit of a balance of modernity, tradition and reality. As a result of the greater proximity of the international principles for a modern secured transactions system to the most distinctive features in this ambit of common law jurisdictions, but more specifically, of the model embedded in Article 9 of the US Uniform Commercial Code (UCC Article 9) (and its versions), efforts made to reform rules on security interests in civil law jurisdictions tend to clash with classical disparities between legal traditions. In this context, the challenges faced by civil law jurisdictions in the race to align domestic laws with international principles in this field can be classified into three main categories.

(i) Unitary Concept of Security Interest First, the predominant adoption of a unitary concept of security interests on a functional basis in international/regional instruments confront civil law jurisdictions with a conceptual challenge. As a result of a historical evolution,9 secured transactions laws have been incrementally reformed and amended to accommodate legal systems to social and economic changes. On occasion, this process of adaptation to an evolutionary reality has been partial, incomplete, and, above all, fragmentary. Specially, an incremental and historical evolution of secured transactions laws in formalist jurisdictions has frequently led to fragmented, plural, and scattered legal regimes. Accordingly, diverging legal regimes according to the nature or the characteristics of the parties (whether the debtor is a professional party or a consumer); the type of asset (depending on whether the asset is movable or immovable or whether it is tangible or intangible (receivables), or even whether the movables are uniquely identifiable or not);10 or the legal form (security agreement, transfer of title, assignment of debt by way of security, title-retention sale agreement, leasing agreement) were intentionally or randomly developed and incorporated into a fragmented and increasingly complex legal system. 8 Wood (n 7) 451 for Napoleonic jurisdictions and 483 for Roman-Germanic jurisdictions. 9 From that perspective, a historic-formalist group of legal systems, comprising Napoleonic jurisdictions, RomanGermanic jurisdictions and the English tradition, could be then contraposed to the functionalist group of legal systems. See J Feliu Rey, ‘El Derecho de garantías mobiliarias en contexto: una aproximación global’ (2016) No 29 La Ley mercantil 3. 10 Some civil law jurisdictions have added to the classical catalogue of possessory pledges (in movables) and mortgages (in immovable), other security devices more suitable for the needs of modern economies where the dispossession of the debtor is deemed totally uneconomical: non-possessory pledge and movable or chattel mortgage. The availability of these non-possessory security devices depends upon the identifiability of the movable asset (collateral). As a mere illustration, the Spanish Non-Possessory Pledge and Chattel Mortgage Act of 1954 (Ley sobre Hipoteca Mobiliaria y prenda sin desplazamiento de posesión of 16 December 1954, published in Official Bulletin (BOE) 18 December 1954) distinguishes between movables that can be uniquely identifiable and movables that cannot. The chattel mortgage is simply a mortgagelike non-possessory security device that can be granted over uniquely identifiable assets as listed in the NPPA (Art 12). The non-possessory pledge is a pledge-like security interest that can be granted over movables whose identification is weaker and expressly included in the NPPA without dispossessing the debtor. See T Rodríguez de las Heras Ballell and J Feliu Rey, ‘Modernisation of the Law of Secured Transactions in Spain’ in L Gullifer and O Akseli (eds), Secured Transactions Law Reform: Principles, Policies and Practices (Oxford, Hart Publishing, 2016) 422–23.

104 Teresa Rodríguez de las Heras Ballell Therefore, the first challenge that international principles for a modern secured transactions system poses is of a conceptual character. At least three aspects of the international principles pose conceptual challenges to a traditional secured transactions system. First, the employment of a unitary concept of security interest embracing all devices aiming at protecting the rights of a lender or other extender of credit by allowing the latter to take, or retain, a proprietary right or interest over an asset of the debtor (or provided to the debtor). Second, as a consequence of the unitary concept, the application of the same rules to devices based on retention of title by a creditor as well as devices based on grant of an interest by a debtor. Third, the adoption of a secured transactions law which is as comprehensive as possible, allowing the taking of security over any class or type of asset, including future assets, and regardless of the characteristics of the parties, ie, whether they are acting for business or professional purposes or for personal, family or household purposes, in the transaction. Exceptions and specific regimes, departing from a unitary and comprehensive model where the reform is taking place, should be then limited to those soundly justified and be supported by a prior economic assessment of impact on the consistency of the entire secured transactions legal system.

(ii) Institutional Challenges Relating to Creation and Third-Party Effectiveness Second, given their special nature (erga omnes),11 the external dimension of security rights, in the sense of the relationship between the security right and third parties, is particularly critical for the effective functioning of a secured transactions legal system. Hence, a number of international principles of modern secured transactions law refer to the valid creation of a security interest with inter-party effects, the mechanisms to render the security right effective against third parties, and the set of priority rules. The modern international approach to all these layers presents civil law jurisdictions with challenges of an institutional character. Together with other general concerns and policy considerations, institutional approaches to the effectiveness of security rights patently differ among legal traditions and domestic jurisdictions with different historical evolution paths. This second set of challenges has been labelled ‘institutional’ as it is going to be analysed from the perspective of the role of certain institutions, mainly public notaries and registers, in the creation of a security right and achieving effectiveness against third parties. Such an institutional approach invites discussion on the required formalities for a valid security agreement and the role of notaries; the available methods to achieve third party effectiveness, and, in particular, the different registry models – essentially, epitomised in the dichotomy between notice-filing versus document registries; and, finally, the body of priority rules.

(iii) Enforcement Third, enforcement is generally the weakest component of secured transactions systems due to lengthy and burdensome court proceedings, broad limitations on private autonomy, and

11 In the civilian legal dogmatic, one of the distinctive features of security rights, as compared to personal rights, is the ‘absolute’ character or absoluteness, as they are opposable against third parties. See G De Reina Tartière, ‘Teoría general de las garantías reales’ (2011) 87(274) Revista Crítica de Derecho Inmobiliario 717, 725.

Secured Transactions Law Reform in Civil Law Jurisdictions 105 restrictions on available enforcement mechanisms allowed in different transactions. The ‘stress test’ for a well-functioning modern secured transactions system depends on quick, cheap, and effective enforcement mechanisms well-balanced with adequate protection for the debtor’s and other creditors’ rights. International principles of modern secured transactions law pave the path towards effective and sound enforcement departing from traditional limitations and intricacies for enforcement in domestic jurisdictions. Basically, modernisation entails the enlargement of private autonomy in enforcement, the implementation of expedited court proceedings, and the growing availability of out-of-court mechanisms. Hence, these hurdles to overcome in the enforcement race are classified in this chapter as procedural challenges. With diverse levels of intensity and severity, civil law jurisdictions have to deal with these internal dysfunctions in the legal body and embrace the procedural challenges that international modern principles embody in pursuit of an effective, balanced, and transparent enforcement procedure for security interests.

C. Aim of Chapter This chapter aims to examine how civil law jurisdictions embrace the modernisation of secured transactions law to adapt to the reality of global markets, complex transactions and the changing environment. It also aims to explore to what extent international standards for a modern secured transactions system challenge tradition or give the opportunity to enhance existing models whilst preserving some key legal elements of the system. In particular, the opportunities for enhancement that emerging digital technologies offer to secured transactions systems in the process of reform should be attentively considered. These include electronic registries, smart contracts, smart property and algorithm-driven systems and platforms. Given these new possibilities, reform strategies reach a crossroads. In the plan to modernise, new parts must be inserted into the legal system whereas current parts that show imperfections or limitations could either be replaced or, alternatively, be preserved but refined, enhanced, or streamlined. To that end, a thorough analysis of the current (pre-reform) domestic system to produce a diagnosis prior to planning a reform is crucial in order to devise a country-specific strategy, delineate the perimeters of the needed reform, and trace the plan to deploy it in a national context. This chapter is structured as follows. In Part II, I advocate for the implementation of reform strategies for secured transactions law that are driven by international modern principles instead of articulated by means of what might be perceived as legal transplants, to more effectively and positively address main stress points in civil law jurisdictions. Parts III, IV and V respectively tackle the conceptual challenges, the institutional challenges and the procedural challenges posed to legacy systems in civil law jurisdictions by the modernisation of secured transactions law under modern principles. As a final remark, it is argued that solutions based on emerging digital technologies, if wisely implemented, could serve to alleviate the practical discrepancy in terms of efficiency and costs between the ideal model devised from the international principles for a modern secured transactions legal system and the legacy systems based on the classical civillaw pillars. To the extent that application of technological solutions in existing institutional and procedural schemes is able to attenuate certain deficiencies, reduce costs, enhance visibility, and improve efficiency, civil law jurisdictions might be better able to embrace modern principles of secured transactions law without seriously compromising the dogmatic basis of their legal traditions, and also find more opportunities to creatively develop and test alternative models inspired by international principles.

106 Teresa Rodríguez de las Heras Ballell

II. The Merits of an International-Principle-Driven Reform for Civil Law Jurisdictions A. Stress Points The viability and the expected success of reform and modernising initiatives relating to secured transactions law in civil law jurisdictions are heavily conditioned upon the ability to address stress points, smoothen ridges, and revitalise strengths and opportunities for the legal system under reform. Stress points for reform can be grouped in three main variables. First, the familiarity with the new concepts, legal rules, and underlying principles play a critical role in the process of reform. The less familiarity there is with these, the greater their impeding effect on reform. Second, the business climate, the attitude of industry to the reform, and the support of stakeholders is a key trigger. As a matter of fact, strong industry support can deactivate any institutional inertia. In that regard, the initiative and the support of the aircraft industry convincingly explains, at least partially if not totally, the decision to accede to the Convention on International Interests in Mobile Equipment (hereinafter, CTC)12 and its Aircraft Protocol in many civil law jurisdictions, where the solutions of the Convention are unfamiliar and highly transformative of the legacy system in multiple aspects.13 Third, coordination among authorities involved in the reform is an element of practical relevance that can greatly affect the feasibility and the success of the reform.14 Lack of coordination or even conflicts among authorities or legislative bodies can visibly undermine the process, decelerate the pace, and diminish the quality of the reform. Finally, the historical consolidation of legal institutions in a legal system constitutes a two-edged factor in the development of a reform. On one hand, a long legal tradition normally implies developed doctrine, abundant case law, and settled practice. That tends to ensure good understanding of the problems, and knowledge in theory and in practice. This is the case in relation to classical security rights (possessory pledge, mortgage, title-based secured transactions) in civil law jurisdictions of many developed economies. Besides, a long history of legal institutions may also reveal deficiencies and gaps to be repaired and filled. Thus, the need for reform might be more evident. On the other hand, the historical development and consolidation of legal institutions also operate as an obstacle to the reform, as they increase the switching costs and the resistance to change due to learning costs, embedded practices, or status quo benefits.15 This two-edged role of the historical-dependence factor could also explain the diversity of responses to the need for reform in civil law jurisdictions. Responses to the need for

12 The Convention on International Interests in Mobile Equipment (hereinafter, CTC) was adopted in a Diplomatic Conference that was held in Cape Town, South Africa, on 16th of November of 2001 under the auspices of International Institute for the Unification of Private Law/Institut International pour l’Unification du Droit Privé) (UNIDROIT) and the International Civil Aviation Organisation (ICAO). Pursuant to Art 49(1) CTC, the Convention entered into force on the 1st of March of 2006 together with the Protocol thereto on matters specific to aircraft equipment (hereinafter, Aircraft Protocol). 13 For an analysis of the accession to the CTC and the Aircraft Protocol by Spain and its main legal implications in the current framework, see T Rodríguez de las Heras Ballell, ‘Key Points for the Effective Implementation of the Cape Town Convention: The Accession of Spain to the Aircraft Protocol’ (2016) 21 Uniform Law Review 279; T Rodríguez de las Heras Ballell, ‘The Accession by Spain to the Cape Town Convention: A First Assessment’ (2014) 19 Uniform Law Review 1. 14 Recent reform movements in China and Cambodia have been afflicted by additional complexities arising from the lack of coordination among authorities involved in the process. 15 R Fernandez and D Rodrik, ‘Resistance to Reform: Status Quo Bias in the Presence of Individual-Specific Uncertainty’ (1991) 81 American Economic Review 1146.

Secured Transactions Law Reform in Civil Law Jurisdictions 107 modernisation can be classified in three main categories: (1) Those countries where no formal legislative reform has been undertaken, but a combination of creative case law, modernising interpretation, doctrinal efforts to rejuvenate old legal provisions, and the development in the market of non-typified practices and transactions with receptive registrars’ decisions have brought the unreformed legal system up to date.16 (2) Those jurisdictions where an incremental reform17 has taken place with the promulgation of new provisions and the adoption of minor changes without entirely renovating the existing legal system. (3) Those countries where a comprehensive substantial reform18 has been enacted with the passing of a new law, a recast text or a comprehensive code.19 In these latter cases, the reform is formally more visible, but it is not always fully effective.20

B. Perception of Reform as a Legal Transplant: Modern Principles of Secured Transactions Law An examination of such stress points for reform, the main hurdles, and the most convincing reasons for reform suggests that some obstacles and reluctant attitudes might be aggravated by the perception of the reform process as a legal transplant, accompanied by alien legal solutions and unfamiliar concepts. Hence, the perception that international instruments on secured transactions have a high proximity to certain common law models – namely, UCC Article 9 and its subsequent variants – could exert a significant discouraging effect on the motivation, the reaction, and the receptivity of domestic players against any proposal to reform inspired thereby. Hence, I advocate for adopting an approach that is based on the international modern principles of secured transactions law to inspire and stimulate reform and modernisation projects in domestic legal systems. In this model of international-principle-driven reform, the main stress points in civil law jurisdictions are effectively and positively addressed, while the efforts to accommodate the legal framework to a set of international modern principles are more likely to be welcomed as opportunities to enhance the effectiveness and the coherence of the system with more flexibility. Unlike a perceived legal transplant, a principle-driven reform would encounter less opposition and encourage a more proactive and creative attitude towards modernisation. A reform based on principles is indeed more substantial as it touches the foundations of the legal system, but, concurrently, it leaves room for considering alternative solutions to articulate the same principle. Further, it does not necessarily impose alien concepts, allows the development of a perceived country-specific legislative response to harmonisation, and enables a more participative involvement of local actors and domestic legal elites. Besides these practical and operational

16 The practice of Registrars aimed at updating the legal provisions in the face of market needs has been instrumental to a de facto modernisation of the Spanish system in certain areas. See L Fernández Del Pozo, El registro de bienes muebles. Los bienes muebles y la preferencia registral de los derechos inscritos (Madrid, Marcial Pons, 2004). 17 G Castellano, ‘Reforming Non-possessory Secured Transactions Laws: A New Strategy?’ (2015) 78 MLR 611, 613. For examples in this volume, see ch 11 (South Korea) and ch 13 (Thailand). 18 E Dirix, ‘The Belgian Reform on Security Interests in Movable Property’ in Gullifer and Akseli (n 10). For examples in this volume see ch 10 (Philippines) and ch 14 (Vietnam). 19 Belgian Security Rights Act: Loi du 11 juillet 2013 modifiant le Code Civil en ce qui concerne les sûretés réelles mobilières. 20 The adoption of the 2017 Real Property Law of China represented an important reform for the modernisation of Chinese secured transactions law. However, it did not manage to provide a fully uniform, clear, and consistent legal framework, see ch 7 (China).

108 Teresa Rodríguez de las Heras Ballell advantages, a principle-oriented reform would be more consistent with the civil-law dogmatic style. Solutions are articulated around principles, and concepts and rules are formulated to convey such principles and solutions. As a result, whereas a pure legal transplant can create inconsistencies between reformed and unreformed areas of the legal system, may suffocate pre-reform case law and doctrine rendering them inapplicable, and, in many cases, disregard possible domestic solutions in the pre-reform model, a principle-based approach allows leveraging on effective domestic solutions to enhance the resultant system and to contextualise the reform. The acknowledgement of the merits of opting for an approach sensitive to legal traditions does not necessarily imply a compromise or an undermining of the harmonisation goals. The extensive map of ratifications of the CTC21 endorses the success, among other possible concurring factors such as the CTC discount,22 of the original conceptual approach to international harmonisation. Unlike other international instruments, the CTC is based on the creation of a uniform concept (an international interest) that superimposes on national legal institutions (comprising diverse domestic security interests and title-based secured financing devices) subject to an international uniform legal regime, ie, the CTC provisions and the applicable Protocol rules. This conceptual solution, together with the categorisation mechanism (Article 2(4) CTC) of the transaction and the consequent application of the default remedies of the chargee (Articles 8 and 9 CTC) or of the conditional seller or lessor (Article 10 CTC) and a set of available declarations, conveys the principle23 of sensitivity to legal traditions, thus inspiring adoption of the Cape Town system. Although a certain degree of uniformity is sacrificed with the variety of declarations to be made, the duality of remedies regime, and the referral to applicable law in some points, the net value gained by the Cape Town system is amply positive, as the number and the diversity of Contracting States prove.

III. Facing Conceptual Challenges: Policy Implications of a Unitary Approach and Implementation Alternatives A. The Unitary Approach As described above, the conceptual challenge applies to three different, albeit closely connected, dimensions of modern international secured transactions rules: the unitary concept of security interest, the unified legal regime for both secured transactions and title-based devices, and the availability of any type of personal property as collateral, including future assets. These principles 21 On 14 December 2020, there were 82 Contracting States plus the European Union as a Regional Economic Integration Organisation. See updated information at www.unidroit.org/status-2001capetown. 22 The CTC discount is stipulated by the OECD Sector Understanding on Export Credits for Civil Aircraft (ASU). It applies to Contracting Parties for the CTC, provided that certain declarations (‘qualifying declarations’) have been made by the State, and it entails that they can benefit from a reduction of the MPRs (Minimum Premium Rates) to account for the credit risk when providing an officially supported export credit. A premium is charged in addition to the interest rate, as it is meant to cover the risk of non-repayment of the export credits. The ASU is a self-contained agreement for officially supported export credits relating to civil aircraft. The ASU is managed by its own Participants, which are Australia, Brazil, Canada, the European Union, Japan, Korea, New Zealand, Norway, Switzerland and the United States. The prevailing ASU text can be found in Annex III of the current Arrangement on Officially Supported Export Credits. The latest version is the January 2020 version. It is available at www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?doclanguage= en&cote=tad/pg(2020)1. 23 R Goode, Official Commentary on the Convention on International Interests in Mobile Equipment and Protocol Thereto on Matters Specific to Aircraft Equipment, 3rd edn (Rome, UNIDROIT, 2013) 18 and 173. The 4th edition has been published in 2019.

Secured Transactions Law Reform in Civil Law Jurisdictions 109 and distinctive features of modern secured transactions laws have formal implications as well as substantive ones. The formulation of a single term to label any security-based or title-based transaction – such as the employment by the CTC of the newly-created term ‘international interest’ – to replace the historical plurality of legal concepts to categorise secured transactions and functional equivalents (eg charge, chattel mortgage, pledge, non-possessory pledge), or the codification of secured transactions rules in a unified code or legislation, are essentially formal challenges. Whereas the decision to apply the same legal regime to both security-based transactions and title-based devices, as well as the expansion of the material scope of the rules to cover any type of assets, including future assets, have significant substantive consequences. An integral comprehensive reform might more easily and effectively tackle and combine the two faces, formal and substantive, of the challenge. The enactment of a code or single legislation governing all secured transactions would facilitate and provide consistency to a unitary concept which is subject to a unified legal regime. Contrariwise, a long and sound historical legal tradition and the adoption of a partial or merely incremental reform may imply the need to compromise the preservation of traditional concepts, old scattered rules, and different legal regimes with the adoption of modernising solutions in substantive terms.

B. Codification The formal configuration of secured transactions law in a unified legal instrument (code or specific legislation) does not pose a challenge to the civil law dogmatic. On the contrary, the spirit of codification is very deeply rooted in the civil law tradition24 – which is based on the Roman law, as codified in the Justinian Corpus Juris Civilis25 – and, indeed, in many jurisdictions, rules governing traditional secured transactions are very frequently set out in the Civil Code or the Commercial Code. Nonetheless, the fact that formalist systems of secured transactions in civil law jurisdictions have evolved throughout history to meet new market needs has led to the dispersion and the fragmentation of the legal regime on secured transactions with the enactment of special laws (for instance those relating to non-possessory pledges and chattel mortgage) or more frequently, the adoption of specific provisions on secured transactions in a variety of legislation (such as legislation on intellectual property, maritime law, insolvency law, and company law). Given the inconvenience, the difficulty, or simply the disinterest in reforming the Civil or Commercial Code, the traditional rules on security rights have petrified while a number of scattered legal provisions were adopted from time to time.

C. The Functional Approach The decision to subject both security rights and title-based devices to the same legal regime implies a different and more substantial challenge than the mere codification of applicable rules

24 R David and JEC Brierley, Major Legal Systems in the World Today: An Introduction to the Comparative Study of Law, 2nd edn (New York, The Free Press, 1978). 25 Although the relationship between codification and civil law traditions seems strong, it has been argued that the civil law tradition is divided into two streams: the codified Roman law, and the uncodified Roman law (such as Scotland or South Africa). See W Tetly, ‘Mixed Jurisdictions: Common Law v Civil Law (Codified and Uncodified)’ (2000) 60 Louisiana Law Review 677, 683.

110 Teresa Rodríguez de las Heras Ballell in a unified piece of legislation. A monist approach to all functionally equivalent consensual forms to secure an obligation defies the classical distinction between pure security rights and title-based devices. In latter case, the ‘secured creditor’ holds the ownership and is indeed the owner (with a pure ius separationis). Accordingly, the position of the creditor/owner is different from that of a creditor with a security over an asset owned by the debtor, and its default remedies would naturally differ. This dualist treatment is not, however, exclusive to civil law jurisdictions, although it is one of the common denominators normally associated with the formalist approach. The CTC is sensitive to the dualist models and their consequences when providing for two sets of remedies in case of default, based on the re-characterisation of the security agreement under the applicable law (Articles 8, 9 and 10 CTC). Tracing the evolution of the reception of Roman law can shed light on the rationale behind the formalist approach and the dualist models. The Roman law institutions of pignus conventum or hypotheca, fiducia cum creditore, and pignus datum articulated three different allocation schemes for ownership and possession of an asset. The debtor under the hypotheca retained both the ownership and the possession of the property; whereas the fiducia cum creditore entailed that the ownership as well as the possession over the asset were transferred to the creditor. Under the pignus datum, only the possession was transferred to the secured creditor, as the debtor retained the ownership.26 The distinction among these security forms was not based on the type of asset involved. That catalogue of forms, simply based on the transfer of possession, was preserved by the medieval tradition that just showed some reservations against admitting the creation of a pledge (fiducia cum creditore and pignus datum) over immovable property, insofar as the transfer of possession was needed.27 For medieval scholars, the creation of hypotheca over movables as well as immovables was, however, accepted without hesitation, as no transfer of possession was required.28 Nevertheless, the codification in the 18th and 19th centuries departed from the Roman sources and crystallised a distinction of legal forms based of the type of the asset – pledge for movable assets and mortgage for immovable property. That asset-based division marks the origin of the evolution of the formalist system. Later, the need to meet market demand for access to credit triggered the development of new forms more suited to modern economies such as nonpossessory pledges and chattel mortgages, and also the use of ownership for security purposes, for example, reservation of title or the recognition of fiduciary agreements in certain jurisdictions. The plurality of security forms in the absence of an exhaustive list of security rights causes uncertainty over the nature of certain rights and legal situations (eg, retention rights, options to buy, pre-emptive rights), and leads to the multiplicity of legal regimes and the consolidation of a form-based approach. The resultant fragmentation of legal regimes and the complexity deriving from a multiplicity of legal forms29 is indeed the most evident weakness of formalist jurisdictions. Therefore, in 26 See M Fuenteseca, Pignus e hypotheca en su evolución histórica (Santiago de Compostela, Andavira editores, 2013) 19–34, where the author argues that in Roman Law, there were only two relevant forms to create security rights: by means of traditio possessionis (by handing over possession) of the encumbered asset to the creditor (pignus conventum cum traditione); or by mere agreement of the parties to bind the asset to the performance of an obligation (pignus conventum nuda conventione). 27 A Guzmán Brito, ‘La pérdida del concepto romano de hipoteca mobiliaria en los derechos moderno y codificado y su recuperación a lo largo de los siglos XIX y XX con especial referencia al caso de Francia’ (2009) 33 Revista de Derecho de la Pontificia Universidad Católica de Valparaiso 103, 112. 28 E Bussi, La formazione dei dogmi di Diritto privato nel Diritto comune (diritti reali e diritti di obbligazione) (Cedam, Padova, 1937) 145–49. 29 This is so even in those jurisdictions that, having adopted initiatives to modernise the legacy systems, do, however, maintain a formalist model. The new Italian law for non-possessory pledges (Law decree no 59 of 3 May 2016) provides an illustrative example. Although the law has to be praised as a key modernising achievement in the Italian credit market, in

Secured Transactions Law Reform in Civil Law Jurisdictions 111 the face of such deficiencies of formalist legal systems in terms of consistency, efficiency and costs, a ‘functional, integrated and unitary approach’30 does certainly promise great gains. The legal framework is simplified, rules become more consistent and predictable, and an increased and ampler competition in the market among credit providers leads to higher and more efficient access to finance. Such potential advantages would endorse the advisability of a policy decision to steer form-based legal systems towards functional legal models. Although there are substantial dogmatic issues behind this decision, such as the different legal nature of the rights held by the secured creditor, and by the lessor or the conditional seller (in a title-reservation sale),31 the legislative option can be focused only on unifying32 at least priority rules, available remedies in case of default and the legal treatment of the creditors’ rights in insolvency.33 In practice, the secured transactions system would work then as a functional model. Hence, it seems a viable change for formalist legal system in order to enhance consistency and facilitate secured transactions.

D. Security Over Future Assets Finally, there is a third facet of the conceptual challenge that must be tackled: the option for broadening the scope of secured transactions and accepting the availability of any type of personal property as collateral, including future assets,34 or generic assets – inventory, present and future assets of certain category, ‘all present and future assets’. The traditional reluctance to accept security interests over generic assets or an indeterminate pool of assets was rooted in the tenet of specificity or specialty (especialidad) that characterised and defined security rights.35 As the creation of a security interest entails a privileged position (ius praeferendi and

the context of a formalist legal system with a multiplicity of legal methods to take security over movable assets, confusion, and ambiguities have been neither avoided nor prevented. G Castellano, ‘The New Italian Law for Non-possessory Pledges: A Critical Assessment’ (2016) 31 Butterworths Journal of International Banking and Financial Law 542. 30 UNCITRAL Legislative Guide, 334: ‘Para 64. All non-acquisition secured transactions where rights in the grantor’s assets, including ownership, are used to secure an ordinary repayment obligation by a borrower to a provider of credit should be treated as security devices, and identified as such, in contexts both inside and outside insolvency (see recommendation 8). The Guide calls this the ‘functional, integrated, comprehensive and uniform’ approach (see ch I on the scope of application, paras 110–114). There are three main advantages of such an approach: (a) it more obviously promotes competition among credit providers based on price and thus is more likely to increase the availability of secured credit; (b) it better enables legislative policy decisions to be made on grounds of comparative efficiency; and (c) because all transactions creating security rights are treated the same, the regime is easier to enact and apply.’ 31 S Vijn, ‘Is harmonisation of retention of title necessary and feasible?’ (2013) 4 Europeanisation of Private Law 153. 32 Draft Common Frame of Reference (DCFR), Book IX: Propietary Security in Movable Assets, 1:101 and 1:104. 33 The main goal of reinforcing the creditor’s right can be achieved by different forms of value realisation. In the classical conception of the reservation of title, the ius distrahendi does indeed dilute into the ius separationis of the creditor as the owner of the collateral. It means that the conditional seller in a reservation-of-title sale is entitled to separate the collateral from the estate in case of insolvency (ius separationis). This right to separate the collateral, in the capacity of owner, absorbs the right of the secured creditor to the realisation value of the collateral to satisfy the unpaid debt (ius distrahendi). As a matter of fact, diverse functionally equivalent methods have been developed to provide a common solution and achieve the same goal of fortifying the position of the creditor. M Espejo Lerdo De Tejada, ‘Autonomía privada y garantías’ in Estudios Jurídicos en Homenaje al Profesor Luis Díez-Picazo (Madrid, Civitas, 2003) 395. 34 There are not, however, historical reasons supporting such a reluctance to admit the creation of security right over future assets in the Roman tradition as the creation of pignus – where the possession was transferred to the secured creditor, as the debtor retained the ownership – over future assets was admitted in the historical texts – namely, Las Partidas. E Ruiz Fernández, ‘El pignus como garantía real en la tradición romanística’ in L Martínez-Calcerrada y Gómez (ed), Homenaje a don Antonio Hernández Gil, vol II (Madrid, Centro de Estudios Ramón Areces, 2001). 35 A set of basic principles that would constitute a common regime for any security right: see M Cabrillac and C Mouly, Droit des sûretés (Paris, Litec, 1990).

112 Teresa Rodríguez de las Heras Ballell ius distrahendi),36 the encumbered assets should be clearly identified and specifically described. Essentially, the policy rationale behind that principle used to be aimed at protecting the debtor from over-security and providing other creditors with sufficient information about the real creditworthiness and risk exposure of the debtor. Besides, a traditional limited concept of proceeds also contributed, in some jurisdictions, to a legal framework that was less conducive to favouring security rights over generic or indeterminate pools of assets. Should the pool of assets (universitas facti) be described as a generic category of assets or as ‘all of the debtor’s assets’37 for the purposes of the security right, each individual asset, in case of transfer or separation from the pool, could not be easily traced. Therefore, if the individual asset is not identifiable, the ius perseguendi – the right of the secured creditor to follow the eventual transfer of the encumbered asset and enforce its security right over it against any subsequent possessor or transferee – is very poor and unfeasible. Then, a strong and broad concept of proceeds, automatically covering after-acquired property should be admitted to recalibrate the value and preserve the right of the creditor. Then, a generous concept and a broad delimitation of proceeds can cure the weakness or unfeasibility of the ius perseguendi due to the non-identifiability of the encumbered asset. The identification of the asset is replaced by the identification of the proceeds. In a pool of assets, it may be difficult to identify the asset that has been transferred, sold or lost, therefore, the logic of ius perseguendi does not work. Nevertheless, the proceeds – sale price, compensation for loss paid by the insurer – can be more easily identified. Alternatively, in jurisdictions where the concept of proceeds was traditionally narrower38 or required parties’ agreement, other techniques, such a duty to replace or a duty to preserve the value of the collateral – stocks, inventory – was provided for.39 The rigour of the principle was relaxed to accommodate the changing needs of the market and the scope of economic activities. Hence, as domestic legislation started to accept and regulate chattel mortgages given by business and commercial establishments covering (by agreement) fluctuating inventory, and (unless otherwise stated by the parties) equipment and tools that can be changed, replaced, or become obsolete;40 pledge on stock portfolio;41 or, more recently, financial 36 Security interests confer the secured creditor with two main rights: ius praeferendi and ius distrahendi. According to the former (ius praeferendi), the secured creditor enjoys an indemnity position against any eventual action over the collateral exercised by a subsequent/subordinated creditor. The ius distrahendi is the right of the secured creditor to the realisation value of the encumbered asset for satisfying the debt. See U Drobnig, ‘Presente y futuro de las garantías reales y personales. Informe general’ (2004) No 1 Revista Latinoamericana de Derecho 93; J Vallet De Goytisolo, Panorama de Derecho Civil (Barcelona, Bosch, 1973) 229. 37 As Art 8 of the UNCITRAL Model Law explicitly provides, totally aligned with the international principles for modern secured transactions law: ‘Article 8. Assets that may be encumbered A security right may encumber: (a) Any type of movable asset; (b) A part of or an undivided right in a movable asset; (c) A generic category of movable assets; and (d) All of a grantor’s movable assets.’ 38 ML Marín Padilla, ‘La formación del concepto de subrogación real’ (1975) 51(510) Revista Crítica de Derecho Inmobiliario 1111; RM Roca Sastre, ‘La subrogación real’ (1949) 33 Revista de Derecho Privado 281; RD Henson, Secured Transactions under the Uniform Commercial Code (Eagan, MN, West Publishing, 1979) 226–34. 39 L Fernández Del Pozo, ‘Bienes muebles corporales susceptibles de prenda sin desplazamiento. Revisión crítica de la doctrina’ (2016) 92(753) Revista Crítica de Derecho Inmobiliario 11. 40 As an illustration, the Spanish rules on non-possessory pledge and movable mortgage (mortgage in movable property) adopted in 1954 (Non-Possessory Pledge Act, NPPA) – Arts 20, 21 and 22 of Ley sobre Hipoteca Mobiliaria y prenda sin desplazamiento de posesión of 16 December 1954, published in Official Bulletin (BOE) 18 December 1954. 41 Specific provisions laid down in Company law and Securities regulation. As examples, Art 132 of the Spanish Company Law – latest version of Ley de Sociedades de Capital, of 2 July 2010, recast text approved by Real Decreto Legislativo 1/2010, de 2 de julio, por el que se aprueba el texto refundido de la Ley de Sociedades de Capital, published in Official Bulletin (BOE) 3 July 2010 – and Art 12 Spanish Securities Market Act – latest version of the Ley del Mercado de Valores, of 23 October 2015, as recast text approved by Real Decreto Legislativo 4/2015, de 23 de octubre, por el que se aprueba el texto refundido de la Ley del Mercado de Valores, published in Official Bulletin (BOE) 24 October 2015 – in relation to book entry securities where the pledge is registered.

Secured Transactions Law Reform in Civil Law Jurisdictions 113 collateral arrangements,42 the traditional ban on indeterminate or generic scope of security interests was in practice, at least partially,43 lifted.44

IV. Institutional Challenges: Opportunities for Civil Law Jurisdictions to Decode Institutions and Recode in Digital A. Approaches to Creation and Effectiveness against Third Parties Legal systems differ in the legal requirements, formalities, and conditions necessary for a security right to be validly created and effective between the contracting parties on the one hand, and effective against third parties on the other. These disparities are in some cases determined by legal traditions and, in many other cases, simply conditioned by the historical evolution of the legislative framework. In that regard, even if some commonalities could be inferred from an overarching conception of civil law jurisdictions, other features are not linked to the underlying legal tradition, but mainly to the formalist or historicist background of the legal system. The development of different legal forms for taking security in movable/immovable and tangible/ intangible assets have not only led to a plurality of legal regimes but also, to a certain extent, to variations in the legal conditions, formalities, and requirements for creation and third-party effectiveness. Therefore, an exhaustive analysis of various specific requirements provided for by national laws for the purposes of creating a security right and achieving third-party effectiveness is not particularly desirable. It is not likely that such a comparative analysis will provide a significantly consistent overview of civil law systems. Further, it would be an unavoidably limited study, with plenty of nuances and national particularities. As an alternative to such analysis, this section takes a different perspective based on the role of legacy institutions – mainly, public notaries and registries – in the creation and perfection (thirdparty effectiveness) of security rights in the face of modern principles of secured transactions law. The modern approach to creation and effectiveness of security rights can be encapsulated in three main fundamental legal policies.45 First, a distinction between the creation of a valid and effective security right between contracting parties (security agreement) and the mechanisms to make it effective against third parties. Second, easy and clear methods to create security rights by reducing the formalities to a minimum. Third, transfer of possession and registration as main methods for third-party effectiveness, with a marked preference for notice-filing registry models.46

42 Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial collateral arrangements [2002] OJ L168/43 provides a legal framework for financial collateral arrangements and bilateral close-out netting. 43 Comparative analysis of national solutions in that regard in Drobnig (n 36) 118. 44 With the dogmatic formulation of a general category of security rights described as ‘revolving or rotating security rights’ inspired by the floating charge. See C De Cores and E Gabrielli, El nuevo Derecho de las garantías reales. Estudio comparado de las recientes tendencias en materia de garantías reales inmobiliarias (Buenos Aires/Bogotá/México/Madrid, Zavalía/Temis/UBIJUS/Reus, 2008). 45 UNCITRAL Legislative Guide on Secured Transactions; EBRD, ‘EBRD Core Principles for a Secured Transactions Law’, www.ebrd.com/what-we-do/legal-reform/access-to-finance/transactions.html; WBG, ‘Principles for Effective Insolvency and Creditor/Debtor Regimes’, www.worldbank.org/en/topic/financialsector/brief/the-world-bank-principlesfor-effective-insolvency-and-creditor-rights. 46 G McCormack, Secured Credit under English and American Law (Cambridge, Cambridge University Press, 2004) 129. See also ch 2 IV B (ii) and (iii).

114 Teresa Rodríguez de las Heras Ballell

B. Ex-ante Certainty versus Efficiency From an institutional approach, the disparities among national solutions can be grouped under a set of policy considerations, instead of being compared to each other in detail. In general, it can be argued that civil law jurisdictions tend to rely on institutions and preventive mechanisms aimed to promote ex-ante legal certainty. An ex-ante preventive model is aimed to assure certainty on the transaction in advance reducing future litigiousness and avoiding prospective conflicts to the maximum extent. Efforts are focused on verifying and ensuring validity and enforceability of the security agreement – parties’ capacity, existence of the agreement, compliance with legal requirements, validity, etc – from the outset. The formal requirements for a valid security agreement and, in particular, the intervention of public notaries at that stage, as well as a registry model based on a prior legal assessment by the registrar (instead of pure notice filing) for the purpose of perfection, are examples of policy solutions aimed to deploy ex-ante legal certainty. That approach does inevitably add time and formalities at the initial stage of the transactional process. From the perspective of an efficiency analysis, it is usually sustained that such ex-ante mechanisms increase transactions costs, add complexity to access to credit, and, occasionally, could also undermine predictability. Therefore, it is particularly relevant to assess the compatibility of these institutional models, frequently, but not exclusively, adopted in civil law jurisdictions, with the modern principles of secured transactions law; and also consider how the implementation of improved solutions based on emerging digital technologies could enhance the compatibility of such legacy systems without fully compromising their dogmatic tenets. There is room for compromise to a certain level. Whereas some dogmatic tenets prevailing in civil law jurisdictions are inevitably incompatible with the international principles for a modern secured transactions system, others might be preserved, with the needed readjustment aimed to reduce unjustified costs and enhance efficiency. Implementing technological solutions to streamline the authentication processes conducted by notaries and registrars – digital identity, electronic signatures, remote verification, or artificial intelligence (AI) applied to increasingly automatic legal checking at the registries – are potential ways to reach a trade-off.

C. Agreement and Formalities In relation to the first and second aforementioned fundamental legal policies underpinning the modern approach to secured transactions law, it is observed that legal jurisdictions can differ both in the conditions needed for a valid security agreement and in the formal steps that must be taken to gain third-party effectiveness. The need for these legal requirements and conditions is theoretically justified by the privileged position granted to the secured creditor. Whereas the unsecured creditor is only entitled to exercise general actions and remedies inherent to the credit as the natural effect of the general liability principle of the debtor, the secured creditor is placed in a privileged position as he holds an additional right/privilege.47 Accordingly, because of the additional protection given by these security rights over the general liability of any debtor, an act of creation of that security interest is needed.48 That is the legal rationale

47 FJ Orduña Moreno, La protección patrimonial del crédito, I (Madrid, Thomson-Civitas, 2006) 28–29. 48 M Amorós Guardiola, ‘La garantía patrimonial y sus formas’ [1972] Revista General de Legislación y Jurisprudencia 568.

Secured Transactions Law Reform in Civil Law Jurisdictions 115 behind consensual security rights. Legal systems recognise party autonomy to reinforce the creditor’s position by an agreement (security agreement) that adds an additional right/privilege to secure the credit.49 To achieve that aim, the security agreement must meet certain formalities and legal requirements. In general terms, civil law systems have historically tended to require more rigorous legal conditions for security agreements and to add certain formalities and steps to be taken as preventive and protective mechanisms (writing, notarisation, deeds, language requirements).50 These formalities and, specifically, the intervention of public notaries is aimed to reduce the risk of unconscionability, ensure proper understanding of the transactions, protect debtors, reduce fraud, assist in the prevention of money laundering, and control abusive terms. In many jurisdictions, notaries are used to perform these educational, preventive and protective functions, as well as ensure authentication and the identity of the parties. At present, alternative methods to fulfill the same functions are being considered and implemented in some civil law jurisdictions.51 For authentication and identification purposes, digital-technology solutions from digital signatures to biometric identification and trust services are available, and promise highly-effective equivalent results.52 Also, in contemporary economies, other trust service providers have emerged and compete with notaries as gatekeepers. Trust services providers can perform identification and authentication functions on the basis of digital-identity and cryptography-based technologies. Likewise, the growing popularity of distributed ledger technologies (DLTs), such as blockchain, also proves to have interesting properties to serve gatekeeper functions.53 Even so, the replacement of public notaries by trust service providers is not and cannot be complete unless the equivalence of legal effects is assured.54 Available technology is providing highly-reliable identification services, but for the time being, the legal assessment of the transaction is still requiring at least a certain degree of human intervention. An increasing standardisation of formats for agreements, the deployment of more sophisticated AI-driven systems, and the implementation of totally or partially automatised checking processes promise to unleash soon the potential for an increasingly automatised performance of notary functions.

49 E Roca Trías, ‘Rasgos básicos de la regulación española en materia de negocios de garantía’ in U Nieto Carol and JI Bonet Sánchez (eds), Tratado de las garantías en la contratación mercantil, I (Madrid, Consejo General de los Colegios Oficiales de Corredores de Comercio-Civitas, 1996) 127. 50 For some examples illustrating general comparative features between Anglo-American jurisdictions, Napoleonic systems and Roman-Germanic jurisdictions, see Wood (n 7) 86–90. 51 In the realm of land registries, the European Land Registries Association (ELRA) has launched some projects to assess and implement the use of emerging technologies in land registries to enhance effectiveness of registers and interoperability in Europe (distributed ledger technologies, e-conveying, standardised templates, etc): www.elra.eu. One of the projects, IMOLA II, is lengthily explained and analysed in the IMOLA II e-book, gathering a series of contributions of experts and academics: www.elra.eu/imola-ii/imola-ii-e-book/. 52 As seen in the model implemented by the Regulation (EU) No 910/2014 of the European Parliament and of the Council of 23 July 2014 on electronic identification and trust services for electronic transactions in the internal market and repealing Directive 1999/93/EC [2014] OJ L257/73. 53 From a technological perspective, see N Kannengießer et al, ‘Bridges between Islands: Cross-Chain Technology for Distributed Ledger Technology’ in Proceedings of the 53rd Hawaii International Conference on System Sciences (Hawaii International Conference on System Sciences, 2020). 54 On the possibility of using a DLT-based system to perform notary functions, see JW Ibáñez Jiménez, Derecho de Blockchain y de la tecnología de registros distribuidos (Madrid, Thomson Reuters, 2018) 389–402. About the applicability of classical registry principles in a civil law jurisdiction to DLT, see JW Ibáñez Jiménez, Blockchain: Primeras cuestiones en el ordenamiento español (Madrid, Dykinson, 2018) 37–60. More focused on the impact of DLT on the legal effects of registration, see J Sieira Gil and J Campuzano Gómez-Aceebo, ‘Blockchain, tokenización de activos inmobiliarios y su protección registral’ (2019) 95(775) Revista Crítica de Derecho Inmobiliario 2277.

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D. Registration The third fundamental legal policy involves another conspicuous institutional feature that characterises traditional legal systems. Ensuring effectiveness of security rights against third parties (or perfection) is a critical value-creating and expectation-preserving element for secured creditors. Among the available methods for achieving third-party effectiveness, most secured transactions legal systems, both at the international55 and domestic level, pivot on the registry model as the prevailing publicity-providing system for secured transactions, frequently along with the traditional possession-based method.56 The modern principles clearly adopt this dual approach, but show a preference for a notice-based model for registration. This debate on the registry model is latent in the comparative law scene57 and has surfaced in discussions relating to the harmonisation of secured transactions law (for example in relation to the 2007 United Nations Commission on International Trade Law (UNCITRAL) Legislative Guide; the 2016 Model Provisions on Registry of the UNCITRAL Model Law; and the international registries associated with the operation of the Cape Town Convention).58 The notice-filing model prevails essentially in common law countries that have reformed their law but not exclusively so, as civil law countries, for example Latin American countries59 that have modernised their systems in accordance with the Organisation of America States (OAS) Model Law,60 have also incorporated a notice-filing model despite their historical legal tradition.61 A notice-filing registry model is faster, cost-effective, and more confidentiality-friendly; but it may be argued that this projects a weaker trust in the market, as information has to be broadened, completed, or even confirmed in an out-of-registry context. Alternatively, registry models predominant in other civil law jurisdictions pivot on the central institution of the registrar as a trust provider and are based on a prior formal and substantive assessment over the registration. While that model tends to enhance the certainty in the market, it is also afflicted by certain imperfections and failures as it increases costs, takes time, adds complexity, and may undermine or, at least, postpone visibility of secured transactions. Whereas legal certainty is reinforced by the legal assessment of the transaction carried out by the registrar and future conflicts about the

55 The UNCITRAL Model Law provides, as primary methods for achieving third-party effectiveness (Art 18), the registration of a notice in the Registry and the possession of the encumbered asset by the secured creditor. Under the UNIDROIT Cape Town Convention, however, due to the specific characteristics of the categories of covered objects (unique identifiable, high-value, and mobile), third-party effectiveness is exclusively based on notice registration in an International Registry. 56 Unlike possession, where the legislator simply acknowledges the publicity effects naturally and spontaneously resulting from a social phenomenon (possession), registration would produce an ‘artificial’ or ‘provoked’ publicity expressly created by the decision; see R De Ángel Yagüez, Apariencia jurídica, posesión y publicidad inmobiliaria registral (Bilbao, Universidad de Deusto, 1975) 26, 28. 57 A Pau, La convergencia de los sistemas registrales en Europa (Madrid, Colegio de Registradores de la Propiedad, Mercantiles y Bienes Muebles de España, 2004); S Cámara Lapuente, ‘Los sistemas registrales en el marco del Derecho privado europeo: reflexiones comparatistas sobre la inscripción registral como formalidad de los contratos’ (2004) 57 Anuario de Derecho Civil 929. 58 RCC Cuming, ‘The International Registry: An Overview of its Structure’ (2006) 11 Uniform Law Review 18, 58–59. 59 AM Garro, ‘Security Interests in Personal Property in Latin America: A Comparison with Article 9 and a Model for Reform’ (1987) 9 Houston Journal of International Law 157; AM Garro, ‘The Reform and Harmonization of Personal Property Security Law in Latin America’ (1990) 59 Revista Jurídica de la Universidad de Puerto Rico 1. 60 AM Garro, ‘The OAS-Sponsored Model Law on Secured Transactions: Gestation and Implementation’ (2010) 15 Uniform Law Review 391; B Kozolchyk and J Wilson, La Ley Interamericana de Garantías Mobiliarias (Ley Modelo) de la Organización de Estados Americanos (Arizona, NLICFT, 2003). 61 M Dubovec, ‘UCC Article 9 Registration System for Latin America’ (2011) 28 Arizona Journal of International & Comparative Law 118.

Secured Transactions Law Reform in Civil Law Jurisdictions 117 existence and the validity of the transaction are largely prevented accordingly; the immediacy of the publicity might be negatively affected. As the legal assessment takes time, unless other mechanisms to mitigate the delay in the publicity-providing functions are adopted, it can entail late registrations. Some jurisdictions allow provisory registrations (upon the formal assessment of the registration) pending the completion of the legal assessment by the registrar, in order to reduce the period of invisibility. Behind the confrontation of registry models lies a classical dichotomy of ex-ante versus ex-post policy options. Whereas a notice-filing model infuses rapidity in the credit market and postpones the solving of potential conflicts to a later stage if a dispute arises, the registrar-supervised model aims to prevent conflicts by an ex-ante control of all transactions at the initial stage. Accordingly, the notice-filing model selectively allocates costs only to those transactions where and when a dispute arises, whereas the registrar-supervised model spreads the pre-control costs throughout the entire system by a preventive approach. The availability of data on costs and actual conflict rates under both models would provide a valuable input to assess their effectiveness in practice. Notice-based models enable advance filing, whereas document-based models do not easily embrace this and, in order to gain a similar benefit, have to articulate other mechanisms to enable priority notices where possible, such as preventive annotations or provisory annotations. Advance filings are alleged to alleviate uncertainty as to whether a security interest would be immediately effective against third parties at the time of registration. So, the priority is preserved by the advance filing, even if the negotiations between the parties to reach the security agreement require more time. Besides, it is also affirmed that advance filings can better reflect the actual scheme of priority agreed by contracting parties in the sense that parties can manage the priority by planning the making of the advance filings – scheduling priority – independent of the vicissitudes of the negotiations of each transaction. Considering the conspicuous preference in international instruments for the notice-filing model, an eventual total shift from traditional registry models towards notice-filing registries in those civil law jurisdictions where the legacy model has played a central institutional role will pose an observable institutional challenge. Therefore, it is particularly intriguing to explore the opportunities that digital emerging technologies could provide to implement hybrid models, and achieve balanced solutions. Interestingly, the incorporation of digital technologies in registries would enhance visibility, streamline registration, increase efficiency, reduce errors, improve accuracy, and ensure updating. The application of technological solutions based on AI to carry out the legal assessment on registration can partially decongest the load on (human) registrars and, therefore, accelerate registrations. An AI-driven legal assessment can be a feasible alternative for streamlining the legal checking of massive numbers of registrations, provided that they are relatively simple, standard, and predictable. In such cases, registers can design a protocol (embedded in algorithms) to check and assess groups of registrations on an automatic basis.62 Thus, only complex registrations are referred to the (human) registrar. The AI-driven system is continuously fed by data and triggered by deep-learning and machine-learning techniques in order to enhance its efficiency, refine the assessment, and learn how to deal with other similar or analogous legal situations. Likewise, the AI-driven system should be regularly monitored to detect mistakes or biases and fine-tune the outcomes.63 Hence, a well-designed digital transformation strategy could 62 An AI-driven system to verify the admissibility of requests for registering company names can easily check, on an automatic basis, basic conflicts with other registered names and reduce the workload of registrars. Registries, such as the Spanish Registro Mercantil Central, have implemented these systems. 63 T Rodríguez de las Heras Ballell, ‘Legal Challenges of Artificial Intelligence: Modelling the Disruptive Features of Emerging Technologies and Assessing their Possible Legal Impact’ (2019) 24 Uniform Law Review 302.

118 Teresa Rodríguez de las Heras Ballell repair the traditionally denounced deficiencies of document registries and infuse high levels of predictability and certainty in secured transactions without compromising the fundamental institutional features.64 Solutions, as the ones described above, can push traditional registries up to a midway point. On the one hand, delays of registrations are significantly reduced, bringing registry models requiring legal assessment closer to notice-filing systems in terms of immediacy. Predictability does also increase, as the possible abuse of discretion of registrars in carrying out the legal assessment is limited, especially where confidence in the competence of professionals responsible for registries is modest or questioned. For many jurisdictions, however, this problem is almost irrelevant, as registrars are professionals of high qualification and their performance is of high quality and subject to liability rules. On the other hand, digitalisation also allows publicity to be given, at an affordable cost, to more and better selected information about the registered transaction. Whereas document-based registry models may provide all the information about the transaction at the expense of confidentiality and with the risk of hiding relevant data due to overinformation; notice-filing models suffer from providing too limited information. Technology enables both models to get closer to each other, and very effectively select relevant information to be made public, present it in a structured manner for searchers, and classify information based on different levels of access (public, private, only to interested parties, etc). In that regard, digitally advanced registries enhance efficiency in the performance of publicity-providing functions, decrease costs and repair deficiencies associated with old paper-based registry systems, and reduce the gap between notice-filing registries and document-based and title-based systems. Even so, differences between registry models are still there. The implications of substantive and legal assessment on the reliability and the legal effects of registered information is a notable difference. Hence, although technology is an extraordinary driving force in the reform, it might not be sufficient to achieve the expected alignment with international principles. Then, the adoption of substantive rules in addition to the digital transformation of the registry system might be a strategy to consider in a reform and modernisation initiative. Thus, an effective implementation of digital-technology solutions in registries could reduce the apparent confrontation between notice-filing models and title registries with prior formal and material assessment of the security transaction. As a consequence, it could be a viable strategy to adopt modernising projects that are better suited to the predominant legal tradition in the jurisdictions under reform and more sensitive to legacy institutional styles. The level of automation and the scope of automated tasks will strongly depend upon the nature of the assessment to be conducted by the Registry: no assessment, formal assessment or material/substantive assessment. Whereas notice-filing models can easily automatise, other registry models encounter more intricacies and complexities to complete this process. However, the implementation of technological solutions should not be only aimed to reduce the gap between existing registry models or to repair deficiencies of traditional registry systems. Beyond that, it is an opportunity to imagine new functions and devise added-value models. Possibilities are multiple and promising. The publicity-providing function of registries involves two main components: data and accessibility/visibility tools. Emerging digital technologies greatly impact on both of them. Far from the monolithic model of classic registries solely fed by data provided by registrants and competent registrars, an interconnected electronic registry stirs the imagination to conceive

64 This proposal is elaborated on further by the author in T Rodríguez de las Heras Ballell, ‘Digital TechnologyBased Solutions for Enhanced Effectiveness of Secured Transactions Law: The Road to Perfection?’ (2018) 81 Law and Contemporary Problems 21.

Secured Transactions Law Reform in Civil Law Jurisdictions 119 of multi-source data provision through sensors, actuators, third-party providers, etc. Hence, registration could be fed by data collected, generated, or provided by different sources, either machine-controlled or human ones. These possibilities sustain the original proposal65 of future ‘dynamic transactions’. Registrations would be updated by data gathered, produced, or collected thought interconnected devices/sensors/actors. That would transform the registry model from a service provider to a platform. The development of a multilateral platform managed and operated by the registry where users interact each other and through which transactions could be partially or totally conducted: searching title on land, verifying data, managing security rights, monitoring asset locations, paying taxes, etc. All relevant information would be processed within the platform. Confidentiality needs should be tackled and carefully managed. Information should be compartmented and would be accessible selectively on the basis of the user’s characteristics. The performance of the platform-based registry can be enhanced and highly automated with the incorporation of automatic tasks and procedures (eg, smart contracts and algorithm-driven processes), the continuous collection of data through smart property (Internet of Things (‘IOT’) applications, sensors, etc) and oracles responsible for feeding the registry (cadaster, tax authorities, authorities, meteorology services, etc).

V. Fortifying Enforcement of Security Rights – A Matter of Balance A. Fairness versus Efficiency The ‘stress test’ for a well-functioning modern secured transactions system lies in the enforcement of security interests. The need to balance the opposing interests of the creditor and the debtor surfaces in the enforcement stage more visibly, critically, and bluntly than in the other stages. Whereas the satisfaction of the creditor’s interest depends upon quick, cheap, and effective enforcement mechanisms, the debtor’s and other creditors’ rights and interests require adequate protection that might easily conflict with the expectations of the creditor for a prompt and simple solution. Legal systems have historically set the crucial balance between conflicting interests in different ways that reflect a disparate approach towards assessing which interest requires more attention or deserves higher protection based on arguments of fairness or effectiveness.66 Traditionally, in a comparative study, the international variation is greatly simplified in a dual categorisation simplistically differentiates between common law and civil law systems. Under this oversimplified view, civil law jurisdictions would be more concerned about protecting the debtor’s interests in enforcement and, therefore, more reluctant to amply admit extrajudicial enforcement in general terms. In practice, such a debtor-friendly philosophy would frequently imply longer procedures, more formalities, less private autonomy, a limited role for self-help measures, and a generalised need for judicial intervention. Modern principles point towards a different direction, that seems more familiar to common law jurisdictions, in general terms.

65 T Rodríguez de las Heras Ballell, ‘A Technological Transformation of Secured Transactions Law: Visibility, Monitoring, and Enforcement’ (2017) 22 Uniform Law Review 693. 66 Legislative analysis and comparative remarks on legal solutions in the UNCITRAL Legislative Guide, VIII, 275ff are illustrative.

120 Teresa Rodríguez de las Heras Ballell The availability of effective, cheap, and quick enforcement of security interests following a debtor’s default, including extrajudicial enforcement, is critical for a modern well-functioning secured transactions system.

B. Challenges for Civil Law Jurisdictions In the above-described scenario, the challenges for civil law jurisdictions in moving towards the modern principles are conspicuous and numerous. Stress points are multiple, as fundamental constitutional, procedural and policy considerations would be directly or indirectly affected.

(i) Procedural Challenges A closer look at the broad category of civil law jurisdictions reveals a more granular image. Legal variation within the civil-law family is immense. Private autonomy has been increased, expedited judicial proceedings have been deployed;67 the classical ban on pactum commissorium68 has been countered by the acceptance of pactum marcianum or pactum ex intervallo,69 or otherwise limited or exempted; and non-judicial enforcement has been facilitated in different forms, for example, by notary-supervised enforcement.70 Therefore, the intensity of the procedural challenges greatly differs among jurisdictions, depending upon the modernisation path taken, and the specific solutions adopted. Despite accepting this granularity, a consistent position of civil law and common law families in relation to enforcement is nonetheless perceptible where confronting international instruments. A look at the declarations made by various Contracting States under Article 54(2) of the CTC, regarding whether or not any remedy available to the creditor under any provision of the Convention which is not there expressed to require application to the court may be exercised only with leave of the court, is quite revealing of certain trends. For example, civil law countries have tended to make declarations requiring the leave of the court in exercising the remedies, whereas common law jurisdictions have tended to take the opposite approach.

67 F Adan Domènech, La ejecución hipotecaria (Barcelona, Bosch, 2009); J Burgos Ladrón De Guevara, ‘El principio de legalidad procesal y la constitucionalidad del procedimiento extrajudicial de ejecución hipotecaria’ (2001) Nos 2–4 Revista de Derecho Procesal 57. 68 F Carnelutti, ‘Note sul patto commissorio’ (1916) II Rivista di Diritto Commerciale 887. 69 According to the ban on pactum commissorium, a creditor cannot appropriate the assets given by way of pledge or mortgage, or dispose of them, and accordingly, any stipulation to the contrary is null and void. The rationale behind the traditional prohibition of the pactum commissorium is preventing the risk of unjust enrichment if the secured creditor appropriates the encumbered asset and its value is higher than the owed debt. Both pactum marcianum and pactum ex intervallo are admissible variants as they mitigate such risk. Accordingly, pactum marcianum is a clause according to which parties establish an objective and impartial mechanism to estimate a fair value of the encumbered asset and ensure that the creditor will pay to the debtor the difference between the owed amount and the estimated value of the asset (surplus). The pactum ex intervallo is a pactum commissorium agreed by the parties after the security agreement has been concluded. The underlying reasoning to admit the validity of this subsequent agreement is that it is traditionally assumed that upon the conclusion of the security agreement the debtor may be in a vulnerable situation due to the need of funds. Therefore, the debtor may be forced to accept the pactum commissorium at that stage. However, scholars do not see any reason to prohibit an ulterior agreement between the parties to solve the conflict by enabling the appropriation by the creditor with a pactum ex intervallo. See Carnelutti (n 68); F Capilla Roncero, La responsabilidad patrimonial universal y el fortalecimiento de la protección del crédito (Jerez, Fundación Universitaria, DL, 1989) 206; MI Feliu Rey, La prohibición del pacto comisorio y la opción en garantía (Madrid, Civitas, 1995) 74–75. 70 As an example, Art 16 and First Additional Provision, Spanish legislation regulating hire-purchase agreements of personal property: Ley 28/1998 de Venta a Plazos de Bienes Muebles, of 13 July 1998, published in the Official Gazzette, No 167 of 14 July 1998.

Secured Transactions Law Reform in Civil Law Jurisdictions 121 But this is not conclusive.71 Whereas civil law countries such as Argentina, Brazil, Colombia, China, or Spain, have made declarations requiring the leave of the court in the exercise of the remedies, other countries belonging to the common law tradition (eg Australia, Canada, India, South Africa, Singapore, UK and USA) do not require a court order. A distinction based on legal tradition does not, however, fully explain the position adopted by various countries, For instance, civil law countries like Indonesia, Vietnam and Turkey have made declarations not requiring leave of the court. That leads one to think that there are other factors determining or contributing to the policy decision on the admissibility on extrajudicial enforcement. Even more, the apparent reluctance of civil law jurisdictions to admit extrajudicial enforcement inferred from the aboveexplained declaration under the CTC might be an illusion, as these same jurisdictions can have rules allowing out-of-court enforcement in their domestic laws, specifically, notary-supervised proceedings for the realisation of collateral in movable mortgages or non-possessory pledges, or for voluntary auctions conducted by the clerk in certain cases.72 The procedural challenges for the traditional civil law legal systems to fully embrace the modern approach on enforcement of security interests cannot, however, be totally disregarded. Certainly, legal basis and procedural enablers are instrumental to enhance the effectiveness of enforcement. But, in addition to these formal elements, digital technology can help to create an environment conducive to an effective satisfaction of the creditor’s rights.

(ii) Technology In the context of secured transactions, effectiveness in enforcement could be incredibly enhanced with the implementation of state-of-the-art technological solutions. These might enable an extremely satisfactory repossession by an automatic and immediate transfer of control over the collateral (password, digital keys, or other identification factors), an expeditious disposition of the intangible assets or rights (value transfer, settlement), or the conclusion of a lease or licence agreement as a post-default remedy by the automatic coding of a new smart contract for those purposes. Remedies should be provided for in the security agreement or specified in the applicable law and, if there are multiple remedies, they should be exercise in a compatible way.73 The selfexecution of automatised remedies in smart contracts should neither ignore nor elude legal requirements for the exercise of the relevant post-default rights (giving notice, specifying procedures, using adequate methods, observing good faith and commercial reasonableness).74 In sum, the incorporation of automatic self-executing remedies implemented through an ecosystem of smart contracts and smart devices should be managed and supervised according to applicable legislation and, above all, be in accordance with important general principles (eg, good faith, reasonableness, no abuse or antisocial exercise of rights, no violation of constitutional rights, and preservation of public order). These technological solutions seem particularly appropriate for civil law jurisdictions as they offer an ideal balance between reasonable protection of interests and efficiency. In effect, the formalities, caveats, and preventive measures that the prevailing debtororiented model in civil law jurisdictions generally require are usually blamed on being a source of

71 See www.unidroit.org/status-2001capetown. 72 Rodríguez de las Heras Ballell, ‘Key Points’ (n 13) 294. 73 As an illustration of a standard rule, see Art 72 of the UNCITRAL Model Law. 74 As required, for instance, by Art 78 of the UNCITRAL Model Law for disposing of the encumbered asset, after default, without applying to the court.

122 Teresa Rodríguez de las Heras Ballell complexities, time-consuming formalism, and inefficiencies. Technology promisingly enables a trade-off by enhancing efficiency (reducing costs, streamlining processes, decreasing formalities, etc) without compromising the tenets underpinning the debtor-protection aspirations of civil law jurisdictions.

(iii) Secondary Markets The enforcement of security rights is furthermore conditioned upon the existence of a well-functioning secondary market. In fact, concerns about inefficient and uneconomic prices obtained for the asset by adjudication in public auctions or sales are usually raised. Yet, in the absence of a sufficiently wide and competitive second market for the collateral at stake, the efficacy of the right to dispose of the encumbered tangible asset, lease or licence is very limited and, in practice, unsatisfactory. Even should a market exist, if it does not work efficiently, there can be little expectation for a recovery of the reasonable value of the collateral. Technological architecture75 can create new and suitable environments to foster the emergence and consolidation of a secondary market, for instance by the use of electronic platforms.76

VI. Conclusions and Proposals From the examination of how civil law jurisdictions embrace modernisation of secured transactions law in the context of increasingly denser and broader harmonisation and the progressive consolidation of international principles for a modern secured transactions system, three lessons can be learned. First, the convenience of a comprehensive reform involving all legal components, institutional parts, and procedural aspects, to the maximum extent possible. As rules on secured transactions operate in a manner that is deeply interwoven with procedural laws, insolvency legislation, registry regulations, rules concerning public notaries and the enforcement legal framework, the expected effectiveness of the reform outcomes strongly depends upon the consistency achieved among all relevant components of the system. Such risk of inefficiency by internal inconsistency or incompatibility between reformed components and pre-reform pieces of the system is particularly severe where the legal system under reform greatly differs in concepts, principles, practices, or legal solutions from the inspiring international models. This could lead to path-dependency responses rather than really transformative solutions that undermine the actual effectiveness of the envisaged reform. Although assuming that a comprehensive reform as an optimal strategy might not be always a realistic approach for all jurisdictions at all times, it is advisable to keep it as an aspirational benchmark because that helps to better understand the different reform strategies observed in practice – incremental reform, global reform, reform based on an updating and modernising interpretation of existing rules – and identify which are the major causes of reform failure. Second, the advisability of a principle-based approach as a preferred reform option over a legal-transplant alternative. Inferring international principles for a modern secured transactions 75 Rodríguez de las Heras Ballell, ‘A Technological Transformation’ (n 65). 76 T Rodríguez de las Heras Ballell, ‘The Legal Anatomy of Electronic Platforms: A Prior Study to Assess the Need of a Law of Platforms in the EU’ (2017) 3 Italian Law Journal 149.

Secured Transactions Law Reform in Civil Law Jurisdictions 123 system from legal harmonisation instruments helps to enhance the perception on the need for modernisation in the jurisdiction under reform, quietens opposition from local actors against unfamiliar legal transplants, infuses the reform process with a universal dimension, and encourages a more proactive and creative domestic attitude towards modernisation. This lesson is especially relevant for civil law jurisdictions where the distance between classical dogmatic tenets underlying domestic secured transactions law and international harmonisation instruments might be perceived, if not insurmountable, at least appreciably large. The benefits of a principle-driven reform for stimulating modernisation in civil law jurisdictions are also the flexibility that entails, as it leaves room for considering alternative solutions to articulate the same principle; and a larger receptivity in the civil-law dogmatic style more familiar with a principle-based legal logic. Third, the reform of secured transactions law under the modern international principles poses several challenges to civil law jurisdictions, but also represents an opportunity for modernisation in pursuit of a balance of modernity, tradition and reality. To that end, the challenges faced by civil law jurisdictions in the race to align domestic laws with international principles have been classified for purpose of the analysis into three main categories: conceptual, institutional and procedural challenges. Under the conceptual category, neither the formulation of a unitary concept nor the ‘codification’ of the legal regime in a unified instrument constitutes a primary challenge for civil law jurisdictions. On the contrary, formalism is more based on historical evolution than on dogmatic assumptions or legal tradition. The adoption of the functional approach is, however, more challenging, as it represents the dilution of a solid conceptual and dogmatic distinction between pure security rights and title-based devices. Therefore, for the sake of feasibility, it has been proposed as a legislative option at an intermediate point the possibility of only unifying priority rules, available remedies in case of default and the legal treatment of the creditors’ rights in insolvency without go further in the functional approach. In practice, the secured transactions system would work so as a functional model with less dogmatic disruption. The challenges labelled as institutional describe how civil law jurisdictions embrace modern principles of secured transactions law as regards the creation and perfection (third-party effectiveness) of security rights from the perspective of the role of legacy institutions – mainly, public notaries and registries. With the primary aim of providing ex-ante legal certainty and minimise ex-post litigation, civil law jurisdictions have been historically more inclined to establish formalities and requirements for creation, as well as subject perfection by registration to prior material legal assessment where legacy institutions play a critical role. In this area, civil law jurisdictions have an extraordinary opportunity to decode legal institutions and recode them in digital. The examination of a multiplicity of technological applications – AI-driven legal assessment, ‘dynamic transactions’ fed by data collected through Internet of Things (IoT) devices, platform-based registries, smart contracts, remote verification, etc – reveals two promising opportunities. On the one hand, technology helps civil law jurisdictions to enhance effectiveness of the secured transactions system and reduce time-consuming and costly processes without desisting from certain debtor protection measures and ex-ante legal certainty. On the other hand, digital transformation brings about opportunities to reconsider the role of existing institutions and perform new functions: platform-based registries assisting the creditor in monitoring collateral (by IoT devices), in automatically updating registrations (with ‘dynamic transactions’), in interacting with other market players (rating agencies, insurers, etc), in self-executing certain remedies in case of default, or in providing a secondary market for enforcement (electronic marketplaces, digital auctions, platforms, etc). These emerging

124 Teresa Rodríguez de las Heras Ballell opportunities do not only help jurisdictions in reducing discrepancies between legal traditions, but also offer unprecedented improvements for the credit system in its entirety regardless of the legal tradition. Finally, the procedural challenges spotlight the enforcement of security interests as the cornerstone of a well-functioning modern secured transactions system. In the enforcement, the need to balance the opposing interests of the creditor and the debtor becomes more visible, and critical. Whereas the satisfaction of the creditor’s interest depends upon fast, and effective enforcement mechanisms, the debtor’s and other creditors’ rights and interests require adequate protection measures likely to conflict with the expectations of the creditor for a prompt and simple solution. Therefore, the traditional debtor-friendly model of many civil law jurisdictions is at stake, if that means sacrificing, beyond reasonableness, the efficacy of the response to the creditor’s expectations. It is an intricate decision: assessing which interest requires more attention or deserves higher protection based on arguments of fairness or effectiveness. Once again, technology can contribute to create environments, processes, and solutions more conducive to equilibrate fairness and effectiveness in enforcement – platform-based secondary markets, closer monitoring, better estimation of asset value, new forms of control as enforcement mechanisms, self-executing automatic remedies, etc. A principle-driven and technology-enabled reform of secured transactions legal systems constitutes a balanced, effective, and tradition-sensitive modernisation strategy for civil law jurisdictions to face reality and embrace modernity in a context of increasing legal harmonisation and growingly denser internationalisation.

7 The Law of Secured Transactions in China: Comparison and Future Reform LEBING WANG

I. Introduction The stagnant reform in the law of secured transactions has laid down institutional obstacles for financing transactions in China. There are, increasingly, new categories of assets which are not listed as eligible collateral in the 2007 ‘Real Property Law’, but which are employed as collateral by the financial institutions and enterprises in practice. The floating charge and the pledge over tangible personal property share similar functions and compete with each other in practice, and thus lead to conflicts of priority among competing creditors. The pledge over account receivables derived from the proceeds of the disposition of tangible goods also conflicts with the floating charge over personal property, as a result of the separate legislative framework that applies to secured transactions involving tangible as compared to intangible personal property. This chapter argues that evolving financing practices require China to adopt a uniform legislative framework governing secured transactions in personal property, so as to cover the new forms of collateral and resolve the conflicts of priority. China has been the biggest manufacturing country in the world since 2010, and accounted for 28 per cent of the world’s total manufacturing output in 2018. Now China has the most comprehensive industrial system in the world and has the biggest output in about 220 out of the world’s 500 major industrial products. Industrialisation and informatisation of the economy interact with each other and facilitate economic development. In addition to modern and great enterprises, China has 30 million small and medium enterprises (SMEs), which contribute 50 per cent of the national tax income, 60 per cent of the national GDP, 70 per cent of the R&D achievements and 80 per cent of the total employment.1 Even though the Chinese economy is increasingly reliant on the service sector (accounting for 52.16 per cent of the 2018 GDP),2 manufacturing industry (accounting for 40.65 per cent of the 2018 GDP) still plays an essential rule in the economic development.

1 See National Press Conference, 20 September 2019, presided over by the Ministry of Industry and Information Technology, at www.china.com.cn/zhibo/content_75224144.htm. 2 National Bureau of Statistics, ‘China Statistical Yearbook 2019’ (2019), www.stats.gov.cn/tjsj/ndsj/2019/indexch.htm.

126 Lebing Wang The landscape of the existing Chinese law on secured transactions involving personal property resembles that of most civil law countries as a result of the legal transplantation from continental Europe since the Reform and Opening Up in 1978. However, the role of the law on secured transactions was ignored by the Chinese legislature for a long time until 1995, when China enacted its first Law of Guarantee. This just provides a very simple legal framework governing secured transactions for several specified categories of personal property. Thereafter, the 2007 Real Property Law started to modernise the rules for secured transactions in personal property, through expanding the categories of eligible personal property that could be used as collateral. It introduced non-possessory mortgages over tangible personal property and established on-line registration systems for security interests in different types of personal property, such as inventory, account receivables, stocks and so on. China is currently codifying the existing private rules into a civil code, also covering those on secured transactions. Unfortunately, the codification project will not bring about fundamental change to the legal framework on secured transactions established by the 2007 Real Property Law, which will still be piecemeal in the future civil code. Despite the fact that the latest draft of Civil Code has introduced some new rules on secured transactions, such as the purchase-money security and electronic registration for conditional sales and leases, these have led to more confusion, particularly relating to conflicts of priority among creditors and interested third parties. In contrast to the stagnant and conservative legislative reform, secured lending transactions in China have proliferated since 2001, when China joined the World Trade Organization (WTO) and started its economic globalisation. With rapid economic development, new types of personal property are employed as collateral, such as account receivables, asset-management programmes issued by banks, bank accounts belonging to enterprises, the right to lease equipment or real estate, and so on, to secure the performance of a loan.3 Additionally, China also developed and adopted numerous forms of security arrangements, in addition to those already provided by the statutory law, such as title transfer arrangements relating to inventory, account receivables (namely factoring), listed stock and so on. These arrangements are designed for the purpose of efficiency and timely liquidation, by circumventing the restrictions imposed by the 2007 Real Property Law as well as the insolvency rules and procedures that might affect the debtor’s estate.4 It thus raises the question of how to characterise them in nature, namely, whether to adopt the ‘form dominates over substance’ approach or the ‘substance dominates over form’ approach, and consequently, how to determine the rules applicable to a specific transaction. One important driving force for the reform in the law of secured transactions is to ease the credit shortage for Chinese SMEs, which were subject to financial depression and discrimination in the loan market. On the other hand, the emerging lending practices, as mentioned above, impose practical challenges to the existing legal rules on secured transactions, which should be modified or reconstructed, with reference to the latest international experience in a reform of the law on secured transactions. The current chapter is arranged as follows. After this brief introduction of the context of this chapter, part II introduces the evolution of the Chinese law on secured transactions since the start of the 1980s, covering the 1995 Guarantee Law and its legal framework and problems;

3 See B Chen, ‘On the Legal Status of the New Categories of Security Interests’ (2014) 8 Tsinghua University Law Review 87. 4 See L Yang, ‘Transfer of Title for Security: A Security Interest in Formation in Customary Law’ (2013) 3 China Legal Science 74; X Dong, ‘On Transfer of Title for Security: A Response to Professor Yang Lixin’ (2014) 3 China Legal Science 288.

The Law of Secured Transactions in China: Comparison and Future Reform 127 part III introduces the latest reform initiated by the 2007 Real Property Law, which shapes the framework and rules on secured transactions, and the existing problems; part IV reflects on the possible approach for the reform of the existing law on secured transactions in the context of the Chinese civil codification, which is unlikely to solve the problems in this area; and part V concludes.

II. The Period from the Reform and Opening Up to 2007: The Formation of the Legal System of the Law on Secured Transactions A. The Enactment of the 1995 Guarantee Law and the 2000 Judicial Interpretation on Guarantee Law Before 1995, there was no legislation governing secured lending in the long period after the Reform and Opening Up, as a result of stagnant reform of the centrally planned economy, in which state-owned enterprises usually got credit directly from state-owned banks without provision of collateral to the latter. In most of these cases, it was the government which ordered the banks to extend credit to the enterprises in implementing the economic plan, like most of the transition countries.5 And this constituted the direct cause of the banking crisis at the start of the 1990’s, when some banks were on the edge of technical bankruptcy. After 1992, China decided to establish a market-oriented banking system, which encouraged banks to evaluate the credit risk of debtors, even state-owned enterprises, which were thus required to provide collateral to secure the performance of their loans from banks. In this context, China enacted its first legislation on secured transactions, namely the 1995 Chinese Guarantee Law, which establishes a basic legal framework for secured lending transactions, covering the guarantee, the mortgage over immovable property and certain categories of personal property, pledge and statutory detention of personal property. The mortgage, a term introduced from China Hong Kong and also influenced by the German Civil Code,6 is construed as a non-possessory security interest over real estate (usually state-owned land-use rights, apartments, commercial and industrial buildings etc). It could also be created over certain movable property, such as aircraft, cars, and ships, which have comparatively stable market values and are subject to special state supervision in practice. The registration of mortgages over real estate and special personal property was localised and diversified across the country. One basic characteristic was that the parties had to follow a strict procedure and burdensome information duties were imposed so as to ensure the accuracy of registration. Even though the mortgage could also be granted on enterprises’ equipment and other property,7 it was rarely used by SMEs to get loans from banks, because the latter preferred real estate to be given as collateral. So the majority of

5 See A Harmathy, ‘Secured Transaction in a Country of Transition: The Hungarian Experience’ (2009) 27 Penn State International Law Review 757, 758. 6 It is distinct to the meaning of this term in the UK where it originated. For example, for personal property, a mortgage is a defeasible outright transfer of the mortgaged property. The property is automatically reconveyed to the debtor upon repayment of the mortgage advance. See H Beale et al, The Law of Security and Title-Based Financing, 3rd edn (Oxford, Oxford University Press, 2018) para 1.19. 7 See Art 42(5) ‘Administrative Measures for the Registration of Mortgage on Enterprises’ Movable Property‘ enacted by the former State Administration for Industry and Commerce in 1995 (abrogated in 2007).

128 Lebing Wang secured transactions were implemented in the form of pledges which required the possession of the collateral, either tangible or intangible. Later, in order to better implement the 1995 Guarantee Law and to elaborate on some specific rules in question, the Supreme People’s Court of China enacted the Judicial Interpretation on Some Issues Regarding the Application of Guarantee Law in 2000 (hereafter called the Judicial Interpretation on Guarantee Law). However, the rules of these two important and fundamental pieces of legislation imposed unfair restrictions on secured lending based on the type of personal property involved. For example, most personal property could not be mortgaged, except those already specified by the 1995 Guarantee Law. Further, the registration systems were only open to the types of personal property already specified by the 1995 Guarantee Law and were closed to all the other types of personal property. In consequence, the 1995 Guarantee Law brought about great institutional obstacles for the undertaking of secured lending. Following the traditional distinction between the non-possessory mortgage (mainly concerning immovables) and the possessory pledge as a result of legal transplant from civil law countries, personal property in China is usually considered to be eligible collateral just for a pledge under the creditor’s possession. After the 1995 Guarantee Law, the former State Administration of Industry & Commerce of China enacted a regulation titled ‘Administrative Measures for the Registration of Mortgage on Enterprises’ Movable Property’ which expanded the scope of personal property that was eligible to be mortgaged,8 including equipment, raw materials and supplementary materials, products of the enterprise and the other chattels. This regulation in fact reconstructed a substantial part of the legal framework for secured lending on movable properties that had been established by the 1995 Guarantee Law. However, the registration system established under this regulation was just open to enterprises, not to individuals. Furthermore, the outdated paper-based registration system for personal property could not ensure the efficiency and safety of the secured transactions. For this reason, secured lending on personal property in the 1990s was stagnant and was not well known to the public, particularly the SMEs in the private sector.

B. The 2007 Real Property Law and the Fragmented Legal Framework of the Law on Secured Lending Since entering the WTO in 2001, the Chinese economy witnessed rapid growth, and thus Chinese enterprises required more credit support from the banking system to expand their productive capacities and international markets. However, SMEs and private enterprises could not get enough loans from the banking system as a result of the shortage of eligible collateral, such as buildings and land-use rights. The valuable assets they owned consisted exclusively of personal property, such as inventory, which were not eligible collateral under the existing law at that time. With technical support from the World Bank, the 2007 Real Property Law elaborated on the new rules for secured transactions over personal property, particularly the floating charge, which allows the debtor to create a non-possessory mortgage over ‘present and future’ ‘equipment, raw materials, semi-manufactured goods and products’, through introducing an after acquired property’ clause based on Article 9 of the US 8 See Art 3, ‘Administrative Measures for the Registration of Mortgage on Enterprises’ Movable Property‘ enacted by the State Administration for Industry and Commerce in 1995 (abrogated in 2007).

The Law of Secured Transactions in China: Comparison and Future Reform 129 Uniform Commercial Code (UCC Article 9). As illustrated in Articles 180 and 181 of the Real Property Law, enterprises, commercial individuals or farmers, which have been registered in the State Administration of Market Regulation (SAMR) and its subsidiaries, could register non-possessory mortgages over their equipment or inventory in the localised filing system, operated by SAMR and its subsidiaries.9 However, what this legislation brought to China is not a uniform, clear legal framework which responds well to practical needs. One proponent for the introduction of the non-possessory mortgage over personal property argues that it satisfies both the needs of creditors, who must control the market value of the property for the future satisfaction of the underlying debt, and of debtors, who would like to still maintain possession of the collateral and make exploitation of it.10 However, the introduction of the mortgage over personal property also brought about some problems to the existing legal framework of property law. Personal property can be mortgaged a dishonest debtor to one creditor and then pledged to another. In this situation, the two group of rules, particularly those on priority, compete with each other in practice,11 and make the pledge of personal property less attractive, and have even caused it to be substituted in most cases.12 In fact, the pledge over personal property is employed mainly by individuals for simple private lending among them, while enterprises prefer to make use of mortgages over their movable assets to secure the performance of loans. Yet, the latest development in China also demonstrates that the pledge also has advantages because of the element of possession, which could be seen as a more direct and safe method to protect the interests of the creditors. Thus some creditors, particularly banks, prefer to create a pledge through designating a third party (usually an enterprise specialising in logistics) to possess the collateral on its behalf. And this indirect possession through a designated third party to perfect the pledge has already been acknowledged by the Chinese courts, and thus it is very popular in lending by banks secured by inventory, as banks usually do not own a warehouse and do not have the necessary personnel to manage the inventory. In contrast, it may be difficult to restrict or prohibit the transfer of ownership of, or the creation of an encumbrance in, mortgaged property. This is particularly true where the property is subject to a floating charge, which has limited legal effect against a third party who acquires the inventory in the ordinary course of business of the debtor. So we find that the existing legal framework on secured transactions is fragmented, diversified and divided into at least three parts, namely the mortgage over certain categories of personal property, the floating charge over equipment and inventory owned by enterprises, commercial individuals or farmers, and the pledge over personal property. The discussion above also demonstrates the possibility that personal property can be subject to both a mortgage and a pledge, and thus there exists a potential competition among these different forms of secured transactions in China, and this also constitutes the origin of the priority problems of the mortgage and pledge, as we discuss below.13

9 See III C below. 10 See L Wang, ‘The Development of the Law on Secured Transaction and the Draft of “Real Property Law of China”’ (2006) 29 Journal of Shanxi University (Philosophy & Social Science) 1. 11 See III D (iii) below. 12 See X Dong, ‘The Evolution of Mortgage and Its Effect on the Legal System of Real Property Law’ (2017) 181 Studies in Law and Business 87. 13 See III D (iii) and (iv) below.

130 Lebing Wang

III. The Reform of the Law on Secured Transactions in the 2007 Real Property Law A. The Expansion of Eligible Collateral by the Reform In order to facilitate SMEs to obtain credit from the banking system, Article 180 of the 2007 Real Property Law substantially expanded the movable collateral eligible to be mortgaged in a very broad way, including ‘equipment, raw materials, semi-manufactured goods and products’, ‘vessels and aircraft that are under construction’, ‘means of communications and transportation’, all of which could be employed as collateral for secured lending. And this article particularly states that ‘the properties not prohibited to be mortgaged according to any law or administrative regulation’ could also be mortgaged, which means that nearly all personal property can now be mortgaged in China. Additionally, Article 181 allows present and future equipment and inventory of factories to be collateral under a floating charge. Accompanying the expansion of tangible movables as collateral for mortgages, the types of intangible property that could be subject to a pledge were also simultaneously expanded by the 2007 Real Property Law to cover account receivables, transferable fund units, stocks of listed companies, intellectual property rights, and any other property rights allowed to be pledged under the existing law.14 As compared with the open provision relating to tangible personal property that can be subject to mortgage in Article 180, Article 223 of the Real Property Law strictly follows the ‘numerus clausus’ principle and imposes restrictions on the type of intangible property that is eligible as collateral under a pledge.

(i) Account Receivables Among the new types of intangible property that can now be subject to a pledge, the introduction of account receivables is of particular importance for various enterprises and financial institutions, and has greatly facilitated secured lending. According to the statistics of the Credit Reference Centre of the People’s Bank of China, which operates the electronic filing system for account receivables, it has registered about 3.4 million secured transactions and over 1 trillion RMB loans through the pledge of receivables from October 2007 to the end of June 2019.15 Among the creditors, there are the leading national banks, but also localised community banks, trust companies, financial leasing companies and so on. Among the debtors, there are both leading national enterprises and local SMEs, because the recorded amount of a specific loan could fluctuate from 10,000 RMB to 70 million RMB so as to satisfy the needs of different debtors. Compared with the technical definition of ‘account’ in UCC Article 9,16 the definition of ‘account’ has been expanded and reformulated through the modification of the 2007 Measures

14 The pledge of intangible property originally just referred to a pledge over title documents such as the negotiable instruments, bonds, security certificates, deposit receipts, warehouse receipts, bills of lading, etc, the possession over which could be realised through the delivery of the certificate or title documents. Later it was expanded to uncertificated intangible property, such as intellectual property, stock of listed companies, shares of non-listed companies and, account receivables which are not represented by a title certificate and thus cannot be possessed through the delivery of a document. See Real Property Law, Art 223. 15 Available at www.crcrfsp.com/index.do. 16 UCC, §9-102(a)(2).

The Law of Secured Transactions in China: Comparison and Future Reform 131 for the Registration of Pledge of Account Receivables, which provides the general meaning and lists the categories of receivables in China.17 It is worth noting that the concept of ‘account receivables’, similar to the concept of ‘account’ in UCC Article 9, has also a highly technical definition, which can be expanded in order to meet the needs of certain industries or sectors. It is thus no longer limited to rights to payment relating to goods or services. Some categories of rights to payment that were classified as general intangibles under UCC Article 918 are also ‘accounts’ under the Measure. For example, China lists bank loans as a subcategory of receivables, while it is treated as payment intangible under UCC Article 9.19 And this leads to an entirely different arrangement for its perfection in China as compared to the USA: in China, the pledge and transfer of a bank loan requires the filing of a financing statement in the electronic filing system, otherwise it is not effective in the law; whereas in the USA, it is exempted from the requirement of filing, as a result of the automatic perfection for payment intangibles.20

(ii) Beneficiary Rights An important sub-category of account receivables is that of the beneficiary rights arising from various underlying assets,21 such as infrastructure projects, most of which are directly operated by the government or indirectly by its subordinated state-owned enterprises. Compared to other investments, investment in infrastructure is enormous and usually cannot be afforded by the local government. The solution is that the local government assigns the beneficiary rights (usually with a comparatively stable cash flow) arising from highway or other infrastructure projects to banks, which provide funds for the construction and operation of the infrastructure. In the early years, the beneficiary rights were closely connected with government concessions which are in substance administrative licences. And disputes arising from concession agreements between the private investors and the government are considered as administrative disputes, and the procedure of administrative litigation will apply. However, private investors are reluctant to apply administrative law to govern their agreement and future disputes with the government, because they feel that they are always discriminated against in administrative litigation and cannot get fair or full compensation to cover the damage resulting from a breach of contract on the part of the government. For this reason, the Supreme People’s Court of China enacted a guiding case in 2015, in which the judges distinguished the beneficiary rights from the concession rights in a sewage plant in Fuzhou city, and asserted that beneficiary rights are of a private nature and can thus be transferred and disposed of freely by the right holder.22 This finding is of historic significance, as it reduces the primary legal risk or uncertainty of a Public-Private-Partnership contract. Since then, the Chinese government (for example, the Legislative Affairs Office of the State Council in a reply to the Ministry of Transport) has confirmed that the disputes

17 See Measures for the Registration of Pledge of Accounts Receivables, the China People’s Bank, as amended in 2017, Art 2. 18 UCC §9-102(a)(42). 19 See L Wang, ‘The Pledge of Account Receivables in the Civil Codification: The Institutional Dilemma and Potential Reform’ (2016) 4 Law Science Magazine 49. 20 See UCC, §9-309; UCC, §9-109, Official Comment 5. 21 This category was included in the concept of account receivables after the modification of the Measures for the Registration of Pledge of Accounts Receivable in 2017 by the Central Bank of China (see III C below). Before that, it was called a ‘right to charge’, with a clear meaning in administrative law. 22 See Guiding Case No 53, Haixia Bank of Fujian v Changle Yaxin Sewage Plant Co Ltd, Fuzhou Public Works Co Ltd.

132 Lebing Wang arising from a government concession agreement do not fall into the category of administrative disputes which should be governed by the Administrative Reconsideration Law.23

(iii) Stock of Listed Companies Besides account receivables, the stock of listed companies also deserves particular attention because of its special market performance in China since 2015. In fact, the pledge of stock was already provided for by the 1995 Guarantee Law. Since then, in the past two decades, the Chinese stock market gradually developed the margin loan, repos, the title transfer arrangement of stock for security and the pledge of stock. However, the market complexity brought about by these new transactions contributed to the market turbulence in 2015 and 2018. With particular reference to the pledge of stock of listed companies, despite the proliferation of lending secured on stock in the capital markets, the reform of the governing legal framework and the specific rules for these transactions haves been stagnant. In particular, the 2007 Real Property Law only contains one simple clause specifying the condition for establishing an effective pledge over stock. It does not provide for the rights of the creditor over the pledged stock, particularly taking into consideration the fluctuating value of the stock. The satisfaction of the creditor through the disposal of pledged stock, which is similar to close-out netting, is distinct from that through the disposal of other tangible or intangible collateral.24 Usually the creditor has to monitor the market value of the stock, and, if the market value of the stock decreases to below a prefixed percentage of the underlying obligation (usually 130 per cent), it has to require the debtor to provide additional collateral or to dispose of the pledged stock itself. It is not appropriate to allow the court to dispose of the collateral if the debtor breaches the contract, unlike in the case of a mortgage over immovable or movable property. Secured lending based on stock requires special rules, not only for the satisfaction of the creditor, but also for the daily operation of the market.25 One example is the creditor’s right to sell the stock constituting the collateral before the debt becomes due (the ‘right of use’). Unfortunately, these rules are neglected by the 2007 Real Property Law and also the new ‘Security Law’ which was revised in 2019. At the same time, secured lending based on stock is closely tied to the systemic risk of the capital market and thus its stability, because simultaneous underselling of the stock will finally knock down the stock price, as had occurred in 2015 and 2018 in China. And the fall in the stock price would in turn worsen the situation of the pledgors, the stock of which would be sold regardless of the creditworthiness of the borrower. This has imposed very serious side effects on the stability of the Chinese capital market, which is evidenced by the 2015 capital market disaster and a new turmoil since the start of 2018. In the first part of 2018, the loan-to-value of the lending secured by stock has decreased from 40 per cent to 20 per cent, and some even lower than 15 per cent. Meanwhile, it is clear that the outstanding amount of secured lending on stock has also decreased, and it is recorded that there was about 40 billion RMB withdrawn from the stock lending market in June 2018, and 30 billion RMB withdrawn in May 2018.26 In consequence, the 23 See Reply of the Legislative Affairs Office of the State Council to the Letter from the Ministry of Transport on Whether Disputes over Administrative Agreements Arising from Government Franchise Agreements and Other Agreements Are within the Acceptance Scope of Administrative Reconsideration, Letter No 866 [2017] of the Legislative Affairs Office of the State Council. 24 See C Mooney, Jr, ‘Beyond Negotiability: A New Model for Transfer and Pledge of Interests in Securities Controlled by Intermediaries’ (1990–91) 12 Cardozo Law Review 305. 25 See L Gullifer, ‘What Should We Do About Financial Collateral?’ (2012) 65 Current Legal Problems 377. 26 See ‘The Risk of Close-Out: A Comprehensive Overview of the Pledge of Stock’ (Sina Finance, 9 September 2018), finance.sina.com.cn/stock/marketresearch/2018-09-28/doc-ihkmwytp6091558.shtml.

The Law of Secured Transactions in China: Comparison and Future Reform 133 price of the stock has declined as a result of the lack of market confidence, to the extent that the pledgee (usually the banks, security intermediaries, or asset management programmes created by them), as the supplier of funds, had to sell the pledged stock in great volumes, and thus caused the stock index to crash to its lowest level since 2014. The regulation of secured lending by stock is a complicated and highly technical affair, and has to be governed both by the law of securities with public supervision, and the law of secured transactions laying down a robust fundamental legal framework for these specific types of transaction. Unfortunately, China has neither enacted a specific private legal framework for the transaction, nor established a public regulation regime like the Financial Collateral Directive in Europe.27 This could partly explain the violent fluctuation in stock prices in the past few years.

(iv) New Types of Intangible Property As demonstrated above, the 2007 Real Property Law and the related regulations expanded the categories of intangible property which could be used as collateral for secured lending, such as account receivables. However, there are other new intangible property rights which have arisen as a result of fast economic development or financial innovation, which are still not regarded by Article 223 of the 2007 Real Property Law as eligible collateral for a pledge, for example, a share of a limited partnership fund, a right to lease an office or taxi, a share of a wealth management programme,28 an emission right,29 data collected by AI technologies and so on. These property rights are usually of high value, but with poor market liquidity or legal uncertainty because of their own character or legal restrictions imposed on them. For example, data is considered as the new petroleum in the economy of the 21st century, and some of the top data companies have also grown up in China, but there exists great debate over whether data can be treated as a type of property in law, because some types of data are closely connected with privacy,30 while some others are produced in the course of public administration and so are connected with public security. However, most of the new types of property could be employed to secure the performance of underlying obligations in practice, particularly by SMEs. The problem is that the validity of secured lending based on these types of collateral would possibly be challenged or refused by a competent court on the ‘numerus clausus’ principle. In this aspect, there is still much room for future reform in the law on secured transactions.

B. Creation of Security Interests in Personal Property With respect to the creation of security interests, the 2007 Real Property Law facilitates the establishment of mortgages over tangible property. According to Article 188 and Article 189, a mortgage or floating charge over tangible property is established once the contract is concluded. This is when the mortgage itself becomes effective between the mortgagor and mortgagee. Registration is not necessary for the establishment of the mortgage; it just makes the mortgage

27 EU Directive 2002/47 on Financial Collateral Arrangements. 28 It is estimated that the market of wealth management programmes exceeded 3 trillion RMB at the end of 2017, and Chinese banks usually accept wealth management programmes issued by themselves as collateral for secured lending. 29 See B Chen, ‘The Legal Characterization of New Secured Transactions’ (2014) 2 Tsinghua University Law Journal 88. 30 In this aspect, Art 111 of the 2017 General Part of Civil Law clearly prohibits the illegal collection, use, processing or transfer of personal information, and it is illegal to buy and sell, supply or publish the personal information of others.

134 Lebing Wang effective against third parties, such as a potential creditor of the mortgagor. This is fundamentally different from the mortgage over immovables, which becomes effective (and also perfected) between the mortgagor and mortgagee only when it is registered. With technical development and reform, the parties can register the mortgage on-line, and the registration system reduces the amount of information disclosed in the system. This greatly facilitates the creation of nonpossessory mortgages over personal property and reduces the transaction costs, particularly for the SMEs. In contrast to mortgages over tangible property, pledges over intangible rights are still extensively regulated by the 2007 Real Property Law, which requires registration for the effective creation of a pledge. The concern of the legislator is that the nature of intangible rights assumes some kind of legal uncertainty about their existence and validity, so it is necessary to register a pledge over them so as to prevent possible fraud and protect innocent creditors. For this purpose, Article 223(7) follows strictly the ‘numerus clausus’ principle and provides that only property rights recognised by the governing laws and regulations can be pledged. So the creation of a pledge over intangible rights is subject to stricter regulation, registration is essential for its establishment and it thereupon becomes effective between the pledgor and pledgee, and also against third parties.

C. The Perfection and Registration of Security Interests in China There exist different ways of perfection of security interests on personal property, such as possession, registration and even control in relation to some specific lending practices. As discussed above, possession is the way for both the establishment and perfection of a pledge over tangible personal property. However, direct possession prohibits the use of the collateral by the debtor and thus has a negative impact on enterprises’ production. So Chinese banks have developed the practice of indirect possession through the custody of third party professional institutions as illustrated above,31 which assist the creditor to monitor the collateral and to secure the performance of the loan.32 The registration of a secured transaction in China is of particular importance, because it determines whether it is enforceable against a third party (if the transaction is by way of mortgage) or legally effective (if it is by way of pledge over intangible property). The most significant achievement of the 2007 Real Property Law for the reform of secured transactions is the establishment of an electronic registration system for security interests in inventory and account receivables. Concretely speaking, Article 189 designates the SAMR (in substitution of the prior State Administration of Industry and Commerce) responsible for establishing registration system for security interests in equipment and inventory; while Article 228 designates the Central Bank of China responsible for establishing the registration system for security interests in account receivables. The 2007 Real Property Law also inherited the registration system for security interests in auto vehicles, aircraft and vessels already operated by the governing authorities, which also provides the registration system for security interests on intellectual property rights, stocks and transferable fund units, and so on. So the most apparent characteristic of the Chinese registration

31 See II B above. 32 See L Wang, Principles of Guaranty Law (Beijing, University of International Business and Economics Press, 2018) 200–01.

The Law of Secured Transactions in China: Comparison and Future Reform 135 system is the existence of different systems for security interests in different kinds of personal property, as a result of the fragmented legislative framework that applies to the non-possessory mortgage, and the pledge of intangible property. Another possible reason is the division of regulatory power over certain categories of collateral among different government authorities, which are designated to establish the corresponding registration systems; for example, the Civil Aviation Administration of China establishes and operates the registration system for security interests on aircraft. The regulatory authority thus confines its subordinated registration system to the movable property subject to its jurisdiction. This contributes to the fragmentation of the registration systems; moreover, it is estimated that there are about 15 registration systems established by different government authorities, which in consequence brings about inconvenience to the parties involved in secured lending as regards registration and searching.

(i) Mortgages Over Personal Property With particular reference to the level of information disclosure, registration requires very complicated documents and compliance with a strict procedure, as with registration of a mortgage over immovable property. The applicants have to present the title certificates, the identity of the mortgagee and mortgagor, the underlying loan contract and mortgage contract, and other requested documents. The 1995 Chattel Registration Regulation additionally requires the authority to review the documents presented so as to confirm their authenticity for the purpose of protecting the safety of the transaction. For these reasons, the registration system for movable properties is similar to that for immovable property, which functions in a rigid way. The system thus imposes unfair transaction costs to participants in lending activities secured by movable property. Besides the complicated and burdensome registration practices for personal property, searching by creditors to discover possible encumbrances is also inconvenient and expensive, because the registration system for personal property is still a localised, rather than a national, paperbased archive. A creditor cannot easily to get the information about encumbrances, particularly when the creditor and debtor are located in different jurisdictions. In this case, the creditor has to go to the debtor’s location to search for information about encumbrances on certain assets, which can be very costly and thus increase transaction costs, which is likely to be reflected in the lending interest rate. As explained above, the 1995 Chattel Registration Regulation imposed additional burdensome requirements for the perfection of mortgages over tangible personal property. Unfortunately, the situation has not improved even after the enactment of the 2007 Real Property Law, because the 2007 Measures for the Registration of Mortgages over Personal Property33 still require the disclosure of detailed information about the collateral, including the identity of the parties, the name, quality, quantity, location and ownership of the collateral, the date for the performance of the underlying obligation and so on.34 The situation started to change since May 2018, when the SAMR decided to establish a national electronic registration system for equipment and inventory specified under Article 181, and selected Beijing, Shanghai and Wuhan to make a pilot experiment for on-line registration practices. At the same time, the modified Measures for the Registration of Mortgage over Personal Property (amended in April 2019) does not require the

33 Enacted in 2007, amended in 2016 and modified in 2019. 34 See Art 5 of 2007 ‘Measures for the Registration of Mortgage over Personal Property’ (as modified in 2016). In fact, some developed economies also face similar problems: see A Duggan, ‘Globalization of Secured Lending Law: Australian Developments’ (2000) 34 International Lawyer 1107, 1108.

136 Lebing Wang parties to present the title document of the collateral and permits the parties to give a general description of the collateral so as to facilitate registration and searching.35

(ii) Pledges of Account Receivables (a) Development of the Registration System When the Real Property Law entered into force in October 2007, the Central Bank established an independent company (the Credit Reference Centre) responsible for the technical affairs of on-line registration of pledges over account receivables (‘the CRC system’). This has proved to be very efficient through the years, and it is the first true electronic registration system in China. The creditor and debtor can file their financing statement on the system in any place, even if they are located in different regions, and this has encouraged cross-regional lending nationwide since 2007. The registration and searching can take place at any time, because the registration system is open and accessible 24 hours a day. That is why most of the banks, enterprises of different scales and even individuals prefer to use this registration system. Another possible reason is that the CRC system is open-ended and is always accepting some new transactions to be registered in it, while the registration system of SAMR mentioned in the previous paragraph is close-ended and always refuses to register new transactions. In the past decade, the CRC system has accepted assignments of account receivables, the financial leases, conditional sales,36 pledges of inventory or warehouse receipts, pledges of cash deposits, trusts of personal property and so on.37 As revealed by its statistics, the CRC system has registered 14743 pledges of account receivables, 15726 assignments of account receivables, 32555 financial leases, 678 cash deposits, 209 pledges of inventory or warehouse receipts, 17 conditional sales, 34 statutory detentions, and 2 trusts of personal property in June 2018.38 In fact, except for the pledge of account receivables, there is no law or regulation providing for the registration of the other transactions mentioned above,39 and this precisely violates the ‘numerus clausus’ principle.40 The effort of the Central Bank to establish a uniform registration system for various secured lending transactions demonstrates its ambition to construct a fundamental financial infrastructure for the Chinese financial market in the future so as to facilitate the practice of

35 See Art 5. 36 See L Wang, ‘On Several Questions of the Conditional Sale – A Comment on the Judicial Interpretation of Contract of Sale’ (2014) 1 Law Review 182. 37 See Art 14 of ‘The Operating Rules for the Uniform Registration System of Secured Transaction on personal property’, enacted by the Credit Reference Centre of the People’s Bank of China, www.zhongdengwang.org.cn. 38 See monthly statistics of the Uniform registration system for secured transaction, www.zhongdengwang.org.cn. 39 It is notable that the registration of financial leases, hire-purchase agreements, statutory liens, pledges of warehouse receipts and inventory, trusts of personal property, and cash deposits as collateral were only practically possible since the issue of the 2014 ‘Operating Rules for the Uniform Platform for the Registration of Secured Transaction on Personal Property,’ while registration of transfers of account receivables has been practically possible since 2007 under the ‘Operating Rules for the Registration of Pledge of Account Receivables’ (see n 43 and its accompanying text). Neither of these sets of rules, however, was a law or a regulation. The 2017 amendments to the 2007 Measures for the Registration of Pledge of Account Receivables did provide for the registration of transfer of account receivables so that after 2017 registration of these transfers was legal according to the law. However, the registration of the interests mentioned in the text and this footnote (other than the pledge and the transfer of account receivables) is still illegal in the law, except for the pilot reform implemented at Beijing and Shanghai as discussed at IV B below. A positive development is that the latest draft of the Civil Code provides for the registration of conditional sale, financial lease and factoring in the Part relating to ‘Contract’ (see IV A below). 40 See 2007 Real Property Law, Art 5. See also L Wang, ‘The Principle of Statutory Jus in Rem’ (2007) 1 Northern Legal Science 6.

The Law of Secured Transactions in China: Comparison and Future Reform 137 secured lending. This has been partly achieved at Beijing and Shanghai since 2019, because the local Department of Market Regulation of these two cities have used the CRC system to register mortgages over equipment and inventory as a pilot reform. (b) The Legal Effect of Registration An interesting problem relates to the legal effect of registration of a pledge of intangible property. For example, the 2007 Real Property Law provides that a pledge over account receivables does not become effective unless registered in the electronic filing system, and this usually requires the involved parties to present various detailed documents (particularly title documents) and the registry to review the authenticity of the detailed information.41 In contrast, the 2007 Measures for the Registration of Pledge of Account Receivables enacted by the Central Bank and the related documents issued by the Credit Reference Centre adopts the filing system of UCC Article 9, which just requires registration of the identities of the debtor and creditor, the general or specific description of the account receivable, and the duration of registration. The 2007 Measures for the Registration of Pledge of Account Receivables also clearly states that the CRC system does not guarantee the authenticity of the information provided by the involved parties and does not bear any loss suffered by third parties consequent on the registration of inaccurate information. Moreover, the registration just functions as a signal of the encumbrance so that potential third parties can evaluate the credibility of the debtor.42 Even more importantly, the CRC system does not impose any review of the authenticity and accuracy of the documents presented by the parties. This is fundamentally different from the registration practice for mortgages over immovable property, where the parties are required to ensure the accuracy of the information disclosed, and the registry usually undertakes a substantial review of the documents presented by the parties, otherwise they are liable for any wrong registration. Direct assignments of account receivables (for example, a ‘true sale’ in a securitisation transaction) are also able to be registered in the CRC system for pledges of account receivables. In fact, although the Measures for the Registration of Pledge of Account Receivables (2007) did not clearly provide for its application to the assignments of account receivables, a complementary ‘Operating Document’ implementing those Measures was issued by the CRC in 2007, and this Document provided for identical treatment of pledges and direct assignments of account receivables as a matter of registration practice.43 However, this treatment brought about a conflict between the 1999 Contract Law, which governs the assignment of contracts and just requires a notification to the debtor by the creditor, and the 2007 Real Property Law, which applies to the pledge of account receivables (which in fact is also a contractual right). The consequence was that the law applicable to the assignment of contracts was very confusing to participants

41 See 2007 Real Property Law, Art 228. 42 See Operating Rules for the Registration of Pledge of Account Receivables, Credit Reference Centre of China People’s Bank, Art 3. 43 See Operating Rules for the Registration of Pledge of Account Receivables, by CRC of China People’s Bank, Art 26. This document is not a law or regulation, but just a document governing the specific detail for the registration of pledges of account receivables, which has to be followed by the parties of secured transaction in practice, and it includes provisions for the registration of outright transfers of account receivables. The ‘Operating Rules for the Registration of Pledge of Account Receivables’ was amended in 2009 and has now been abrogated by the ‘Operating Rules for the Uniform Platform for the Registration of Secured Transaction on Personal Property’ issued on June 30, 2019 by CRC. It should be noted that this ‘Operating Rules’ is not a law or regulation. So strictly speaking, the registration of assignment of account receivables before the 2017 amendment to the ‘Measures for the Registration of Pledge of Account Receivables’ was illegal. See also Wang, ‘The Pledge of Account Receivables’ (n 19).

138 Lebing Wang in secured transactions that are based on account receivables. Fortunately, the 2017 amendment to the ‘Measures for the Registration of Pledge of Account Receivables’ acknowledges and adopts this approach of identical registration treatment of pledge and assignment of account receivables.

(iii) Inconsistency between Registration Systems The level of information disclosure required for the registration of security interests over personal property is inconsistent in different registration systems. In particular, the registration system for mortgages over equipment and inventory imposes stricter and more detailed requirements in the name of protecting the safety of transactions,44 while the registration system for pledges of account receivables leaves a broader space for the involved party. The effect of registration is also different for different transactions. Under Article 188 of the 2007 Real Property Law, a mortgage over personal property comes into force when the mortgage contract becomes effective between the mortgagor and mortgagee; and if it is not registered, the mortgage is not effective against any bona fide third party. In contrast, under Article 228, a pledge over account receivables will not become effective if not registered, even between the pledgor and pledgee. It is necessary to establish a uniform registration system for security interests over all types of personal property so as to have the same standard of information disclosure for registration and the same legal effect for a failure to register. This is of particular importance for determining priority among the creditors against the same debtor.

D. Competing Rights and Priority In view of the fragmented registration systems under the regulation and operation of different government authorities, the 2007 Real Property Law does not provide a comprehensive rule to resolve possible conflicts of priority between security interests in personal property. In fact, it has two articles relating to the priority problem, namely Article 199, which exclusively governs priority disputes between mortgages, and Article 239, which governs priority disputes between mortgages, pledges and statutory detentions of personal property.45

(i) Article 199: Priority between Mortgages Over the Same Personal Property With particular reference to the priority between mortgages over the same personal property, Article 199 establishes the basic principle of ‘registration first, payment first’, and thus a registered mortgage takes priority over a mortgage registered after it and an unregistered mortgage. If all the competing mortgages are not registered, the creditor-mortgagees are entitled to get paid in accordance with of the proportion of the credit they provided. However, this provision is only applicable to conflicting mortgages over the same personal property.

44 See ch 6. 45 As discussed in IV C below, these two articles are likely to be replaced by Arts 414 and 415 of the Property section of the new draft Chinese Civil Code.

The Law of Secured Transactions in China: Comparison and Future Reform 139

(ii) Article 239: The Priority of a Creditor with a Statutory Detention At the same time, Article 239 only provides for the priority of a creditor with a statutory detention as against a mortgage and a pledge over the same personal property: the creditor with the statutory detention will get paid in priority to those with a mortgage and a pledge.

(iii) Priority between a Mortgage and a Pledge in the Same Personal Property However, Article 239 does not resolve the priority conflict between mortgages and pledges over the same personal property. In fact, Article 79 of the 2000 Judicial Interpretation on Guarantee Law provides that a registered mortgage is executed and satisfied before a pledge. This result is based on the credibility of registration as a result of the strict procedure and high level of information disclosure, as compared with that of simple possession. However, this rule was not adopted in the 2007 Real Property Law, thus contributing to the confusion about priority conflicts. With respect to competing mortgages and pledges over the same personal property, there are two possible situations, namely the mortgage could be created before or after the pledge over the same personal property. Where the mortgage is created and registered before the pledge, the mortgage is considered to effective against the pledge, because it has already been perfected through the registration. Where the mortgage is created before the pledge but not registered, the mortgage is not effective against a third party, including the pledgee, because the pledge has been perfected through possession by the creditor taking possession of the collateral.46 Where the pledge is created before the mortgage, some scholars question the rationale and legality of this arrangement, because the implementation of the mortgage would conflict with the interests of pledgee with possession.47 Some scholars maintain that it is possible to create a mortgage after the pledge so as to make full use of the value of collateral, and that here the pledge can be enforced and satisfied before the mortgage, because of it was perfected first through the possession of the collateral. In the latest draft of the Civil Code, the chapter on ‘Property’, which also covers the rules on secured transaction, adopts a new rule, Articles 414 and 415, governing competing rights between mortgages and pledges over the same personal property. This rule provides that the order of payment shall be determined according to the time of registration and delivery of possession of the collateral.

(iv) Priority between a Mortgage Over Inventory and a Pledge of Account Receivables A second conflict arises from the separation of the mortgage over movable properties and the pledge of account receivables, particularly where there is a floating charge over inventory and a pledge of account receivables. As provided by Article 180 and Article 181 of the Real Property Law, the disposal or sale of inventory gives birth to account receivables. Thus, there exists a circle of value between inventory and receivables in the ordinary course of business of the debtor. This means that there would be a mortgage over the existing inventory and the future account receivables, which are in fact the same value, and thus may encourage fraud by dishonest debtors. This would not occur in a uniform legal framework on secured transactions, such as UCC Article 9. 46 See S Gao, On the Interpretation and Application of the New Rules on the Secured Transaction in Real Property Law (Beijing, People’s Court Press, 2013) 414–19. 47 See M Guo, On the Principles and Practice of Guarantee Law (Beijing, China Fangzheng Press, 1995) 75.

140 Lebing Wang Under that system, the debtor has to disclose any encumbrances on existing or future personal property, either tangible or intangible, in the financing statement, and the potential creditor can easily discover them through searching the register, and can then make further inquiry into the specific situation of the debtors’ assets. In contrast, in China, the separation of the mortgage over inventory and the pledge over receivables is accompanied by separate registration systems, in which the debtors are required to disclose information about encumbrances to different levels. In this case, even a prudent and sophisticated creditor cannot discover the fraud, because the information disclosed by the registration system cannot reveal the value link of the collateral, that is, when inventory can be converted into receivables in the enterprise’s ordinary course of business. From this point of view, it is desirable for China to adopt a uniform legal framework for secured transactions, rather than the existing diversified and fragmented system, so as to resolve the competing rights between a mortgagee of inventory and a pledge of receivables resulting from the sale of such inventory.

IV. Future Reform and Chinese Civil Law Codification After 10 years of development of secured transactions in personal property, China has developed various lending practices secured by personal property and thus accumulated abundant experience in this aspect, which will be helpful for the current codification of Chinese civil law. However, the reform and codification of the existing rules of secured transactions have been deliberately or unconsciously ignored by the Chinese legislators. The attention and debate has mainly concentrated on whether or not to draft a special chapter on the right of personality and how to protect them, particularly in the context of the internet era.48 Even though personality rights are of particular importance for the dignity and safety of everyone, it is not a legal framework which would impose fundamental effects on the normal functioning of the lending market, for example, which is substantially important for enterprises and banks. Moreover, some of the scholars participating in the drafting of the civil code hold a very conservative attitude against the reform of the law on secured transactions. In contrast, there are also some scholars with great insight who advocate undertaking a fundamental reform of the existing legal framework of secured transactions, so as to resolve its systemic drawbacks, as discussed above. This chapter argues that China should establish a uniform legal framework for secured transactions in substitution for the current fragmented one, and then establish a uniform registration system for tangible and intangible personal property so as to resolve potential priority conflicts. In this respect, the current draft of the civil code is unsatisfactory.

A. A Uniform Legal Framework for Secured Transactions With respect to the status of the law on secured transactions in the civil code, there are two contrasting proposals, one conservative and one reforming. For the conservatives, they prefer to preserve the existing legal framework already established by the 2007 Real Property Law, and 48 See L Wang, ‘The “General Part of Civil Code” Shall Not Provide All the Personality Rights – Comment on the Independent Chapter of Personality Rights’ (2015) 3 Modern Law Science 82; H Liang, ‘The “General Part of Civil Code” Shall Provide Personality Rights in an Independent Chapter’ (2016) 2 Academic Journal of Zhongzhou 48. There are also many other scholars participating the debate on this topic, and thus diversified the efforts of the legislators, namely the National People’s Congress. See also K Oliphant, L Chen and P Zhang, The Legal Protection of Personality Rights: Chinese and European Perspectives (Leiden, Brill Academic Publishers, 2018).

The Law of Secured Transactions in China: Comparison and Future Reform 141 to make modifications only to the extent that they consider necessary, even though this is not enough to improve the position in practice. On the conservative basis, the pattern of the nonpossessory mortgage and the pledge with possession will not fundamentally be reformed. According to these scholars, they will only reform, add or delete certain articles or rules, which have already been evidenced to be problematic in practice. However, as we seen from the foregoing analysis of the problems in the existing legal framework, this conservative or gradualism approach will not be helpful in resolving the errors, confusion and conflicts in the existing law and practice. The rigid conservative opinion has been reflected in several drafts of the civil code, which have also been criticised by scholars and practitioners. Fortunately, the latest draft of the Civil Code published in December 2019 demonstrated that the legislator has tried to adopt a functional legislative approach to secured transactions, through introducing registration of conditional sale, financial lease and factoring,49 although this introduction is in the ‘Contract’ chapter and not the ‘Property’ chapter, which governs secured transactions. In a manner similar to the mortgage and the floating charge, under the latest draft these three types of transaction can be effective among the parties by agreement, but they are not effective against third parties without registration. This arrangement shows that the Chinese legislator has recognised the necessity of adopting the functional approach in China so as to make better use of the function of certain types of transactions to secure the performance of obligations, but is reluctant to implement it right now. So, the new draft of the civil code still includes a separate legal framework for secured transactions, including rules from both contract law and property law. This will bring about serious priority conflicts among the secured creditors, buyers and lessors. In the light of the observations above, it is necessary to construct an independent part or chapter for secured transactions over personal property, separate from that for mortgages over immovable property. So the property law rules should be divided into two parts according to whether the collateral is immovable property or movable property, and no longer according to whether the collateral is possessed or not by the creditor. The law relating to mortgages over immovable property is already written in a relatively satisfactory way. Therefore, the work left is to perfect the legal framework and the specific rules on the law of secured transactions involving personal property. In this aspect, it is necessary to introduce a new concept, like the ‘security interest’ in UCC Article 9, to cover the existing mortgage, the floating charge, the pledge and the statutory detention of personal property, and to unify the rules on the attachment, perfection, legal effect, priority, satisfaction and implementation of security interests.50 From the point of view of eligible collateral, the restriction imposed by the ‘numerus clausus’ principle should be gradually relaxed so that the newly arising classes of assets can be used as collateral for secured transactions, particularly so as to support the development of SMEs and high-tech companies. A uniform law on secured transactions must also deal with the general rules relating to most types of the personal property, as well as those relating to specific types of personal property, such as the stock of listed companies, which at present are governed by special legal regimes outside the law on secured transactions. For this purpose, it is also necessary to consider how to implement these special rules for the benefit of creditors and to maintain the stability of the financial markets, as evidenced by the financial turbulence in 2015 and 2018.

49 This includes legal provision for the registration of these interests for the first time; see n 39. 50 See X Dong, ‘On the Unification of the Law on Secured Transaction’ (2014) 6 Chinese Journal of Law 99. See also X Dong, ‘Suggestions on the Codification of Secured Property Rights’ (2017) 6 Journal of Shandong University (Philosophy and Social Sciences) 4.

142 Lebing Wang

B. A Uniform Registration System for Secured Transactions In contrast to the diversified registration system for security interests over personal property, China has already established a national uniform registry in 2015 for rights over immovable property, including usufructuary rights like state-owned land-use rights, property rights on various buildings and fixtures, mortgages over land and buildings and so on.51 In contrast, a uniform registration system for security interests over personal property, covering tangible and intangible property is, until now, still a part of the ‘Chinese Dream’, which depends on the uncertain reform of the civil code. Compared with possession, the advantage of on-line registration for perfecting a security interest over personal property is very clear, and a third party can easily get information about the encumbrance over the collateral through on-line searching. A uniform online registration system is even put forward by some scholars as a substitute proposal if a uniform legal framework for secured transactions is not adopted by the legislature.52 The obstacles in the way of establishing a uniform on-line registration system include the current fragmented registration systems, the different documentary and procedural requirements for registration, the different levels of information disclosure, and the different legal effects of registration, as discussed above.53 In addition it has to be recognised that the function of registration of security interests in personal property is distinct from that in relation to immovable property. For personal property, the registration just gives a signal of an encumbrance and thus encourages potential creditors and third parties to make further inquiry about the financial situation of the debtor, while the registration system for immovable property is employed to determine the existence, ownership and scope of any encumbrance. Some scholars perceive the necessity and urgency of establishing a uniform electronic registration system, so as to unify the scope, legal effect, registry, document and procedural requirements for registration, and so on.54 The purpose is to facilitate registration and searching, in order to encourage nationwide secured lending across regions, to lower transaction costs and to improve legal certainty. The uniform registration system for secured transactions involving personal property also needs to coordinate its relationship with the existing registration systems already established by the governing authorities, such as the registration system for vehicles, aircraft, and vessels, which are established also for the purpose of administration and supervision for the public interest. These registration systems are employed to determine the ownership of these three categories of assets. As discussed above, the registration of a secured transaction does not necessarily involve the title or ownership of the collateral; so it is possible to establish a mechanism to share the information and coordinate the relationship between the governing authorities and the uniform registration system. Another possible approach is that the uniform registration system could just cover personal property, except those types subject to special regulation by the government authorities, and could be open and accessible to all other types of personal property with market value and good market liquidity. In order to achieve this, it also needs to combine the two registration systems, which are currently operated independently by the China People’s Bank and the SAMR, into one system, so as to avoid potential competition and conflict. For this purpose, the

51 See Interim Regulation on Real Estate Registration (November 2014), Art 5. 52 See Dong, ‘Suggestions on the Codification (n 50). 53 See III C above. 54 See S Gao, ‘The Construction of a Uniform Recording System for the Secured Lending by Personal Property’ (2017) 6 Global Law Review 66.

The Law of Secured Transactions in China: Comparison and Future Reform 143 pilot experiment at Beijing and Shanghai is not enough, and it would be necessary to promote it nationwide. Were this registration system to be created, it would also be necessary to designate a single regulatory authority over it, rather than two or more regulators (like the existing Central Bank and SAMR in the current system). In my opinion, it would be better to designate the Central Bank to regulate it, as such a system is usually considered to be an infrastructure facility of the financial market.

C. Reform of Priority Rules The new draft of the civil code on ‘Property’ has added new rules, Articles 414 and 415, which determine the order of priority for creditors to get paid according to the time of registration or possession. Whoever’s interest is perfected earlier, will get paid first. The actual time of creation of the mortgage or pledge or knowledge about the existence of other security interests is irrelevant to the question of priority. This is a bright-line rule that helps the judge avoid having to deal with factual disputes and affords predictability of outcome.55 One possible problem is how to determine the time of possession. A dishonest creditor could declare that he or she had already taken possession of the collateral before the registration of the competing interest, in collusion with the debtor. And that is why the 2000 Judicial Interpretation holds that a registered mortgage shall be granted priority against a pledge with possession. Another problem is that the perfection of a security interest could also be achieved by other means apart from registration and possession, such as the control of a deposit account by the bank, although this is still not recognised by the existing law or the draft of the civil code. ‘Control’ is an important concept created by UCC Article 9, and it is helpful for Chinese scholars and practitioners to understand its use in some special types of secured transactions, such as the secured transaction of stock in the capital market. It should therefore be acknowledged by the Chinese law on secured transactions as a means of perfecting the security rights on certain collateral. For this purpose, the priority rules in the draft of the civil code should be reconstructed so as reflect the need and desire of lending practice. However, it is clear that the current draft Article 414 (which is limited to determining priority between registered mortgages) and the Article 415 (which is limited to determining priority between perfected mortgages, pledges and statutory detentions) cannot be used to determine priority between conditional sales, financial leases and secured transactions. So it is necessary to clarify the status of conditional sales, financial leases and factoring in the legal framework of secured transactions, so that the uniform rules of creation, perfection and priority can be applied to them.

V. Conclusion This chapter reviews the history and evolution of the law on secured transactions in China over the past decades, and demonstrates the landscape of its development and its overlap with other legal systems. The legal framework and specific rules for lending secured in personal property

55 See FD Struell, ‘Quebec’s Creative Regime as a Model for Chile’s Secured Transaction Reform’ (1998) 5 Southwestern Journal of Law and Trade in the Americas 207, 216.

144 Lebing Wang have been analysed in detail, with particular concentration on analysing the existing problems relating to eligible collateral, creation, registration and priority conflicts among different forms of secured transactions. In the context of the codification of civil law in China, it seems that the establishment of a uniform law on secured transaction is impossible in the near future, because of the conservative attitude of the drafters of the civil code regarding the functional approach for the reform of the law on secured transactions. This is the case even though the latest draft of the Civil Code has provided rules for registration of conditional sales, financial leases and factoring, which are already recognised as able to secure the performance of obligations. More time is needed to reach a consensus among the scholars, legislators and practitioners regarding the reform orientation and approach. For this reason, reform of the Civil Code is only expected to undertake some limited technical improvement to the existing rules on secured lending. Whether or not a uniform law for secured transactions is drafted, the Chinese legislator has to consider adopting some new and rising types of property as eligible collateral, so as to enable as many enterprises as possible (particularly the high-tech companies) to get access to credit using the valuable assets they own. This is particularly important for SMEs, because they usually do not own immovable assets that can be used as collateral for secured lending. The special rules governing the taking of security over certain categories of personal property, such as stock of listed companies, account receivables, and intellectual property must also be considered by the Chinese legislators. One possible reform should be the establishment of a uniform on-line registration system for the general personal property owned by enterprises, partnerships or individuals in their ordinary course of business, except those subject to special supervision under the corresponding government authorities. With the creation of this uniform registration system, it is possible to unify the rules for the creation, perfection, priority of various security interests.

8 Secured Transactions Law Reform in Indonesia: Fiducia, at a Crossroads IBRAHIM ASSEGAF AND ARIA SUYUDI

I. Introduction A robust secured transaction law enables any businesses to leverage on a variety of assets to obtain financing. Traditionally, lending secured by real estate or land is a lender’s comfort zone; however, small and medium sized enterprises (SMEs) or companies in new economies might not have those assets, or its business might not rely on them but instead focus heavily on movable assets. To lend to these businesses, lenders need to be comfortable that security over movable assets will be effective so that they can be repaid if the debtor defaults. Without this assurance they would deem the financing risky and will either lend less or increase the cost of lending/ credit. Economic analysis suggests that countries with effective secured transactions law have greater access to credit, lower rates of non-performing loans, and a lower cost of credit.1 As pointed out in the discussion of the Modern Principles in chapter 2, the salient features of a modern security right framework over movable properties typically include: • a broad scope of assets that can be used as security, covering tangible or intangible movables, existing and future assets and a fluctuating pool of assets; • clear, easy and effective rules for creation and perfection, requiring fewer formalities in creation, enabling easy perfection (by registration), and establishing clear rules on priority for the secured creditor; • a centralised robust registry is critical to ensure third parties are made aware of the security rights, and should require registrants to provide ‘need to know’ information and have robust search abilities; • effective enforcement of security upon default, without court intervention, and flexible modes of enforcement, including repossession and sale of the secured assets with sufficient safeguards to avoid creditors’ misuse. If required, judicial intervention should be limited. The Indonesian financial system remains dominated by banks (especially state-owned banks), with multi finance companies a distant second.2 Banks typically lend to larger corporates but are 1 International Finance Corporation Legal Diagnostics, ‘Increasing Access to Credit in Indonesia through Secured Transactions Reform’ (2009, revised 2014) i. 2 International Monetary Fund/World Bank, ‘Republic of Indonesia Financial Sector Assessment’ (2017) 7, https://openknowledge.worldbank.org/handle/10986/28391.

146 Ibrahim Assegaf and Aria Suyudi required to set aside 20% of their lending portfolio to SMEs. These loans are typically distributed through multi finance companies or regional cooperative banks. Net interest margin is high, demonstrating high costs compared to similar economies. This is due to a weak enabling environment, in that the framework for creditors’ rights and insolvency are not conducive to lending.3 Creditors expect recovery rates to be low, and this increases the cost of financing.4 The World Bank, in a recent study suggested various reforms, such as the registration of security interests (of multiple creditors) over movables, the removal of excessively formal steps in the process of granting security, and the provision of greater flexibility in relation to asset sales during the enforcement of security over movables.5 Although unsecured lending is possible, it is limited to loans to large corporates or small personal financing. Secured lending in Indonesia is still dominated by security over real estate or land. Even though banks and finance companies generally accept movable assets as security, these assets are, typically, seen as secondary to land. Banks do not ascribe real value to non-land assets,6 but, rather, include them to complete the security package so that it covers most, if not all, of the debtor’s assets as well as the financed projects assets. The exception to this practice, perhaps, is in the area of consumer/personal -finance by, and consists of loans made by banks or non-bank finance companies for the acquisition of motor vehicles or equipment, which are then secured solely by the acquired assets. Indonesian security rights have been slow to develop. The law relating to the taking of security over land was regulated in the Indonesian Civil Code (ICC) enacted during the Dutch colonialisation and was reformed in 1996, but only in respect of land rights. The only security rights over movables are the ‘pledge’, which is a possessory security (gadai)7 and the ‘fiducia’ which is a non-possessory security (fidusia). The pledge continues to be regulated under the ICC, while an earlier form of fiducia developed by practice in the Netherlands, was later adopted by practice and the judiciary.8 The law on fiducia was codified by Law No 42 of 1999 on Fiducia Security (Fiducia Law) in the aftermath of the Asian economic crisis of the late 1990s, together with many laws and regulations to support commercial activity and economic resilience. The Fiducia Law derives from the traditional concept based on precedent, but includes some additional details for the creation and enforcement of these fiducia, facilitating their registration and priority, and regulating enforcement. Recently, reforms have been implemented to increase use of this type of security particularly for consumer finance by creation of an electronic registration system.9 Despite these reforms, the law does not accommodate taking security over a broad enough range of assets. It is rife with unnecessary formalities, and its implementation remains chequered, particularly in relation to other laws governing other priority rights and enforcement. This paper will elaborate upon the salient features, theoretical debates, and practical issues that arose with the development of the Fiducia Law, while also focusing on the Indonesian Government’s reform initiatives designed to improve the effectiveness of these movable security rights. It also discusses the latest Constitutional Court decision concerning the implementation of the rights of the fiducia security grantee as secured creditor in the event of default. Section II gives an overview of the law relating to secured transactions in Indonesia. Section III considers the various different aspects of the Fiducia Law and section IV concludes.

3 ibid

8. 25. 6. 6 International Finance Corporation (n 1) 8. 7 In some circumstances intangible property can be pledged, see III B (vii) and (viii) below. 8 J Satrio, Hukum Jaminan, Hak Jaminan Kebendaan Fidusia (Bandung, Citra Aditya Bakti, 2005) 8–19. 9 See III D (iv) below. 4 ibid 5 ibid

Secured Transactions Law Reform in Indonesia: Fiducia, at a Crossroads 147

II. Security and Priority Rights in Indonesia Indonesian security rights are commonly divided into two categories: security rights over assets (security in rem) and security rights over persons (security in personam). Security rights over assets create preferential rights over the secured objects and give the lender, as a secured creditor, rights to receive payment ahead of the other creditors. Security over persons, which typically granted by a third party affiliated to the borrower, results in the lender being an unsecured creditor of that third party with the right to demand payment upon default by the borrower. The lender remains an unsecured creditor of the borrower. This type of security is not the subject of this chapter. Other types of security or quasi-security rights common in other jurisdictions, such as assignment of contractual rights and conditional novation of contracts, are not statutorily recognised in Indonesia. This lack of recognition has the effect that, upon the insolvency of the security provider, in that the lender may not be recognised as a secured creditor unless otherwise specified in the Insolvency Law. Security rights over assets are regulated by many different laws, the application of which largely depends on the types of assets and/or rights to be secured or the types of security rights. Indonesian law generally categorises assets into (i) immovables (land, building and fixtures, but also vessels, and arguably aircraft) and (ii) movables (either tangibles or intangibles10). For most of the twentieth century, the ICC was the primary (and only) law on security rights, and, initially, only recognised the pledge (over movable assets) and the hypothec (over immovable assets11) as security rights. In the 1990s, new laws were introduced to regulate other types of security rights, such as the hak tanggungan (a mortgage of land and buildings), fiducia (security rights in movable tangible and intangible assets and also buildings that cannot be secured by a mortgage), and warehouse receipts for certain movable tangible assets. Since then, the ICC has had relevance only for the pledge and, to some extent, the hypothec over vessels and aircraft. Some other sectoral laws also regulate security over relevant assets; however, different types of security rights remain. For example, a maritime law was passed in 2009, which reaffirms the hypothec as a security right over vessels and regulates some details on formalities and registration. Although creation of these security rights largely depends on the type of assets and/or rights to be secured, some may be overlapping. For example, movable assets can be secured by either a pledge or a fiducia security. Thus, there is no one unified law on security rights in Indonesia and no one fixed form of security for each type of assets.

A. Creation and Perfection The formalities required to create and perfect security rights over assets differ depending on the type of security rights. In general, security rights are created by executing a security agreement. In relation to certain security rights such as fiducia security, mortgage, and warehouse receipt, the law requires the agreement to be in the form of a notarial deed which must contain certain minimum information relating to the security provider, secured assets, secured creditor, and secured loan. Some security rights over intangible property need to be ‘perfected’12 to be fully enforceable 10 See Table 1 below. 11 Including certain ships and aircrafts. 12 To some extent any discussion of a distinction between creation and perfection of security rights under Indonesian law is irrelevant since all relevant laws does not distinguish between these concepts as other jurisdictions do. In those

148 Ibrahim Assegaf and Aria Suyudi against the party against whom such security needs to be enforced. For example, a fiducia over receivables must be notified to the obligor of such receivables for the secured creditor to be able to enforce such fiducia against the obligor.13 The types of assets over which security can be taken, the relevant types of security rights and the requirements for creation and perfection are set out in Table 1. Table 1 List of assets and corresponding security rights No

Type of assets

Type of Security Rights

Security Documents

Creation and Perfection of Security Rights

1

Land and buildings

Hak tanggungan (mortgage) (Law Number 4 Year 1996)

A notarial deed of Registration power of attorney to grant a mortgage in and/or a deed of granting of hak tanggungan executed before a land deed official

2

Buildings that cannot be secured by a mortgage

Fiducia security (Law Number 42 Year 1999)

Notarial deed

Registration and consent from the land owner

3

Aircrafts

Hypothec (Indonesian Civil Code)

Notarial deed

Registration (primarily for Irrevocable De- Registration and Export Request Authorisation – IDERA)14

4

Ships > = 20 m3

Hypothec (Indonesian Civil Code)

A notarial deed of power of attorney to grant a hypothec in the ships and/or a deed of granting of hypothec executed before the Ship Registry and a Recorder Official

Registration

5

Ships < 20 m3

Fiducia security (Law Number 42 Year 1999)

Notarial deed

Registration (continued)

jurisdictions, creation enables the secured creditors to seize the secured assets of the borrower while perfection grants priority for the secured creditors against other secured creditors. Instead, Indonesian law only deals with the creation of security rights which grants both rights at the same time. 13 Technically, in the absence of such a notice, the obligor can continue payment and fully discharge its obligations to the security provider/fiducia grantor. 14 Indonesia has ratified the Cape Town Convention and the Aircraft Protocol by way of Presidential Regulation Number 8 Year 2007, on the Ratification of the Convention on International Interests in Mobile Equipment dan Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment. In relation to IDERA in particular, see the Director General Air Transportation Regulation Number KP 347 Year 2018 on Technical Regulation on Civil Aviation Safety part 47-02 (Staff Instruction CASR Part 47 -02) Irrevocable Deregistration and Export Request Authorisation (IDERA).

Secured Transactions Law Reform in Indonesia: Fiducia, at a Crossroads 149 Table 1 (Continued) No

Type of assets

Type of Security Rights

Security Documents

Creation and Perfection of Security Rights

6

Machineries and equipment

Fiducia security (Law Number 42 Year 1999)

Notarial deed

Registration

7

Inventory

Fiducia security (Law Number 42 Year 1999)

Notarial deed

Registration

8

Receivables

Fiducia security (Law Number 42 Year 1999)

Notarial deed

Registration and notification

9

Insurance claims

Fiducia security (Law Number 42 Year 1999)

Notarial deed

Registration and notification

10

Shares

Pledge/Fiducia Security

Notarial or private deed

Notification

11

Accounts

Pledge (Articles 1150–1161 Notarial or private Indonesian Civil Code) deed

Notification

12

Contracts (rights and obligations)

Conditional novation (Article 1413 Indonesian Civil Code)

Notarial or private deed

Notification and consent

13

Warehouse receipts

Security over warehouse receipts (Law Number 9 Year 2006 as amended by Law Number 9 Year 2011)

Notarial or private deed

Notification

14

Intellectual property rights

Fiducia security (Law Number 42 Year 1999)

Notarial deed

Registration and notification

B. Priority The general rules governing priority are contained in the ICC and the Indonesian Commercial Code. These rules include those dealing with retention of title and reclamation rights. More recent legislation regulate priority rights, and the means to enforce such rights, in specific sectors such as tax,15 customs and duties,16 banking,17 and employment law.18 Unfortunately, these laws were drafted in silos so that it is very difficult to construct a clear priority of rights. The provisions dealing with priority rights in the ICC itself are very outdated, given the period in which it was drafted. Moreover, even though the ICC distinguishes priority rights over specific assets from those over the debtor’s general assets, in practice these distinctions are not consistently applied. State claims (such as tax, customs and duties) rank ahead of secured creditors but a recent court decision ranks unpaid wages/severance ahead of all creditors (including State claims 15 Art 21 of Law Number 6 Year 1983 (as amended) stipulates that government shall have priority rights, in relation to tax debt, over the taxpayer’s assets. 16 Art 11 of Law Number 11 Year 1995 (as amended) stipulates that Government’s claim under the law shall have priority over any claims to debtor’s asset, except for a few other claims. 17 Art 17 of Government Regulation Number 25 Year 1999 on the Revocation of License, Dissolution and Liquidation of Banks also creates another stream of priorities by stipulating that payment to creditors shall be conducted after settlement of unpaid employee wages, litigation costs, unpaid costs of auction, unpaid taxes and office costs. 18 Art 95(4) of Law Number 13 Year 2003 on Manpower stipulates that in the case of bankruptcy or liquidation, the unpaid payment of wages and other rights of employees/workers shall be prioritised.

150 Ibrahim Assegaf and Aria Suyudi and secured creditors) while any other employee rights will rank ahead of other preferred creditors.19 A comprehensive stock take of priority rules is required taking modern requirements into account, and consequential reform of relevant legislation is imperative so that a clear set of priority rights is available. This is a significant undertaking, as it will encompass wide ranging laws, and therefore many stakeholders, but it is critical as it will form a foundation for a reformed law governing security rights or insolvency.

III. Fiducia Security as a Non-possessory Security Right Over Movables The pledge as a possessory security right was considered no longer suitable for certain types of financing, including financing over production assets, vehicles, and inventories. For these types of financing, the security provider needs the secured assets to keep its business going. Thus, a more ‘flexible’ security right, where the secured assets can remain under the possession of the security provider, was desirable, and fiducia security as a non-possessory security right was introduced. In the Netherlands the fiducia was created out of precedent in the 1920s, responding to the need to have a non-possessory security right as the pledge does not suit this purpose.20 The concept was immediately adopted in colonial Indonesia and further recognised after independence in the 1950s.21 This precedent based fiducia has been used until the Fiducia Law was enacted in 1999. This section critically analyses the fiducia under the Fiducia Law, the introduction of which was a major step forward for Indonesian law, which was further enhanced by the introduction of an electronic registration system in 2015.22 Despite these initiatives, the state of the law remains unsatisfactory and there is, arguably, more to be done to achieve a fully modernised secured transactions law.

A. Legal Construct and Impact Although the Netherlands have since moved away from the fiducia to the non-possessory pledge, the drafter of the Fiducia Law maintained the construct of transfer of title based on trust.23 Under the Fiducia Law, the fiducia is defined as a transfer of title over certain assets based on trust with the requirement that the assets title to which title is transferred remain in the possession of the original owner.24 However, this transfer of title construction is merely a legal fiction, created so that the creditor can attain possession of the assets as a security on paper, with no actual transfer of title over the secured assets taking place.25 Upon enforcement of the fiducia security, 19 Constitutional Court Decision Number 67/PUU-XI/2013 on the Review of Article 95 (4) of Law Number 13 Year 2003 on Manpower. 20 Satrio (n 8) 37. 21 ibid 111–27. 22 See III D (iv) (b) below. 23 World Bank Group, Naskah Akademik Perubahan UU 42 Tahun 1999 Tentang Jaminan Fidusia, Discussion Material, Prepared by International Finance Corporation for Directorate General Administration of General Law Ministry of Law and Human Rights (unpublished, 2015) 22. 24 Art 1(1) Fiducia Law. 25 Satrio (n 8) 132–33.

Secured Transactions Law Reform in Indonesia: Fiducia, at a Crossroads 151 the creditor cannot possess and own the assets directly, but instead, as with any other security rights, must sell such assets and use the sale proceeds to repay the debt.26 If the sale proceeds are in excess of the debt, then the creditor must return the remaining balance to the fiducia grantor.27 This requirement would not be necessary if the creditor had become the actual legal owner of the assets. However, this legal construction creates contradictions in practice concerning the treatment of the secured assets. This is especially the case where fiducia security is used to secure repayment of certain types of financing transactions where the title over the secured assets is not with the debtor but remains with the creditor. Here the debtor cannot legally transfer the title over such assets by fiducia security, as it never had the title in the first place. In an operating lease where the title of the leased assets is with the lessor, the lessee cannot grant fiducia security over such assets although they are in its possession. This should not be an issue, given that, as owner, the lessor should be able to repossess the leased assets directly; however, some lessors posited that, in practice, commencing repossession against an uncooperative lessee requires a lengthy and costly procedure as opposed to the easier method of enforcement of fiducia security. For example, the authors have encountered a situation where the lessor insisted on the lessee granting a fiducia security over leased machinery even though, legally, the title over the leased objects was still in the lessor, because the lessor needed comfort that they could gain possession over the machineries through the use of fiducia security enforcement. World Bank, IFC and Government studies28 proposed that the law be reformed by replacing the title transfer construct with a security right or interest in order to broaden the types of transaction that could be secured by ‘fiducia’. While these proposals surely have merit, the key issue here is that doing so will require significant work, not only in drafting the new statute but, more importantly, in ensuring that the new construct is understood and implemented. Despite the Fiducia Law being enacted in 1999, many stakeholders still do not fully understand the law, and hence implementation remains patchy and rife with issues.29 Therefore, a change of construct is only feasible as long-term reform along with other fundamental changes (eg priority rights generally).

B. Secured Assets Fiducia security can be created over any property which can be owned and transferred, including movable property, both tangible and intangible, and registrable and non-registrable, and also over immovable property which cannot be secured by way of a mortgage30 (hak tanggungan).31 Thus the range of assets that can be subject to fiducia is wide. It includes a building (if it is not subject to any mortgage), vessels of less than 20m3, vehicles, machinery and equipment, stock/inventory, receivables or insurance claims proceeds. Fiducia security covers existing and future acquired assets, without the need for separate creation or perfection.32 It is commonly understood that, under Indonesian law, one cannot assign

26 Art

29 Fiducia Law. 34(1) Fiducia Law. Bank Group (n 23). 29 ibid 23–24. 30 See category 2 in Table 1. 31 Art 1(2) and (4) Fiducia Law. 32 Art 9 Fiducia Law. 27 Art

28 World

152 Ibrahim Assegaf and Aria Suyudi future assets, especially receivables, unless there is an underlying legal relationship under which the security provider will obtain such assets.33 However, the Fiducia Law seems to allow fiducia security over any asset that may be later be acquired, regardless of when the legal relationship underlying the ownership of such asset is formed and without the need to enter into a separate fiducia security agreement. But, due to the specificity principle adopted by the Fiducia Law, an amendment to the registration once the future assets are in existence is necessary to ensure that the secured assets are specifically identified.34 This creates extra cost and a non-compliance risk. Further, with the title transfer construction, fiducia security can only cover assets to which the fiducia grantor holds title or ownership.35 In respect of future assets, effectively the fiducia grantee can only enjoy the security if at the time of enforcement, the fiducia grantor has acquired title over such future assets, at which point the fiducia grantor’s ownership is deemed to be automatically transferred to the fiducia grantee.36 As discussed below, Fiducia Law permits a wide range of assets, to be secured. However an over-formalistic approach by the authorities in relation to certain types of assets (eg bank accounts, contractual rights, intellectual properties) and the lack of clarity of the regulatory framework in relation to shares hinder a wider use of fiducia for certain assets. The following sub-sections discuss the taking of fiducia security over particular types of assets in more detail.

(i) Machinery and Equipment These (along with motor vehicles and inventory) are the traditional types of property secured by fiducia security. The debtor needs them to conduct its business, and so they cannot be the subject of a pledge. However, if machinery and equipment constitute fixtures, then can also be secured under a mortgage.37

(ii) Motor Vehicles Vehicles are the most common assets subject to fiducia and comprise more than 95% of fiducia registrations. This is because the ownership of vehicles is registered and because they are easy to repossess. However, the vehicle registration does not cover security. Hence, an interested party would need to check two separate registries: one for ownership and one for security.

(iii) Inventory As it is constrained by its title transfer construct, the Fiducia Law generally prohibits the sale of secured assets by the debtor.38 Obviously this would not work for inventory given its nature, hence the Fiducia Law contains exceptions to this general prohibition in relation to inventory. Thus, (i) it permits the fiducia grantor to sell the inventory in the ordinary course of business,39 provided 33 Satrio (n 8) 229. See also J Satrio, Cessie Tagihan Atas Nama (Jakarta, Yayasan DNC, 2012) 142. 34 Art 16 Fiducia Law. 35 See III A above. 36 Art 1 Fiducia Law. See Satrio (n 8) 181–84. 37 It is not uncommon that these fixtures are then subject to two types of security rights, ie fiducia and hak tanggungan. The same secured party has both these rights, and then selects which security right they wish to enforce over the other. Despite the conceptual complexity, there does not seem to be an issue in practice. 38 Art 23(2) Fiducia Law. 39 Art 21(1) Fiducia Law.

Secured Transactions Law Reform in Indonesia: Fiducia, at a Crossroads 153 that it replaces with inventory of similar type and value,40 unless the grantor is in default,41 (ii) it exempts inventory from the principle that the fiducia follows the property into the hands of whoever has it(droit de suite principle),42 (iii) it stipulates that, by law, the fiducia will cover any receivable arising from sale of the encumbered inventory,43 and (iv) it stipulates that a purchaser of inventory cannot be held liable for the purchase if it has paid the market price in full (to avoid fraud or misuse).44

(iv) Receivables Receivables have traditionally been secured by fiducia security.45 The Fiducia Law emphasises that creation and perfection of fiducia security does not negate the need to notify the obligor (the party against which the fiducia grantor has a claim) as required under Article 613 of the Indonesian Civil Code.46 This Article applies to any transfer of registered claims (piutang atas nama) as a consequence of the transfer of title construct in the Fiducia Law.47

(v) Insurance Claims If the secured assets are insured, fiducia security also covers the insurance claims proceeds unless otherwise agreed.48 In practice, lenders often require a separate fiducia over insurance to be executed for clarity, especially if the insurance covers many assets.49 There is a similar notice requirement to that applying to receivables.50

(vi) Buildings Fiducia can only cover buildings which are owned by parties other than the land owner51 since the regulator presumes that when the owner of the building is the same as the owner of the land, the logical choice of security would be mortgage covering both the land and building.52 This is useful, for example, in a build own operator structure as it permits the developer to use the building it has constructed as security.53 Nonetheless, given that any rights to the building are difficult to segregate from those to the land, typically, in practice, consent from the land owner is required.54 40 Art 21(2) Fiducia Law. 41 Art 21(3) Fiducia Law. 42 Art 20 Fiducia Law. 43 Art 21(4) Fiducia Law. 44 Art 22 Fiducia Law. 45 See the general elucidation to the Fiducia Law, para 3. 46 See the elucidation to the Fiducia Law in relation to Art 14(3). 47 See III A above. 48 Art 10 Fiducia Law. Art 25(2) further affirms that, if the secured properties are destroyed, which otherwise would be a ground to extinguish the fiducia, the lenders have the right to the insurance claims proceeds. 49 Typically, lenders also require the insurance policy to include loss payee/bankers clause since it remains uncertain whether a receiver will have claim over insurance proceeds if the borrower is declared bankrupt. 50 See III B (iv). 51 See the general elucidation to the Fiducia Law, para 2. 52 See category 1 of Table 1. 53 Typically in these structures the owner of the land prohibits any security over the land where the building/construction is erected; however, since the partner needs funding for construction, security over the building/construction only is permitted. 54 This is not regulated under the Fiducia Law, but, rather, from practice.

154 Ibrahim Assegaf and Aria Suyudi

(vii) Bank Accounts and Contractual Rights In the early phase of the Fiducia Law, bank accounts could be secured by fiducia security. However, in 2006 the Ministry of Law and Human Rights issued a letter refusing the registration of security over bank accounts and other contractual rights on the basis that they are not rights in rem (hak kebendaan) but rights in personam (hak perorangan).55 Since then, bank accounts have been secured by the use of a pledge,56 while contractual rights are either secured by way of a conditional assignment or a conditional novation (if there remain outstanding obligations that the security provider must fulfil) or fiducia security (if there are no outstanding obligations eg receivables).57

(viii) Shares Shares in a limited liability company were traditionally given as security by way of pledge, and this custom has continued even after the Fiducia Law was enacted. However, since 2007 the Indonesian Company Law provides that shares may be encumbered by means of a pledge or fiducia security58 and requires any security right (pledge or fiducia security) to be registered in the shareholders’ register. The Indonesian Company Law further stipulates that voting rights over shares that are encumbered by a pledge or fiducia still remain with the shareholder.59 This provision suggests that possession of the shares60 is not transferred to the secured creditor but remains with the shareholder, in which case the construction of fiducia security is more fitting. Nonetheless, up till now shares are very rarely secured by fiducia security. Presumably, this is due to the mainstream understanding that the fiducia, as a non-possessory security interest, is particularly useful for assets the grantor needs to be able to manage and control in the ordinary course of business. A shareholder does not require this management and control of its shares, and since lenders are more comfortable holding a pledge, which is understood as being possessory security,61 the pledge is usually chosen as the security interest in relation to shares which are being used as collateral. However, lenders should re-assess the viability of fiducia security over shares since it offers more certainty both because it is the subject of public registration,62 and because of the clarity of the means of enforcement.63 55 Director General Administration of General Law Number C.HT.01.10-74 Year 2006 on the Rejection of Fiducia Security in Form of Bank Account and Other Personal Rights. 56 As to whether this is a possessory or non-possessory pledge, see III B (viii). The pledge is created by notice to the bank. 57 It is interesting to note that, initially, notaries would advise against listing contracts giving rise to receivables because of concerns that the Fiducia Registration Office would refuse the registration of the fiducia. 58 Art 60(2) of Law Number 40 Year 2007 on Limited Liability Company (Company Law). 59 Art 60(4) Company Law. 60 See the next footnote for a description of what is meant by ‘possession’ of shares. 61 This is really a misnomer, since a pledge as a possessory security only applies to tangible movable property and is created and perfected by physical possession of the secured property (see Art 1152 ICC). However, a pledge over intangible movables is created by way of notice (Art 1153 ICC). In the case of shares, this notice has to be given to the board of directors of a company who under the Company Law must register the pledge in the shareholders register. This is often confused by views requiring creditors’ possession of share certificates to perfect a pledge. 62 While the fiducia must be registered in a central electronic registry which is publicly accessible, the shareholders’ registry is maintained by the board of directors only and there is no central registry. Companies have reportedly recreated shareholders’ registries omitting any prior security over shares. 63 Some Auction Offices have reportedly questioned the enforcement powers of a share pledgee on the basis that the share pledge agreement/deed does not contain enforcement title (titel eksekutorial) or offer summary sale powers (parate executie) (see III E below), even though it is understood as such as a matter of doctrine.

Secured Transactions Law Reform in Indonesia: Fiducia, at a Crossroads 155

(ix) Intellectual Property Rights To date, the general consensus appears to be it is not possible to create security over intellectual property (IP), reportedly on the basis that no law specifically permits it. Nonetheless, in practice, creditors are taking IP as security by way of fiducia even though they may not attribute a high value to such security (if at all).64 Although it does not so specifically refer to IP, the Fiducia Law in fact covers IP as it is a type of intangible movable property65 and is used by lenders as collateral. Recent amendments to copyright and patent laws expressly permit the taking of security over such IP by way of fiducia. These laws simply provide that the IP can be secured by fiducia but delegate the details to further implementing regulation which has not been promulgated.66 It is interesting to note that the recent legislation on trademarks surprisingly does not regulate security over trademarks67 and it remains to be seen whether this would be used as a ground for refusing the validity or enforcement of fiducia over trademarks, even though this type of security is currently used in practice. The main practical legal concerns relating to the taking of fiducia security over IP are as follows. First, there is the question of registration of fiducia over IP and, second, the question whether the enforcement of the fiducia will be recognised and registered as such by the Directorate General of Intellectual Properties. To date the IP registry does not accept registration of security over IP hence, technically, the grantor of the fiducia may still sell or transfer the IP while it is encumbered and the purchaser or transferee may not be aware of the fiducia. As for enforcement, any sale of the encumbered IP should be recognised and the purchaser should be registered as the new owner of the IP since the IP laws recognise a transfer by ‘other reasons provided by law’.68 Thus, these concerns can be addressed without amending any laws, by solely changing the perspective of the registry. Recently, along with development of the Indonesian creative industry, security over IP has been subject to much discussion. The main challenges and prerequisites to be provided by government that have been identified are (i) a specific regulatory framework concerning security over IP (ii) independent appraisers who are competent to appraise the value of the IP, (iii) the willingness of financiers to accept IP as collateral and (iv) a market in IP rights which can provide a reference point for valuation of IP. In our view, this identification seems naïve given that (i) the inherent risk of business in which IP is important (eg technology, e-commerce) is such that the most suitable financing of such businesses at an initial stage is equity financing, (ii) the existing fiducia regulatory framework can work with minor adjustments, as pointed out above, (iii) a valuation is not required for registration purposes and (iv) financiers will be happy to consider IP rights as collateral if they can draw comfort that there is a robust market in which the IP can be disposed of on its own.

64 Typically, a lender requires security over IP if it is crucial to the borrower’s business, eg in relation to consumer products, so that if and when the lender decides to enforce by way of selling the debtor’s assets it will be able to sell the entire business. 65 Art 1(2) Fiducia Law. 66 Art 108(1)–(2) Patent Law; Art 16(3)–(4) Copyright Law. 67 Law No 20 of 2016 on Trademarks and Geographical Indication. This is unfortunate, given that trademark should be an important and valuable asset to a debtor’s business. 68 Art 74(1)(f) Patent Law; Art 16(2)(f) Copyright Law; Art 41(1)(f) Trademarks Law; Art 31(1)(e) Industrial Design Law.

156 Ibrahim Assegaf and Aria Suyudi

C. Secured Liabilities The Fiducia Law offers a definition of both ‘receivables’ as the ‘right to receive payment’ of a sum of money69 and ‘a debt’ as an actual or contingent obligation that is expressed or may be expressed in money.70 The definitions are not symmetrical, and appear to be narrower than the general concept of obligation under the ICC. Nonetheless, nothing in the law specifically restricts the nature of underlying obligation secured by fiducia. In fact, the Fiducia Law provides in certain articles, though rather circuitously, that the underlying debt need not arise from a debt transaction but, rather, may also arise from any type of transaction so long as the debt can be expressed in money when the debtor defaults,71 though the elucidation is more restrictive.72 The question of how to determine the amount owed is addressed by a provision in the fiducia deed that the certificate of the amount outstanding is conclusive. The Fiducia Law affirms that the secured debt may comprise existing or future debt of a specific amount which has been agreed upon.73 In any event, due to the fiducia’s accessory nature, the legal relationship from which such future debt arises must exist at the time when the fiducia is created.74 Note, however, that the Law requires the fiducia deed to specify the value of the secured obligation (nilai penjaminan)75 and, even though one enforcement provision stipulates that creditors may apply enforcement proceeds against its outstanding claims,76 another provides that any balance from secured value must be refunded to the fiducia grantor.77 Hence, technically, if the amount outstanding exceeds the secured value, the fiducia deed needs to be amended to cover any balance.

D. Creation & Perfection, Registration (i) General While the fiducia is made by signing a notarial deed of fiducia security,78 the priority rights under fiducia security arises on the date the fiducia is registered.79 Although the Fiducia Law does not specify this, some scholars argue that an unregistered fiducia deed does not result in any rights/obligations.80 Art 11 of the Fiducia Law lays down a requirement of registration, but the Law does not prescribe any specific consequence of non-registration, so the position as between

69 Art 1(3) Fiducia Law. 70 Art 1(7) Fiducia Law. 71 Arts 4 (‘Fiducia Security is any derivative agreement of a principal agreement that incurs obligations to the parties to fulfill any performance’) and 7(c) (‘Any debt whose settlement is secured by fiducia may take the form of: … any debt whose amount at the time of execution may be determined under the principal agreement which will create any obligation to fulfill any particular performance’) Fiducia Law; Satrio (n 8) 158–59. This view is to be compared with International Finance Corporation (n 1) 16, which postulates that the Fiducia Law does not cover performance of obligations. 72 See, eg the elucidation of Art 7(c) Fiducia Law, which appears to limit its application to interest and other expenses the amount of which will be specified later. However, ‘performance’ in Art 4 is elucidated as ‘to deliver something, to do something, or not to do anything that can be valued with money’. 73 Art 7(b) Fiducia Law. 74 Art 4 Fiducia Law. 75 Art 6(d) Fiducia Law. 76 Art 29 Fiducia Law. 77 Art 34 Fiducia Law. 78 Art 5 Fiducia Law. 79 Arts 14 and 27(1) Fiducia Law. 80 Satrio (n 8) 248.

Secured Transactions Law Reform in Indonesia: Fiducia, at a Crossroads 157 the creditor and the grantor seems to be unclear. It is, however, clear that, if the fiducia is not registered, the secured creditor will not have priority over any competing claims to the encumbered assets. A fiducia security deed must at least include: (i) the identity of the fiducia grantor and grantee, (ii) a description of the underlying debt secured by the fiducia, (iii) a description of the assets subject to the fiducia, (iv) the amount secured, (v) the value of the assets subject to the fiducia.81 The fiducia grantee or its proxy (typically the appointed notary) registers the fiducia by summitting a registration application to the fiducia registration office.82 The Fiducia Registration Office must register the fiducia security in the Fiducia Registration Book and issue a fiducia registration certificate at the same date as it accepts the fiducia registration application.83

(ii) The Notarial Deed as the Basis for the Creation of the Security Interest A fiducia security is created by executing a notarial deed in the Indonesian language.84 A notarial deed is regarded as an authentic deed that provides the strongest evidence as to all matters stipulated therein which are directly related to the subject matter of the deed,85 such as the date of the deed, the originality of the signatures of the parties thereto and the provisions as agreed between the parties. Such matters stipulated in the notarial deed must be accepted as true unless a relevant party can satisfactorily prove otherwise before a court.86 By law, a notarial deed must be drawn up by or before a public notary in a certain prescribed form and using particular procedures depending on the type of transaction.87 An important role of a notary is to ensure that the persons executing the notarial deed understand the provisions of the deed. In order to do this, by law, the notary must read the salient provisions to all of the signatories prior to signing unless the signatories have understood the provisions and do not so require.88 The Notary Law aims to protect any party entering into an authentic deed, by enabling that party to understand what he or she is entering into.89 For the above reasons, Indonesian law requires a notarial deed for important legal actions such as those involving ownership (including security rights), establishing companies, etc. Although the Fiducia Law does not so specify, the requirement that a fiducia is created by notarial deed aims to protect the interest of the security provider by ensuring that they understand the terms and consequences. However, as will be discussed below, this requirement results in some inefficiency. Aside from costs90 in practice, based on the authors’ experience, the following inefficiencies can exist. First, in corporate financing, the requirement results in additional logistical hurdles (for example, the notary must convert documents prepared by lawyers into a specific form, the physical signing by all signatories must be arranged, etc). Second, in personal financing, the notary does not need to be present during the signing. One may argue that there is

81 Art 6 Fiducia Law. 82 Art 13(2) Fiducia Law. The content of the fiducia registration application is the same as that in the fiducia security deed plus details of the fiducia deed and notary. 83 Arts 13(3) and 14(1) Fiducia Law. 84 Art 5(1) Fiducia Law. 85 Arts 1870 and 1871 of the Indonesia Commercial Code; Art 165 of the Revised Civil Procedure (Herzien Inlandsch Reglement, HIR); Art 285 of the Civil Procedure for Outside Main Islands (Rechtsreglement Buitengewesten, Rbg). 86 See the general elucidation of the Law Number 30 Year 2004 on Notary Office as amended by Law Number 2 Year 2014 (Notary Law). 87 These matters are prescribed in the Notary Law. 88 Arts 16(1)(m) to 16(7) Notary Law; see general elucidation of the Notary Law. 89 See Art 16(7) Notary Law. For discussion of the policy reasons for this, see ch 6 IV A and B. 90 See III D (vi) (a) below.

158 Ibrahim Assegaf and Aria Suyudi little value in the notarial deed requirement unless a notary verifies that a fiducia deed was signed by the parties at the stipulated time, and subsequently registers the deed.91 Thus, the monopoly of notaries in the creation and perfection of fiducia security may need to be revisited. For example: (i) witnessing signatures could be done by any member of the legal profession, and ascertainment of signatures by an electronic system and (ii) the understanding of the fiducia deed by the parties can be better achieved by creating a standard form of fiducia agreement, with an explanation to aid understanding which is accessible to the public.

(iii) Unnecessary Formalities? The Fiducia Law requires the fiducia deed to specify the value of the encumbered assets (nilai obyek fidusia) and the value/amount of the debt secured by the fiducia (nilai penjaminan). The registration application/statement and fiducia certificate must also so specify. The law does not specify the purpose of these requirements and they create unnecessary formalities leading to confusion. Many believe that a statement of the value of the encumbered assets operates in a similar way to a representation and warranty of that value, and will assist the assessment by the fiducia grantee. However, the requirement is both unnecessary and useless, since it has no legal effect whatsoever and the fiducia grantee normally has its own method of valuing these assets. In practice, the fiducia grantor simply copies the master list of assets which shows the acquisition and book value of the assets when signing. As for amount of the secured obligation, the law is not consistent. In one article it only allows the fiducia grantee to recover up to the amount of the secured obligations92 but in another article, it appears to permit the grantee to collect proceeds up to the value of its outstanding claims.93 As explained below, the Fiducia Law provides for the registration of the encumbered assets, and this leads to the requirement, in practice, to include a comprehensive list attached to the fiducia deed (to be periodically updated by the fiducia grantor, though this is rarely done in practice except prior to enforcement) even though the fiducia is to cover all assets (or certain class/type thereof). While a list would be useful in some circumstances, for example, to distinguish specific assets from those contained in a pool of assets, this practice has led many to believe that fiducia grantee’s rights are limited to those assets only.

(iv) Registration System On registration of the fiducia the grantee obtains priority rights over the encumbered assets. However, the law is unclear as to what is being registered;94 is it the encumbered assets,95 the security/priority rights,96 specific covenants therein or all of the above?97 Registration requires an application enclosing a registration statement to be made by the fiducia grantee.98 The reason

91 Although the regulations do not require the registration to be done by a notary, in practice registration is done mostly by a notary. 92 Art 34(1) Fiducia Law. 93 Art 29(1) Fiducia Law. 94 Satrio (n 8) 248. 95 Art 11(1) Fiducia Law (‘Any Goods encumbered with Fiducia Security must be registered’). 96 Arts 12(1), 13, 14 and 16 Fiducia Law and the recital to the Fiducia Law, para c refer to the ‘registration of [the] Fiducia Security’. 97 Satrio (n 8) 248. 98 Art 13 Fiducia Law. Art 13(2) lists the matters required to be included in the registration statement.

Secured Transactions Law Reform in Indonesia: Fiducia, at a Crossroads 159 for both documents is unclear. Even though by law the fiducia grantee is authorised to register,99 in practice two powers of attorneys are prepared, one from the fiducia grantor to fiducia grantee and the second from the fiducia grantee to the notary who registers. This is another example of there being too many formalities.100 In effect, only the registration statement is included in the registry record. The deed is not, so any specific covenants will not be accessible to third parties; they would need to request any other information from the fiducia grantor/grantee or the notary. (a) The Early Manual Registration System The registration of the fiducia is a key feature of the Fiducia Law, which was included to satisfy the publicity and transparency requirements expected of a modern security rights system to protect stakeholders’ interests. Information held in the fiducia book and fiducia registration office is publicly accessible. Until 2013, registration was done manually at the fiducia registration office at provincial level.101 The Fiducia Law set a high standard by requiring same day registration; however, an implementing regulation issued in 2000 contradicts the law by permitting each office to review the underlying documents rather than the registration application.102 This resulted in a time consuming and costly registration process and, as a result, creditors preferred to postpone fiducia registration until the debtor was in default, i.e the security agreement was created but perfection was subject to the compliance of the debtor.103 In response, in 2012, the Ministry of Finance required non-bank financial institutions to register all fiducia agreements within 30 days of the fiducia security deed, arguing that the practice of creating the agreement without perfection was illegal given that the cost had already been collected in advance. Any non-compliance could result in sanctions of varying severity up to the revocation of the institution’s licence and prohibition of enforcement (which is typically by repossession) on the debtor’s default.104 The regulation increased fiducia registration exponentially but created further operational burdens for the fiducia registration offices, which further aggravated the problems. In 2013, the Ministry of Law and Human Rights105 launched an online fiducia registration system to replace the manual system.106

99 Art 13(1) Fiducia Law. 100 Satrio (n 8) 251–52. 101 The offices were set up gradually. The first one was set up in the capital, Jakarta, 6 months after the law was enacted, and by the end of 2000 all offices in the province were set up by virtue of the Presidential Decree 139/2000. Offices at municipality or regency levels may be set up if and when required. See the elucidation of Art 12 Fiducia Law. 102 Art 3 of Government Regulation Number 86 Year 2000 on Procedures to Register Fidusia Security and Fees for Establishment of Fidusia Security Deed introduced the obligation for the Fiducia Registration Office to examine the completeness of the documentation required. The role somewhat changed later to include discretion to approve or reject application from substantive point of view. 103 See Kontan.com, ‘APPI akan Menggugat Aturan Wajib Fidusia’ (12 December 2012), https://keuangan.kontan.co.id/ news/appi-akan-mengugat-aturan-wajib-fidusia. 104 Ministry of Finance Regulation No 130/PMK.010/2012 Fiducia Registration for Finance Companies Providing Consumer Financing for Motorized Vehicles. 105 The system was introduced with support from the World Bank Group operating under a memorandum of understanding and cooperation agreements entered into in 2013 and 2014. See ‘Expanding Access to Finance for Small-scale Businesses: Secured Transactions Reform: An Indonesian Case Study’ (World Bank Group) 6, https://documents.worldbank.org/en/publication/documents-reports/documentdetail/319231483698846837/ expanding-access-to-finance-for-small-scale-businesses-secured-transactions-reform-an-indonesia-case-study. 106 Ministry of Law Regulation Number 8 Year 2013 on Delegation on the Signing of Fiducia Security Certificate Electronically; Ministry of Law Regulation Number 9 Year 2013 on the Application of Electronic Registration Procedure for Fiducia Security; DG Administration of General Law Circular Number No AHU-06.OT.03.01 Tahun 2013 on the Operationalization of Electronic Fiducia Registration System (online).

160 Ibrahim Assegaf and Aria Suyudi (b) The Electronic System and its Impact Under the fiducia electronic system, the fiducia grantee (or, typically, its notary) is required to register in order to access the system and is given a user name and password, with which he can upload the fiducia registration application, whereupon the system would produce a printable fiducia certificate as evidence of registration. The online system only records and manages the fiducia registration application as inputted by the notary, and delegates to the notary the obligation to store the fiducia deed and any other relevant documents (including any list of secured assets). These features of the system create decentralised information and give rise to unnecessary logistical issues for the notary, prejudicing timely access. In 2015, the system was further improved to enable wider registration data to be captured and to produce better reports for the registration officer which could be used for policy formulation. In 2016 the system allowed non-notaries to access the system, thereby ending the monopoly of notaries in the registration process. The system added two channels for retail and corporate access with similar data sets allowing those with incidental or large volume registration to directly process registrations (or search the register) without assistance from a notary. Unfortunately, even though the online registration has been operational for 5 years, no policy is in place to integrate fiducia registered manually which remain in effect into the online registration. The online fiducia registration system is a significant improvement allowing centralised registration and an open process. These features remain lacking in respect of other security rights. However, the online system could be improved by further clarity on what needs to be registered and the introduction of a simplified process focusing on stakeholders’ interests as opposed to mere formalities. While a distinction between public and private (commercial) information is crucial given its critical role, the online system could be expanded (with different access levels) to store any relevant information on the fiducia (deed, list of assets) which would make searches more robust. (c) Public Access Another key issue with the manual fiducia registration system was access. Although the Fiducia Law guarantees public access to the fiducia registration, registration officers did not treat registries as public information. Some registration offices required searchers to come to the office which had jurisdiction over the domicile of the fiducia grantor and to search manually for the records and documents.107 Searchers were required to state that they had direct interest to the information to be given access, which resulted in discretionary access to the registered information. These features resulted in very minimal access to the registrations, rendering public access virtually non-existent so that a lender could not ascertain whether a debtor had granted fiducia over its assets (let alone particular assets) therefore increasing risks of double fiducia security.108

107 In the experience of one of the authors, it could take two months to do a search, and even then the result was not conclusive. 108 In 2013 a law firm in Jakarta was sued by its former offshore client for malpractice for providing advice to that client in relation to the provision of finance secured by Fiducia Security over an object which happens to be already also secured to another creditor. See also https://www.hukumonline.com/berita/baca/lt52690e19e5dd8/ dinilai-malpraktik-firma-hukum-digugat-ke-pengadilan.

Secured Transactions Law Reform in Indonesia: Fiducia, at a Crossroads 161 Despite the advent of online registration, the registers only became open for public access in 2016. The data input required for access still remains burdensome, however, and the accessible data set is limited, resulting in very few searches having been done to date. Despite recent cases,109 and the relative ease of searching in an online system, creditors, lawyers or notaries do not conduct searches prior to executing fiducia deeds. A regulatory framework for financial institution creditors or professional standards for lawyers and notaries may need to be introduced.

(v) Other Perfection Actions Even though priority rights arise from registration, further perfection action is required for fiducia which need to be enforced against third parties, particularly in relation to intangible movables such as receivables or insurance, which are to be enforced against obligors or insurance companies.110 In practice, the notice to, and the acknowledgment from, the obligors (especially for receivables) are done either immediately after registration or prior to or after default occurs, depending on the number of obligors and the comfort of the fiducia grantor. Recent proposals suggested the removal of this notice requirement to make enforcement easier. While this is an extension of the construct of transfer of title,111 there is room for discussion given that this construct is only a legal fiction and there is no actual transfer. Nevertheless, for all practical purposes the obligor needs to be informed to whom it needs to perform the obligations or make payment.

(vi) Fees and Costs There are two components of fees and costs for creation and perfection of fiducia: notary fees collected and payable to the notary, and registration fees, payable to the State Treasury. (a) Notary Fees The Notary Law prescribes the maximum notary fees, depending on the amount of the secured obligation, ranging from 2.5% for secured obligations up to IDR100 million (equal to IDR 2.5 million) to 1% for security value of IDR 1billion or more (equal to IDR 10million).112 However, in practice, notaries impose a flat fee depending on the type of financing. For corporate financing by banks, the notary fee is ranging from IDR7,500,000 to IDR15,000,000 per notarial deed. As for personal financing, the notary fees depend on the arrangement between the lenders and the notary, and may be as low as IDR15,000.113

109 Such as the one referred to in n 103 above. 110 Elucidation of Art 14 Fiducia Law (‘This provision is not prejudice to the effectiveness of Article 613 of Civil Code for the transfer of receivables and other intangible goods’). 111 The Fiducia Law makes specific reference to Art 613 of the Indonesia Civil Code, which regulates transfer of title over receivables by requiring notice to and/or acknowledgment from the obligor for the transfer to be enforceable against it. 112 Art 36(3) of Law No 30 of 2004 on Notary Law. The formula was later restated in Art 18 of Government Regulation No 21 of 2015 on Procedures of Fiducia Registration and Fee of Fiducia Deed Creation. 113 Ismiati D Rahayu, SH Chairman Local Committee of Indonesia Association of Notary (Ikatan Notaris Indonesia), ‘Harga Diri Notaris: 1 Akta, Sepiring Nasi Rendang … !’ http://medianotaris.com/harga_diri_notaris_akta_sepiring_ nasi_rendang_berita191.html.

162 Ibrahim Assegaf and Aria Suyudi Notary fees have been subject to contentious debate for some time and the prescription of a fee scale in the Notary Law, coupled by an anti-price war clause in the code of ethics of the association of notaries114 aims at reducing tension. Alas the tension continues. The debate over fees focuses largely on complaints by notaries that the lower fees degrade their standing (and, to a lesser extent, result in prejudice to quality control). However, discussion should instead focus on value for money in contrast to the notary’s monopolistic role and, in addition, quality control. (b) Registration Fees The electronic fiducia registration system imposes progressive fees based on a scale which depends on the amount of the secured obligation. Fees range from IDR50,000 for secured obligations of up to IDR50 million and IDR12,8 million for secured obligations of up to IDR 1 trillion. It is interesting to note that the system imposes a flat fee of IDR200,000 for any change to the registration irrespective of the amount of the secured obligation.115 Compared to other registrable security rights, notably the land mortgage (hak tanggungan), although the percentage is lower, the actual notarial and registration fees for fiducia are much lower.116

E. Enforcement (i) General The Fiducia Law prescribes specific means to enforce fiducia security; any provision to the contrary in the fiducia security deed is null and void,117 including any provision in the fiducia deed permitting the fiducia grantee to take ownership of the secured assets.118 These restrictions, which are found in Indonesian law in relation to all types of security rights,119 aim to protect the fiducia grantor from the possible abuse of enforcement rights resulting in lower enforcement proceeds.120 Typically creditors will require security rights over assets whose value exceeds the amount of the secured debt, so that permitting creditors to take possession would only benefit the creditor, and might prejudice the debtor. The main issue relates to the price obtained for the assets on enforcement. If a market price is obtained, then this is satisfactory, but that requires

114 Art 4, point 10 of the Indonesia Association of Notary’s Code of Ethic prohibits a notary from charging a fee lower than that prescribed by the association, while the current applicable statutory provision does not recognise a minimum honorarium rate, but, rather, sets a maximum rate for the Notary fee applicable to each transaction. Art 28 Notary Law prescribes the honorarium for a notary fee to be determined according to the economic value or sociological value of the object. The current rate is a maximum of 2.5% for value of maximum IDR 100 million or equivalent value of the gold at the time the deed is drafted, or a maximum of 1.5% for value from IDR 100 million rupiah to IDR 1 billion rupiah and a maximum 1% for value above IDR 1 billion rupiah. The latest text of the Notary’s Code of Ethics can be downloaded in https://ini.id/kode-etik. 115 There is no rationale for this fee and it hinders lenders from selling their personal financing portfolios. 116 As a general rule, the land deed officer charges between 0.5 and 1 per million of the amount of secured obligation for hak tanggungan which covers both its fees and registration costs. 117 Art 32 Fiducia Law. 118 Art 33 Fiducia Law. See also III A above on the transfer of ownership construct in fiducia. 119 See Art 12 of Law Number 4 Year 1996 on Mortgage. The only exception is in relation to the pledge, where Art 1156 of the Indonesia Civil Code permits creditors to take possession over the pledged object pursuant to a court order. 120 Satrio (n 8) 331.

Secured Transactions Law Reform in Indonesia: Fiducia, at a Crossroads 163 agreement from both the security grantor and the creditor on enforcement. These restrictions are not a wholesale prohibition on enforcement through other means, or even of creditors taking ownership over the encumbered assets but, rather, restrict agreement to these features within the fiducia security deed when fiducia is granted. If default occurs, however, the principle of freedom of contract applies, in that creditors and security providers can agree to settle the debt any way they like, and this is outside the ambit of the restriction on possession of the secured assets.121 Many commentators postulate that an enforcement auction often yields a price lower than market price,122 and, while this may not always be the case, the restriction is thought to be the best possible safeguard against abuse by creditors. The objective is to achieve a fair market price yielding enforcement proceeds, on the basis of which the debtor’s debt would be reduced.123 Upon default of the debtor or fiducia grantor, the fiducia grantee can enforce the fiducia over the encumbered assets by the following three methods,124 which are discussed further below,125 and which now are subject to the Constitutional Court decision discussed below:126 I. The grantee can use its enforcement title (titel eksekutorial) pursuant to Article 15(2) of the Fiducia Law, which it has because it holds the Fiducia Security Certificate. Under this title, as with other grosse akta instruments,127 the fiducia can be enforced as if it were a final and binding court decision. An enforcement of a court decision is regulated under the Indonesian Civil Procedural Laws,128 which, in essence, provide for the following procedure. First, the creditor is required to apply to the District Court which has jurisdiction over the enforced assets to issue a warning (aanmaning) to the judgment debtor to comply with the court order. Second, the court will summon the judgment debtor to hear any reason for non-compliance. Third, the court will then issue an enforcement order (fiat executie). If the judgment debtor remains non-compliant, the judgment creditor may seek assistance from the court bailiff to enforce the order (in the case of a fiducia by taking possession of the assets subject to the fiducia). Enforcement is concluded by selling the judgment assets in a public auction.129 II. The grantee can, on its own powers and authorisation granted under the law (parate executie), sell the encumbered assets using an auction and can apply the proceeds in full or partial satisfaction of its claims.130 This is distinct from the enforcement title explained above131 and stems from a specific provision enshrined in law (as affirmed in the relevant security deed) granting such authority to the secured creditors. On this basis, the secured creditors may directly, without having to obtain a court order as described in 1) above, apply for an auction with the State Auction Office (KPKNL).132 It is important to note that if, in aparate executie 121 ibid 331–33. 122 ibid 325, 319–20. World Bank Group (n 23) 17. 123 Some argued that the ‘market price’ can be ascertained by an appraiser or by a valuation report; however, that is only an indicative price as ‘market price’ should mean the price at which a willing buyer is willing to purchase. 124 Set out in Art 29 Fiducia Law. 125 See III E (ii) below. 126 See III E (viii). 127 See Art 224 HIR; Art 258 RBg. 128 Arts 195–244 HIR; Arts 206–54 RBg. 129 Art 200 HIR; Art 215 RBg. See also The Guidelines for Enforcement in District Court, Decree of Director General of General Court, Supreme Court of Indonesia Number 40/DJU/SK/HM.02.3./1/2019 on the Guidelines for Enforcement in District Court 4. 130 Art 15(3) Fiducia Law. See the discussion at III E (viii) below. 131 In practice these two instruments are often mixed up and parate executie often ends up being treated as execution under executorial title. See among others, J Satrio, Parate Eksekusi sebagai Sarana Menghadapi Kredit Macet (Bandung, Citra Aditya Bakti, 1993) 43. 132 Satrio (n 8) 321.

164 Ibrahim Assegaf and Aria Suyudi enforcement, the secured creditor faces a challenge from the debtor/security provider (eg refusal to vacate encumbered land or an encumbered building), technically the creditors will not be able to obtain judicial assistance directly. This is in contrast to the titel eksekutorial. It has been argued that, in such a case, the creditor would need to file an ordinary civil suit in court for sita revindikasi (a type of confiscation order available for the owner of relevant asset);133 however, they should not be prevented from applying for a court order under the titel eksekutorial. III. The grantee can effect a private sale based on the agreement of both the fiducia grantor and the grantee. One month’s notice of this sale must be given to all interested parties, and announcement of it must be given in at least two newspapers having circulation in the region where the assets are located. A sale of this type can take place if it will yield the highest possible proceeds.134

(ii) Parate v Titel Eksekutorial The Fiducia Law offers a distinction between enforcement by titel eksekutorial and parate executie as affirmed by scholars and Supreme Court Guidelines.135 According to Satrio, under the parate executie, a fiducia grantee can enforce by selling via a public auction and can apply the resulting proceeds in partial or complete satisfaction of the secured indebtedness. However, if the fiducia grantee needs to use force, for example, by repossessing the object of the fiducia against the will of the fiducia grantor holding and controlling it, it can only do so with the assistance of the court bailiff, for which it needs to commence ordinary civil claim proceedings and apply for repossession order (sita revindicatoir).136 For these reasons, Satrio noted that creditors prefer enforcing via the titel eksekutorial rather than using the parate executie.137 The secured creditor should not need to commence ordinary civil court proceedings in these circumstances, since this contradicts the intent of the Fiducia Law, which offers summary enforcement proceedings. Hence, if the debtor objects to enforcement, the fiducia grantee should be able to switch at any time from a parate executie to an enforcement title mechanism. In addition to these concerns relating to the parate executie enforcement process, Satrio argues that, in such a process, if the fiducia grantee wrongly enforces its rights, it runs the risk of a claim for damages being made by the fiducia grantor.138 In short, the parate executie can only work if the auction office is willing to proceed with enforcement auction without any court order139 and the fiducia grantor cooperates, ie willingly surrenders possession of the assets subject to the fiducia. In any other scenario enforcement of a fiducia would require a court order.

133 ibid 323. 134 Art 29(1)(c) and (2) Fiducia Law. 135 Art 15(2) and (3) and Art 29(1)(a) and (b) Fiducia Law. Satrio (n 8) 321–23; see also http://www.hukumonline.com/ berita/baca/hol20929/prosedur-eksekusi-hak-tanggungan-menyulitkan. 136 Satrio (n 8) 329, citing Art 226 HIR. 137 ibid 321. 138 There has been widely accepted practice that to directly sell the collateral without a prior court judgment is illegal, by reference to Supreme Court Decision Number 3210/Pdt/1984 dated 30 January 1986. The same issue has also been mentioned in the Supreme Court Guidelines on Implementation of Court Duties and Administration (Book II, On Technical Judicial, Number 41 on Execution of Collateral). 139 See III E (iii) below.

Secured Transactions Law Reform in Indonesia: Fiducia, at a Crossroads 165 Despite these distinctions between the parate executie and the titel eksekusi both are considered one and the same and reused interchangeably.140 The Auction Office does not treat them differently, neither does the Police Regulation which regulates the assistance of the police force in fiducia enforcement.

(iii) Public Sale, Auction An enforcement based on titel eksekutorial or parate executie is by auction of the fiducia objects through the State Auction Office.141 Before the enactment of the Fiducia Law, a security holder could only enforce fiducia security or similar security eg a pledge, by using its parate executie rights. There were no executorial powers provided for fiducia security of pledge. However, enforcement through parate executie has problems on its own: for example, certain State Auction Offices would not accept enforcement auction applications without an accompanying court order. Further, there was a Supreme Court decision which stated that an enforcement auction carried out without a court order was an unlawful act (perbuatan melawan hukum) and was void. After the enactment of the Fiducia Law, there remained uncertainties as to whether a parate executie auction could be done without an accompanying court order. This however, is mitigated by providing security holders with executorial power is through the Fiducia Certificate. However, despite having executorial powers, certain scholars still believe that the enforcement of executorial rights as provided by the Fiducia Certificate must be done through a court order so that it is the courts who will order and lead the enforcement.142 We note however, that obtaining a court order based on a Fiducia Certificate should be easier. Regardless, there is still no clarity on how to properly enforce against assets which are the subject of a fiducia. Currently, the enforcement auction requirements and procedures are regulated under Directorate General of State Treasury Regulation No 2/KN/2017 on Technical Guidelines to Conduct Auctions (Auction Regulation). Pursuant to the Auction Regulation and the practices of certain State Auction Offices, an enforcement auction over assets which are the subject of a fiducia can now be carried out by the fiducia grantee without requiring any prior court order to be obtained.143 To commence an auction process, the fiducia grantee needs to apply to the State Auction Office attaching various documents, essentially (i) the warning letters evidencing a demand by the creditor and default by the debtor, (ii) a complete dossier of the fiducia deed and other perfection requirements, and (iii) a confirmation from the fiducia grantee that it has possession over the assets which are the subject of the fiducia and which are to be auctioned. This is to ensure that once these assets are successfully auctioned, the auction winners can receive the auctioned objects. 140 Satrio (n 8) 322. 141 Art 1(1) of the Ministry of Finance Regulation Number 27/PMK.06/2016 on Technical Directives on Auction (Auction Regulation). Some contended that private auction offices can also perform enforcement actions. However, this may have been caused by confusion between an enforcement auction pursuant to the by performing the security holder’s parate executie rights as provided by law, and a voluntary auction held by the security holder acting on behalf of the security provider through a power of attorney to sell typically given in financing transactions. From a legal perspective, the private auction office is only performing a voluntary auction. 142 Satrio (n 8) 260. 143 Please note that each State Auction Office may impose different requirements and policy and therefore, certain State Auction Offices may still require a court order to conduct an enforcement auction.

166 Ibrahim Assegaf and Aria Suyudi On satisfaction of the requirements, the Auction Office will designate the auction date. The fiducia grantee needs to announce the enforcement auction in a newspaper stipulating the time and place of the auction.144 The auction can then proceed at the designated time either through a physical auction or an online auction at the system maintained by the State Auction Office.

(iv) Challenges against Enforcement There are at least four challenges that the fiducia grantor or borrower can mount to frustrate enforcement. 1. Under the Auction Regulation, before the commencement of the auction process, if any unrelated third party (ie other than the security provider, debtor or spouse of the security provider or debtor) files an ordinary civil claim in respect of the ownership of the asset which is the subject of the fiducia, the enforcement auction may be suspended or terminated. In such a case, the security holder would need to obtain a court order to allow the auction to proceed. This could either be a provisional order or part of a court decision).145 Unfortunately the State Auction Office does not maintain any statistics as to whether or not (or how often) this potential challenge has been made (successfully or not). Nevertheless, it is clearly an avenue that a resourceful defaulting borrower/security provider may employ. 2. At any time (prior, during, or after the enforcement action),146 the fiducia grantor or borrower may file, or cause to be filed, a request that the Auction Office terminate a scheduled auction. This can be based on, amongst other things, a court order or court decision pursuant to a civil suit instigated by the borrower/security provider or an unrelated party. Such a civil suit may be based on variety of grounds; for example, that the enforcement is premature as no event of default has occurred, or that the outstanding amount is still in dispute. Meanwhile, it is common for a third party to claim that the fiducia security is not valid as the security providers have no title over the assets which are the subject of the fiducia. 3. At any time, the borrower/security provider may file a civil lawsuit (gugatan) in the relevant court to cancel the underlying loan agreement and/or the deed of fiducia security. In this case, the security provider may also request the court to issue an order prohibiting an auction to commence/proceed. 4. At any time, the fiducia grantor or borrower can cause a criminal proceeding to be brought so that the secured/auctioned property becomes subject to criminal seizure (sita pidana) or blocking (blokir pidana) by the investigator or prosecutor office. These latter challenges are often made by resourceful defaulting borrowers/security providers and, although they may achieve varying degree of success, they are nonetheless often useful to frustrate enforcement actions and to persuade lenders into making concessions they would not have otherwise agreed to.

144 The Auction Regulation sets different requirement of announcement according to the value and/or nature of the object being auctioned. For an object having value less than IDR 20 million (USD 1,500) announcement is sufficient to be put in a classified ads (Art 55 Auction Regulation) and more stringent requirements for higher value objects. 145 Art 14(1) Auction Regulation. While the Auction Regulation only provides specifically for hak tanggungan (land mortgage), this provision is likely also to apply to fiducia. 146 Arts 27 and 30 Auction Regulation.

Secured Transactions Law Reform in Indonesia: Fiducia, at a Crossroads 167 Once a civil claim has been lodged, the secured creditor can only enforce the security by obtaining a court order through an enforcement application (permohonan) to the relevant district court either independently or in conjunction with the respective civil claims. Each of these actions would be heard at first instance level, which typically takes about six months to a year depending on any complexities and the parties to the case, and is subject to appeal, which typically takes no less than two years to complete.

(v) Private Sale Although private sale is regulated in the Fiducia Law,147 fiducia grantees very seldom resort to private sale as there is continuing debate about the details, so that banks and finance companies are cautious about possible repercussion (eg claims that the pricing is too low).148 For example, there remains debate as to whether the agreement of the fiducia grantor can be given on signing of the fiducia deed (which is always the case in practice) or whether it must be provided immediately before enforcement. Consequently, the private sale method of enforcement is only employed if and when the fiducia grantor is cooperative, in which case a bank or finance company would organise a ‘voluntary sale’.

(vi) Voluntary Sale While not an enforcement per se, a voluntary sale is a sale arranged by the fiducia grantee so that (i) the proceeds of such sale will be remitted to an account opened by the fiducia grantor but controlled by fiducia grantee and the proceeds will be applied towards the repayment of the monies due and payable and (ii) the fiducia grantee will then release of the fiducia. This is perhaps the most common enforcement method as it generally yield higher proceeds.149

(vii) ‘Cash Equivalent’ Assets The Fiducia Law does not address the means of enforcement over encumbered assets whose value is reflected in monetary terms, such as receivables and insurance claims proceeds. Enforcement in relation to these assets should not require any sale, since a sale aims at obtaining the monetary value of the encumbered assets. Therefore, the fiducia grantee should be able to enforce by claiming payment directly from the obligor or the insurance company. However, one could argue that doing so contradicts the Fiducia Law’s restriction on taking ownership of the assets, rendering such direct enforcement prone to challenge by the fiducia grantor resulting in cancellation or even criminal complaints. The most usual basis used in criminal complaints is embezzlement (penggelapan) – by arguing that the fiducia grantee took unlawful ownership over assets. While the fiducia grantee can legally have possession of the assets pursuant to the fiducia security, it should not have automatic ownership over assets. Despite the vague argument, the investigator would normally take a conservative approach by summoning all related parties to the transaction prior to determining whether or not they have a case that is suitable for prosecution.

147 Art

29(1)(c) Fiducia Law. discussions with lenders, March 2020. 149 Satrio (n 8) 324. 148 Authors’

168 Ibrahim Assegaf and Aria Suyudi

(viii) Repossession Given the nature of ownership, a key issue in enforcement is repossession. As discussed above,150 the Auction Office requires the security holder to provide a statement letter that it has possession over the fiducia object to be auctioned. Although the Fiducia Law requires the fiducia grantor to surrender possession of the assets which are the subject of the fiducia to the fiducia grantee, if the fiducia grantor refuses to do this, the fiducia grantee can repossess the assets and, if required, request assistance from the authorities.151 However, repossession is not always easy in practice. Previously, the fiducia grantee would rely on the debt collection services to repossess the assets which are the subject of the fiducia, and these services resorted to the use of force resulting in disturbances.152 In an enforcement via titel eksekutorial, the court bailiff performed the enforcement; however, it had no authority to use force for which they would need the assistance of the police force,153 which, unfortunately, was often reluctant to assist.154 As a response, two regulations were introduced. The first was issued by the OJK,155 prohibiting banks and finance companies from retaining debt collectors, but permitting them to use a licensed third party having licensed personnel.156 The second was issued by the Police Force, and regulated the requests for, and the provision of, police force assistance in safeguarding the fiducia enforcement and repossession.157 Many finance companies even enter into MOUs with the (local) police force to further ensure their assistance.158 Under the Police Regulation, the finance companies or agents can request police assistance in safeguarding the repossession of assets which are the subject of fiducia from interference (the repossession is usually done by the agents of the finance companies).159 Sometimes this assistance is given solely by the presence of the police, but, if required, there can be police action against a resisting fiducia grantor. However, the Police Regulation did not give authority to the police force to take over the repossession process nor to forcibly take possession of the assets from the fiducia grantor. Nonetheless, news reports on disturbances arising from repossession by debt collectors frequently appear.160

150 III E (iii). 151 Art 30 Fiducial Law. Note that the Fiducia Law does not provide any sanctions for the failure of the security provider to allow the security holder to repossess the fiducia object. 152 This is the case not only for repossession but also for any type of debt collection, including credit card, other types of consumer loans. 153 Art 15(1)(l) of Law No 2 of 2002 on Police Force (Police Force Law). This should be a general duty of the police but in practice, or misconception, only for those which have been specifically regulated by the Police Force. 154 Discussion of authors with Financial Service Company, Jakarta 10 March 2020. 155 The Otoritas Jasa Keuangan (the Indonesian Financial Services Authority). 156 Art 49 of OJK Regulation No 30/POJK.05/2014. The licensing of personnel is delegated to the association of finance companies (APPI), however, it remains unclear which agency is to deal with the licensing to third party companies remains unclear to be issued by which agency. This is not too dissimilar with the absence of a regulatory framework for the business of acquiring, servicing and collecting non-performing loans generally. Note that the finance companies remain responsible for the action of third-party collectors. 157 The Head of Indonesian Police Force Regulation No 8 of 2011 on Safeguarding Fiducia Security Enforcement (Police Regulation). 158 ‘MNC Finance Dukung Eksekusi Jaminan Fidusia Dikawal Polisi’ dated 11 December 2018, https://ekbis.sindonews. com/read/1264810/178/mnc-finance-dukung-eksekusi-jaminan-fidusia-dikawal-polisi-1512993551. 159 Art 22 Police Regulation. 160 In practice, conflicts that arise as a result of repossession of collateral often occur and have become a serious and recurring social problem. In its official testimony before the Constitutional Court panel on Case Number 18/PUU-XVII/2019 dated 6 January 2020 concerning the Fiduciary Law, the Indonesian Consumers Foundation (Yayasan Lembaga Konsumen Indonesia, YLKI) said that in the last seven years complaints related to consumer financing were amongst the most frequent complaints received by YLKI. These mainly included complaints about debt collection, and the withdrawal of motorised vehicles. Accessible at https://mkri.id/index.php?page=web.RisalahSidang&id=1&kat=1.

Secured Transactions Law Reform in Indonesia: Fiducia, at a Crossroads 169

(ix) Constitutional Court Decision on Constitutionality of Execution of Fiducia Security In a recent unanimous decision, the Constitutional Court ruled on the constitutionality of Articles 15(2) and 15(3) of the Fiducia Law.161 The petition was triggered by abusive repossession measures by a leasing company despite a first instance court decision ordering the company to cease repossession measures. The petitioner then argued against constitutionality of fiducia grantee’s rights to summary enforcement by way or titel eksekutorial and parate executie discussed above on the debtor’s default. The decision of the court concerned Articles 15 (2) and (3). Article 15(2) provides that a fiduciary certificate has enforcement powers equivalent to a final and binding court decision. Meanwhile, Article 15(3) provides that if a debtor is in default, the fiducia grantee (eg the creditor or security agent, as the case may be) has the right to sell the fiducia security object under its own powers. In its decision, the Constitutional Court stated that these Articles would only be constitutional if:162 1. the debtor/fiducia grantor has agreed that it has defaulted, or the creditor has obtained a court decision declaring a default; or 2. the debtor/fiducia grantor voluntarily surrenders the secured object or the creditor has obtained a court decision permitting repossession by court apparatus. In the decision, while the Constitutional Court recognised the creditor’s parate executie power, it found that the default underlying the parate executie cannot be unilaterally determined by the creditor. Instead, there needs to be a forum for the debtor/security provider to contest the creditor’s finding of default unless the occurrence of a default is between the debtor and the creditor. As a result, the creditor must obtain a court decision stating that a default has occurred. Effectively, it means that now the creditor has lost the ability to unilaterally determine a default and it cannot, now, exercise its parate executie power without the debtor’s cooperation/ agreement or a court decision. The Constitutional Court is of the opinion that the enforcement powers under the fiducia certificate are now conditional against the debtor and can only be performed by the creditor if the debtor (assuming that it is the fiducia grantor) voluntarily surrenders the security object. Otherwise, the creditor can only exercise its enforcement powers with assistance from the court. In its consideration, the Constitutional Court stated that its finding was based on the need to protect debtors from creditors, (who are not part of the state apparatus) and who abuse their enforcement powers by using unlawful force and threats to recover monies. While this is understandable, in practice, the requirement for creditors to obtain court’s assistance means that creditors will incur more time and cost in enforcement. In addition, with respect to movable assets, creditors may need to seek assistance from several courts if such assets can be easily moved by the debtor.

161 Constitutional Court Decision No 18/PUU-XVII/2019 dated 6 January 2020. 162 The Court uses the term ‘conditionally constitutional’. In this context the term means that the Court is establishing a new rule or norm on how a provision should be interpreted. If this new rule or norm is not complied with, the provision will be deemed unconstitutional and of no binding effect. In reality, such a ruling constitutes an amendment of the statutory provision by the court even though technically an amendment of the law still needs to be made by the legislative process.

170 Ibrahim Assegaf and Aria Suyudi The court decision effectively requires any enforcement, in the absence of the cooperation of the debtor, to be resolved through the court, which defeats an important tenet of any security rights: enabling secured creditors to recover their claims expeditiously. Even though, formally, the decision undermines the efficacy of just fiducia security, in reality it will also impact other types of security rights such as pledge, hypothec and mortgage (hak tanggungan), which offer similar enforcement rights to lenders.163

IV. Conclusion While some reforms have been made to Indonesian secured transactions law over the last twenty or so years, there is still much further to go. The introduction of the fiducia in 1999 formally enabled a non-possessory security interest to be taken over movables, which was particularly important to enable SMEs to use business assets to obtain finance, as they were unlikely to have available the real estate previously demanded by lenders as collateral. The introduction of a centralised registry for fiducia in 2013, and the subsequent development of an online registry, has clearly improved access to credit further. However, the law in Indonesia has still some severe shortcomings as identified in this chapter. First and foremost, the provisions on enforcement needs much more details and clarity to avoid inconsistencies and practical problems, which may well also lead to priority problems. These provisions need to be aligned with the civil procedural laws, as well as with the practice of enforcement related institutions to reduce the many practical difficulties which currently occur. Moreover, the recent constitutional court decision needs to be addressed to avoid further erosion of lenders, extra-judicial enforcement rights. Second, it is still very fragmented. This is demonstrated by the table in section IIA, which lists the different types of security interest available for each type of asset, and the variations in creation and perfection requirements. The discussion in III B contains more detail of this fragmentation and complexity, even in assets which can be the subject of fiducia: for example, a person taking security over shares in a company would have to check two registries.164 Fragmentation per se may not be a real issue if each of the pieces can still work together. Third, creation of a fiducia still involves considerable formal requirements, at least some of which could be seen as unnecessary and which certainly is not in compliance with the modern principles.165 Moreover, even if there is more law reform to address these problems, to unlock access to credit for the large number of micro, small and medium sized enterprises in Indonesia, more work on capacity building, education and the development of markets will need to be done. Perhaps more importantly, a lot more work needs to be done to create sufficient resources on

163 As of the time of writing, a petition against the constitutionality of hak tanggungan law has been lodged with the Constitutional Court as Case Number 21/PUU-XVIII/2020, citing the decision on fidusia as precedent. See Constitutional Court Press Release dated 12 May 2020 titled ‘Putusan MK Terkait Jaminan Fidusia Munculkan Gugatan Mengenai Hak Tanggungan atas Tanah’ accessible at https://mkri.id/public/content/infoumum/press/pdf/press_1244_12.5.20%20 Rilis%20Perkara%2021%20Tahun%202020%20-%20UU%20HT%20-%20I%20-%20RA.pdf. It is also accessible at Hukumonline.com as ‘Giliran Aturan Eksekusi hak Tanggungan Dipersoalkan di MK’ (14 May 2020) at https://www. hukumonline.com/berita/baca/lt5ebcf2ecb8a50/giliran-aturan-eksekusi-hak-tanggungan-dipersoalkan-di-mk/. 164 See III B (viii). 165 See II above; ch 2 II.

Secured Transactions Law Reform in Indonesia: Fiducia, at a Crossroads 171 conceptual as well as practical issues surrounding these security rights to be used as reference to ensure that the above effort is more informed. The government need also to consider a thorough review of its overall commercial and trade legal framework to ensure consistency and effectiveness, in order to ensure the most appropriate setting that work best with current market situation, by also considering international best practices.

172

9 Navigating the Patchwork of Secured Transactions Rules in Japan: Towards a Framework Conducive to Asset Based Lending MEGUMI HARA

I. Introduction This chapter analyses Japanese business credit in relation to security interests in goods ( especially inventory) and receivables.1 Since the nature of the security interest for these assets has largely developed through case law, it is especially challenging to understand its legal intricacies. In order to provide a better understanding, this chapter will first give an overview of the financing environment in Japan (part II), followed by an explanation of the fundamentals of the underlying legal framework for the security interest (part III). After that, this chapter will provide an analysis of creation (part IV), perfection and priority (part V), as well as enforcement issues (part VII). A separate section will discuss identification criteria for collateral (part VI), as this relates not only to creation and perfection issues but also to over-collateralisation. Lastly, this chapter will discuss recent developments in the Japanese version of the practice of Asset Based Lending (ABL), where the focus is on collateralisation of the whole business, but doing so by establishing separate security interests in inventory and receivables (part VIII). In practice, the use of ABL is scarce, but ABL has appeared time and time again in recent governmental policies2 as a means to facilitate financing.

1 In this chapter, goods signify tangible assets excluding immovables. 2 The following are examples where inventories and receivables are referred to in government policies: ‘Structural Reform and the Medium-Term Economic and Fiscal Perspectives: Amended Version in the Fiscal Year of 2003’ (Cabinet Decision, 19 January 2004) states ‘[r]ealizing security interest by using inventories etc (registration system for goods), without depending on real estates’; ‘Basic Policies for Economic and Fiscal Management and Structural Reform, 2006’ (Cabinet Decision, 7 July 2006) states: ‘Promoting the improvement of the environment for the appropriate collateral evaluation of inventory and accounts receivable, such as the development of the asset evaluation database, and at the same time keeping an eye on future business trends, on the premise of more advanced and strict evaluation of inventory and accounts receivable, further consideration will be made on elevating [such assets] to eligible collateral.’

174 Megumi Hara

II. Economic Overview and Financing Environment Before analysing the legal framework of security interests, it is worthwhile to briefly introduce the economic overview and the financing environment especially in relation to factors affecting the lending practice. Japan is the third largest economy in the world.3 Its industrial sector is highly diversified, as it manufactures products ranging from basic goods, such as steel, to high technology. Globally, Japan dominates sectors such as automobile, robotics, and biotechnology. It is also a home to some of the world’s largest manufacturers of electronic products. In terms of the service sector, major services in Japan include banking, insurance, transportation and telecommunications. The country also has seen a significant growth in tourism in recent years.4 99.7 per cent of all businesses are small and medium sized enterprises (SMEs) which employ 34 million persons, or approximately 70.1 per cent of the private sector labour force.5 Concerning the financing environment, Japanese companies have relied on indirect finance, where borrowers rely on financial institutions to get credit. This tendency is even more so for loans to SMEs, where banks are the source of finance, securing the repayment of loans with collateral or guarantees.6 However, the development of market-based financing that relies on receivables or inventory as collateral has been scarce.7 This can be explained based on the following three factors. First, traditionally, banks have relied on immovable assets and guarantees. A book published in 2015 shows that 51.9 per cent of companies received loans secured with immovable assets as collateral, while 44.6 per cent of companies’ loans depended on a public guarantee, and 23.5 per cent borrowed without any security.8 The book also estimated that use of account receivables and inventories as collateral are between 0.2 per cent and 0.1 per cent, to 3.3 per cent and 0.9 per cent, respectively.9 A noteworthy point is the predominance of the public guarantee system.10 An OECD survey observes that this state intervention is the reason why market-based financing does not flourish in Japan, noting: The government provides about 10 per cent of financing for SMEs, and its share rises to 20 per cent including guarantees, which are much higher than in other OECD countries. However, high public 3 The GDP in Japan was worth 5110 billion US dollars in 2019, according to official data from the World Bank and projections from Trading Economics. The GDP value of Japan represents 4.22% of the world economy. 4 GDP composition by industry is as follows: the primary sector of industry (agriculture, forestry and fisheries) represents 1.2% of GDP; the secondary sector of industry (mining, construction and manufacturing) represents 26.5% of GDP; and the tertiary sector of industry (retail, banking, transport, information and communication industry, service sector) represents 72.3% (Annual Report on National Accounts of 2019, citing 2017 statistics, esri.cao.go.jp/en/sna/menu.html). 5 OECD, ‘Financing SMEs and Entrepreneurs 2019: An OECD Scoreboard’ (OECD, 2019) 143, citing 2014 statistics, doi.org/10.1787/fin_sme_ent-2019-en. 6 For a further analysis of the Japanese characteristics of the financing environment in relation to the credit supplement system and how the credit supplementation system works in Japan, see M Dubovec and S Owada, ‘Secured Lending Stimulants: The Focus on Public Credit Guarantees in Japan’ (2021) Asian Law Review (forthcoming). 7 See CW Mooney, Jr, ‘Insolvency Law as Credit Enhancement and Enforcement Mechanism: A Closer Look at Global Modernization of Secured Transactions Laws’ (2018) 27 Norton Journal of Bankruptcy Law and Practice 673. 8 See A Ono et al, ‘A New Look at Bank–Firm Relationships and the Use of Collateral in Japan: Evidence from Teikoku Databank Data’ in T Watanabe, I Uesugi and A Ono (eds), The Economics of Interfirm Networks (Springer, 2015); see also ch 2. 9 The book gives the following explanation for the range in the numbers: ‘The percentages of firms that register account receivables and inventories as collateral are 3.3 and 0.9 per cent, respectively. However, assuming that firms for which the data entry is “N.A.” have not pledged these types of collateral, the percentages of firms pledging account receivables and inventories as collaterals decrease to 0.2 and 0.1 per cent.’ ibid (205). 10 The public guarantee system is as follows: local (generally on prefecture-bases) credit guarantee corporations (CGCs) serve as guarantors of private-sector bank loans taken out by SMEs. CGCs repay the loans on behalf of SMEs in the event of their default. The government provides a financial backup, in the form of reinsurance.

Navigating the Patchwork of Secured Transactions Rules in Japan 175 support for SMEs has negative side effects. First, it hinders the development of market-based financing. Second, generous government support delays restructuring by keeping non-viable enterprises (so-called ‘zombie’ firms) afloat (Caballero et al., 2008).11

Second, since the late 1990s, an extremely low interest rate environment has persisted in Japan.12 An obvious result of this is that the spreads between funding and lending rates have been compressed and the profitability for the banks is limited. The policy of low interest rates was implemented by the Bank of Japan to boost loan demand, which had been suppressed by the sluggish economy. Thus, the picture here is that the market is in fact a borrower’s market, enabling the borrowers to choose the lender to their advantage, causing severe competition between banks, leading to cases where borrowers get credit without collateral or personal guarantees. Third, policies implemented by the government concerning SMEs have leaned towards protection of SMEs and the measures facilitating their financing have been the driving force in policy decision making especially during the most recent depression. The Act Concerning Temporary Measures to Facilitate Financing for Small and Medium-Sized Enterprises, enacted 4 December 2009, and effective until 31 March 2013, is a prime example. The law stipulated that banks should make efforts to respond favourably in the event that SME loans need a modification, and financial institutions renegotiated loan terms and conditions with distressed borrowers almost in all cases.13 The significance of this law is that when it comes to enforcement of a security interest on default, the banks have little incentive to do so, which in turn has an ex ante effect of banks not attaching too much importance to security interests. All these tendencies in the financing environment lead to a peculiar situation in the availability of secured credit, the increase of which is the fundamental goal of a modern secured transactions law.14

III. Overview of Security Interests A. Types of Security Interests In this section, I will give descriptions of the basic types of security interests, grouping them into security interests that are governed by the Civil Code, and those that are left out of the Civil Code, which have developed through case law.

For information on the lending practice using the public guarantee system in Japan, see A Ono, I Uesugi and Y Yasuda, ‘Are Lending Relationships Beneficial or Harmful for Public Credit Guarantees? Evidence from Japan’s Emergency Credit Guarantee Program’ (2013) 9 Journal of Financial Stability 151. See also Dubovec and Owada (n 6). 11 OECD, ‘OECD Economic Surveys: Japan 2015’ (2015), www.oecd.org/eco/surveys/Japan-2015-overview.pdf#search= per cent27OECD+Economic+Surveys per cent3A+Japan+2015. 12 Bank of Japan, ‘Average Contract Interest Rates on Loans and Discounts’ (November 2017) (Short-term loans: 0.325%, city banks; 1.002%, regional banks; 1.298%, regional banks II; 1.955%, shinkin banks. Long-term loans: 0.965%, city banks; 0.888%, regional banks; 0.988%, regional banks II; 1.674%, shinkin banks), www.boj.or.jp/en/statistics/dl/ loan/yaku/yaku1711.pdf. 13 N Yamori, ‘The Effects of the Financing Facilitation Act after the Global Financial Crisis: Has the Easing of Repayment Conditions Revived Underperforming Firms?’ (2019) 12 Journal of Risk and Financial Management 63. 14 The financing environment will be touched upon further in part VIII, when I discuss asset-based lending in Japan.

176 Megumi Hara Table 1 Types of security interest

Relevant law

Collateral

Mortgage/Hypothec (teitoken)

Article 369 et seq, Civil Code

Immovable only

Pledge (shichiken)

Article 342 et seq, Civil Code

All types of assets (immovable, goods, receivables, IP)

Statutory Right of Retention (ryuchiken)

Article 295 et seq, Civil Code

All types of tangible assets (immovable and goods)

Statutory Lien (sakidori-tokken)

Article 303 et seq, Civil Code

All types of assets (immovable, goods, receivables. IP included for general lien)

*There are special laws that stipulate diverse types of statutory lien. Security Transfer of Ownership (Joto-tanpo)

No law on the nature of right, but a special law on registration has been enacted

All types of assets (immovable, goods, receivables, IP)

Retention of Ownership

No law on the nature of right

All types of tangible assets (immovable and goods)

There are special laws that permit mortgages: –– Goods: Agricultural goods (Agricultural Goods Credit Act, 1933), cars (Car Mortgage Act, 1951), aircraft (Aircraft Mortgage Act, 1953), ships (Commercial Code, Art 848), and construction machines (Construction Machine Act, 1954) –– All assets: Enterprises (Enterprise Mortgage Act, 1958) and estates (Factory Mortgage Act (1905), Railway Mortgage Act (1905), Mining Mortgage Act (1905) Small-Gauge Railway Mortgage Act (1909, Canal Act (which includes canal estate) (1913), Fishery Estate Act (1925), Harbour Transport Act (which includes harbour transport estate) (1951), Road Traffic Transportation Estate Act (1952), and Tourism Establishment Estate Act (1968))

(i) Security Interests in the Civil Code The creation, perfection and priority of mortgages, pledges, rights of retention, and liens are governed by the Civil Code. The enforcement of security interests is regulated under the Civil Execution Act. Mortgages and pledges are created by agreement, whereas rights of retention and liens are statutory security interests, arising only when the law recognises them. In this chapter, the focus will be on security interests over goods and receivables arising from agreement, which under the Civil Code, only applies to pledges, since mortgages only cover immovables. There is no space to give a description of all of these security interests, but I will just provide the four major attributes that are agreed upon and explained in Japanese text books as common characteristic of security interests under the Civil Code.15 They are: (1) preferential satisfaction, where in case of default by the debtor, the creditor has a preferential right to satisfaction; (2) dependence on the existence of a secured obligation, where security interests can only exist to the extent of an outstanding secured obligation; (3) accessoriness to the secured obligation, where

15 These characteristics apply to all security interests in the Civil Code with the exception of statutory rights of retention since there is no subrogation for this type of security interest. Recent textbooks which state these four characteristics of security interests are the following: H Dougauchi, Tanpo Bukken Hou [Security Interest Law], 4th edn (Yuhikaku, 2017) 9–10 (in Japanese); H Matsuoka, Tanpo Bukken Hou [Security Interest Law] (Nihonhyoronsha, 2017) 12 (in Japanese).

Navigating the Patchwork of Secured Transactions Rules in Japan 177 the security interest automatically follows when there is a transfer of the secured obligation; and (4) subrogation, where the creditor’s interest extends to proceeds that the grantor receives as a result of the sale, lease or loss of, or damage to, the object of security interest.

(ii) Security Interests Outside of the Civil Code (a) Joto-tanpo (Security Transfer of Ownership) Some important security interests are left out of the Civil Code. The most notable is the security transfer of ownership, joto-tanpo, that is not provided for in the Civil Code, but that is supported by case law and frequently used in practice. Joto-tanpo is used to secure obligations with goods and receivables. Taking goods for example, the grantor, who is the transferor, retains physical possession and use of the asset, but does so as an agent of the creditor (transferee), there being a constructive change of possession of the goods (fictitious delivery) that establishes the date of delivery and priority. Creditors often attach a plate on the goods to publicise the existence of the joto-tanpo. The plate is not a requirement of opposability, but it is an effective way to strike down the possibility of bona fide acquisition by a third party. There is also a registration system stipulated by a special law – the Act on Special Provisions of the Civil Code regarding Registration on Transfer of Goods and Receivables (Act on Registration) – that co-exists with the Civil Code methods of third-party effectiveness, which are delivery in the case of goods and notification of, or acknowledgement by, the account debtor in the case of receivables. As to the nature of joto-tanpo, the Supreme Court states the following: Joto-tanpo is a transfer of ownership for the purpose of securing obligations, but the effect of the transfer of ownership is to the extent necessary to achieve the purpose of securing obligations; [which means that] the secured creditor is only entitled to dispose of the asset in the event that the grantor defaults, and, with a price that has been evaluated to be just, the secured creditor can either acquire ownership to the object, or sell the object to a third party, resulting in preferential satisfaction of the secured obligation. On the other hand, the grantor, until the secured creditor has completed the disposal, is entitled to satisfy the secured obligation and redeem the object.16

This type of security is important in practice, since under the Civil Code, goods can only be the object of a security interest by way of a possessory pledge.17 There are two competing approaches to understanding the nature of the joto-tanpo. One is placing importance on form over substance. This approach considers that even if joto-tanpo is for the purpose of securing an obligation, it is still a veritable ownership transfer (formalisticapproach). It results in the grantor only having a personal claim against the creditor and no proprietary right to the object of security interest. The competing understanding is to look at substance over form. Under this approach, joto-tanpo is considered as security (functional approach), with the grantor having a proprietary right.18

16 Supreme Court decision of 28 September 1982 [1981 (O) No 1209] Hanrei Jihou No 1062, 81. The Supreme Court also recharacterises assignment with a repurchase option as joto-tanpo: ‘Even if the transaction takes the form of an assignment with a repurchase option, as long as there is no transfer of possession, repurchase option should be regarded as joto-tanpo unless the circumstances are exceptional’ (Supreme Court decision of 7 February 2006 [2005 (Ju) No 282] Minshu Vol 60, No 2, 480). 17 Generally, in the case of a pledge, the obligee will take possession, but for a hypothec/mortgage, a title-transferring security or a preliminary registration security, the person providing the security may continue to be in possession of the property. 18 The nature of such proprietary rights is disputed. Some characterise grantor’s right as ownership, while others create a proprietary right reserved to grantor (‘setteisha ryuho ken’). Dougauchi (n 15) 305–08.

178 Megumi Hara It is unclear which approach the Supreme Court takes. The Court considers, as stated above, that joto-tanpo is a ‘transfer of ownership’ to the creditor. It is generally understood that the Supreme Court, since it considers that there is a transfer of ownership, takes a formalistic approach. However, there have been applications by the Supreme Court of the functional approach on case-by-case bases. For example, there is a case in which the Supreme Court approved of a subordinate joto-tanpo,19 and another case where the Supreme Court approved of subrogation.20 These cases signify that the Court does consider the security right aspect rather than the ownership aspect, since in an absolute transfer of ownership the grantor would not retain any rights to create a subordinate joto-tanpo, and since ownership does not entail a right to subrogation, whereas a right to subrogation is a trait of a security interest. (b) Retention of Ownership Another important security interest recognised by case law and doctrines is the retention of ownership. There is not much discussion of the nature of retention of ownership, but generally, the two approaches of the joto-tanpo apply to retention of ownership as well.21 The creditor is the owner of the object but this ownership is restricted to the purpose of securing the obligation, while the debtor acquires an expectant right to receive ownership on full satisfaction of the obligation. Retention of ownership is widely used, such as for transactions involving payment by credit card or instalment sales, even though the statutory lien already protects sellers of goods (Civil Code, Article 311(5)). There are several reasons why retention of ownership is preferred. First, a statutory lien is cut off by a sale of the asset to a third party. Second, although in cases where the asset is sold to a third party, the creditor can still claim the proceeds by way of subrogation, the procedure of subrogation requires attachment of the proceeds – such as account receivables – before the third party pays to the grantor. Thirdly, in the case of statutory liens, which require judicial enforcement, the creditor is faced with difficulties in identifying the asset to enforce, especially when the contract is a continuous supply contract, since determining which asset in the hands of the grantor is in fact the asset that is the object of the statutory lien is difficult to prove. Retention of ownership permits extra-judicial enforcement. The normal procedure of such enforcement would be for the seller of goods to send a notification to the buyer informing him of the cancellation of the contract of sale and demanding the return of the goods. The seller has the obligation to return the surplus if the value of the goods exceeds the amount of the secured obligation. There is no need for registration or any other method in order for retention of ownership, or a statutory lien on goods, to become effective against third parties. (c) Finance Lease The finance lease also plays an important role in providing credit in Japan.22 There is no provision on finance leases in the Civil Code, but the general provisions on leases also apply to

19 Supreme Court decision of 20 July 2006 [2005 (Ju) No 948] Minshu Vol 60, No 6, 2499. 20 Supreme Court decision of 17 May 1999 [1999 (K) No 2] Minshu Vol 53, No 5, 863. 21 Dougauchi (n 15) 367. 22 In 2017, leasing volumes were approximately JPY 4.87 trillion, a 2.9% decrease from 2016. Leasing volumes to SMEs (capital of 100 million yen or less and sole proprietorships), which accounts for over 50% of the lease, increased by 0.2% from the previous year. Figures indicated are surveyed by Japan Leasing Association at www.leasing.or.jp/english/ statistics/cat/2018.html.

Navigating the Patchwork of Secured Transactions Rules in Japan 179 finance leases. Recently, Japan reformed its obligational law in the Civil Code, which is effective from 1st April 2020. One of the agenda items during the deliberation of the reform was to recognise the finance lease as an independent type of contract which has hybrid characteristics of a lease and a tool for granting credit. However, ultimately, this was dropped. Unique characteristics of a finance lease that differentiate it from an operating lease have been recognised by the Supreme Court.23 First, the Court recognised that a lease payment for a finance lease is not a payment for the use of the object for a certain period (as it is for an operating lease), but rather, it is a repayment of a loan. Second, the lessee’s payment obligation continues regardless of early termination. Upon return of the goods as a result of such early termination, the lessor has an obligation to return any surplus to the lessee. The Court held that in this case, the surplus to be paid by the lessor was the difference between the value of the goods at the point of early termination and their value at the time that the contract would have ended as originally stipulated by the parties. (d) Special Laws In addition to these interests, various special laws exist including the Enterprise Mortgage Act (kigyo-tanpo hou) which enables the entire undertaking of a corporation to be used as collateral, and laws on mortgage for estates (Zaidan teito hou). These will be discussed further in the following section. One must also keep in mind that the following goods are governed by respective special laws under which they may be mortgaged: Agricultural goods under the Agricultural Goods Credit Act (1933), cars under the Car Mortgage Act (1951), aircraft under the Aircraft Mortgage Act (1953), ships under the Commercial Code, Article 848, and construction machines under the Construction Machine Act (1954). There are separate registries for each of these goods. Security rights in intellectual property (IP) may also be governed by different laws and security devices, including the pledge of IP rights that is governed by the respective laws on IP rights.24 The registrations of security interest on IPs are under the respective IP registries.

B. All Assets as Collateral under Special Laws An all asset type of security interest is only recognised under special laws on mortgage and the Enterprise Mortgage Act. As further explained below, in order to create an effective security interest, the creditor must meet the strict requirement of identification of the collateral.25 Special laws on mortgages provide for two types of mortgage: i) the factory mortgage and ii) the estate mortgage. The latter includes factory estate, railway estate, mining estate, small-gauge railway estate, canal estate, fishery estate, harbour transport estate, road traffic transportation estate, and tourism establishment estate mortgages. All of the estate mortgages are governed by their respective special laws, with the exception of the factory mortgage and the factory estate mortgage, which are both regulated by the Factory Mortgage Act. Factory mortgages and estate mortgages derive from the German system, with immovable property being the main collateral and its ‘accessories’ included in the mortgage as constituting a 23 Supreme Court decision of 19 October 1982 [1980 (O) No 1061] Minshu Vol 36, No 10, 2130. 24 Joto-tanpo on IP rights is also used in practice. They are registered as true transfer of IP rights. For security interests on IP, see M Hara and Y Haga, ‘Security Rights in Intellectual Property in Japan’ in E-M Kieninger (ed), Security Rights in Intellectual Property, Ius Comparatum Global Studies in Comparative Law 45 (Springer, 2020) 469. 25 The requirement for creation will be explained in part IV.

180 Megumi Hara single unit of immovable property. These mortgages were first recognised in 1905 by the Factory Mortgage Act, the Railway Mortgage Act, and the Mining Mortgage Act. All these three types of mortgages were important for getting credit after the Russo‐Japanese War (1904–1905). Subsequently, the types of estate mortgages expanded with the Small-Gauge Railway Mortgage Act (1909), the Canal Act (which includes canal estate) (1913), the Fishery Estate Act (1925), the Harbour Transport Act (which includes harbour transport estate) (1951), the Road Traffic Transportation Estate Act (1952), and the Tourism Establishment Estate Act (1968). The difference between the factory mortgage and estate mortgage is in the scope of the collateral. The factory mortgage is only limited to immovables and movables that are physically attached to an immovable (and does not cover a lease, inventory nor receivables), whereas the estate mortgage covers a wider range of objects as explained below. The registration requirement of the factory mortgage is easier to comply with since it is registered in the immovables registry and it does not require registration in a separate registry as the estate mortgages do. Estate mortgages cover additional assets such as industrial property rights, leases, movables that are used for the benefit of the estate as vehicles for transportation of goods, and other assets that are not necessarily attached to the factory. However, inventory and receivables are not included in these mortgages. Out of the nine types of estate mortgages listed above, the factory estate mortgage is currently used the most. One of the problems of estate mortgages is that they require all of the assets consisting of the estate to be listed specifically in the estate mortgage registration. When mortgaged assets change, an amendment to the registration must also be made. Thus, the registration is time consuming, with the necessity to monitor the movement of the assets in order to maintain the effectiveness of the mortgage. Under the Enterprise Mortgage Act (enacted in 1958), which was influenced by the English floating charge, the entirety of the enterprise’s assets is taken as collateral, including the inventory, receivables and any type of intellectual property. It was enacted to address the costly and complex system of estate mortgages where the listing of all assets of the company was impracticable, especially when the size of the company grew larger. However, the Act only applies in very limited cases where a bond is issued, the repayment of which is secured by the enterprise mortgage (Article 1). The Act is basically directed at very large and highly creditworthy stock companies. The enterprise mortgage is registered in the companies registry. However, they are only used as additional credit support. One of the reasons is that enterprise mortgages are subordinate to other security rights, including statutory liens, pledges, and mortgages. There is not much merit in using this type of a security interest, since for companies with such creditworthiness; they will be financed without any collateral anyway. Naturally, the numbers of registrations under the Enterprise Mortgage Act indicate that this law is not seen as a useful tool for financing. The peak was in the latter half of the 1960s with around 250 per year. However, after that, the numbers began to decrease, finally reaching zero in the late 1990s and the situation remains the same in 2019.26 As they are not used in practice, this chapter does not deal with these security interests. The focus will be on the pledge and joto-tanpo of goods and receivables.

IV. Creation Creation of security interests in goods and receivables under Japanese Law is aligned with the UNCITRAL Model Law in the sense that it requires a security agreement. However, unlike the

26 Editorial,

‘Status of Examination of Enterprise Mortgage Law’ [2007] No 1792 Kinyu-houmu-jijyo 8 (in Japanese).

Navigating the Patchwork of Secured Transactions Rules in Japan 181 Model Law, it does not necessarily need to be in writing. Furthermore, under Japanese law, there is no provision setting out the minimal requirements for a security agreement corresponding to Article 6 of the Model Law. Validity of the security agreement is governed by general contract law, and would require certainty of content, which applies to the secured obligation and the security interest.

A. Goods Including Inventory (i) Goods A pledge of goods is created by an agreement between the creditor and the owner of the goods, and delivery of the asset. The delivery includes actual transfer of possession as well as what is called the ‘summary delivery’ (a situation where the creditor already holds possession of the asset and indicates the intention that from then on, it will possess the asset as an object of pledge; Article 182), or delivery by instruction (where a third party such as a warehouse possesses the asset and the grantor instructs this third party to hold the asset for the pledgee; Article 184). However, fictitious delivery, explained in part III A (ii) (a) above, where the grantor keeps the possession, is excluded as a method of delivery for the creation of a pledge. Joto-tanpo for goods is created and granted by an agreement only. Parties can prepare a granting document in the form of a notary deed for enforcement purposes because a notary deed which includes a clause that authorises the creditor to proceed with compulsory execution proceedings when the grantor defaults, is one type of proof of obligation that is accepted by an execution court. With this proof, in the event that the grantor does not cooperate with enforcement, the creditors can rely on compulsory execution proceedings by the court, without first disputing in court the validity of the granting arrangement under the contract.

(ii) Inventory Theoretically, using inventory as collateral is problematic. Since inventory is constantly in a state of flux, it is treated as a bundle of things, an ‘aggregate’, and the ownership of this ‘aggregate’ is transferred to the creditor under joto-tanpo. The utility of the ‘aggregate’ is still debated, but the Supreme Court has recognised joto-tanpo on an aggregate, the collective goods, thereby recognising the concept.27 Since then, the courts have maintained this position: ‘Collective goods that constantly change their element is considered to become an object of security as a single aggregate, if such aggregate is identified by such criteria as kind, place and quantitative range’.28 The general understanding by doctrine is that when joto-tanpo is created over an aggregate, this joto-tanpo also creates a security interest against individual goods that constitute this aggregate.29 There are three things to keep in mind. First, an aggregate is a legal fiction and by nature, a technical notion that is considered to be an intangible asset. The problem of recognising an ‘aggregate’ is acute when considering that the premises of ownership under the Civil Code is

27 Supreme Court decision of 15 February 1979 [1979 (O) No 925] Minshu Vol 33, No 1, 51. 28 ibid. 29 This structure whereby both the aggregate and the individual goods that constitute this aggregate is the object of joto-tanpo is called ‘double attribution’. There is objection to this general understanding which views joto-tanpo in an aggregate as a security interest in the aggregate and not in the individual assets: Dougauchi (n 15) 337.

182 Megumi Hara limited to tangible things, and intangible things cannot be object of ownership.30 Since joto-tanpo is structured as a transfer of ownership, such dogmatic limitation of the object of ownership applies to joto-tanpo as well. Second, the utility of this notion is established by permitting the ‘fictitious delivery’ of the existing ‘aggregate’, and it is the ‘aggregate’ itself and not the individual goods constituting the inventory over joto-tanpo is perfected. This fictitious delivery, since there is no actual delivery, is also another fiction. Only by such recognition of double fiction, is the notion of aggregate useful. The notion of aggregate only finds its applicability in the case of joto-tanpo. Third, the aggregate must meet the strict identification criteria of collateral. The Supreme Court was very clear on the fact that it requires the aggregate to be identified by ‘kind, place and quantitative range’. This strict identification criteria stems from the theoretical premises that in order to have ownership, or any other proprietary rights, the object must have certainty (identification criteria will be further explored in part IV). In such cases that the joto-tanpo is established on inventory, the Supreme Court recognises that the grantor has the power of disposal with respect to individual goods in the inventory in the ordinary course of business. The Court states the following: With respect to a joto-tanpo established on a set of movables [goods], where the components are expected to change, it is anticipated as a matter of fact that the contents of the set of movables will change in the course of the grantor’s business activities, and therefore it is appropriate to construe that the grantor is authorised to dispose of the encumbered goods within the bounds of his/her ordinary business, and the transferee can acquire the ownership of the movables thus disposed of, without being restricted by joto-tanpo.

B. Receivables (i) Future Receivables Receivables can also be either pledged or assigned, either outright or for the purpose of joto-tanpo. In terms of security interests over receivables, there is no difference between using the form of a pledge or an assignment for the purpose of joto-tanpo.31 A number of Supreme Court cases have developed the law in the context of an assignment (mainly as joto-tanpo) rather than a pledge. Thus, I will hereafter refer to the assignment, but the same rules apply to the pledge. Future receivables can be assigned as well. The Supreme Court recognised the validity of assignment of future receivable on the bases that the receivables are sufficiently described in the security agreement: In a contract of the assignment of receivables, it goes without saying that the receivables which are to be assigned should be specified by the cause that generated the receivable and the amount to be assigned; in case of assignment of receivables which are to arise within a certain period in the future, or receivables which are to be due in the future, these receivables should be described by making clear the beginning and the ending of the period of assignment in an appropriate manner. 30 Civil Code, Art 85: ‘The term “Things” as used in this Code shall mean tangible thing.’ 31 In terms of third-party effectiveness, rules on assignment apply for both pledge (Art 364) and assignment for the purpose of joto-tanpo. In terms of enforcement, a pledge of receivables allows the creditor to directly demand payment from the account debtor (Art 366), which is the same for assignment. Thus, there is no reasonable ground for using joto-tanpo for receivables (which is not regulated by any written law) when the Civil Code provides for pledge of receivables. Even so, in practice, joto-tanpo is widely used. The preference for using the form of joto-tanpo, as an author says, can only be explained by the fact that creditors have psychological satisfaction from formalistically ‘owning’ the receivable by joto-tanpo rather than just having it as object of a security interest (Dougauchi (n 15) 350).

Navigating the Patchwork of Secured Transactions Rules in Japan 183 The second instance court has ruled that a contract of assignment of receivables for the fees for providing medical treatment should be regarded as valid, insofar as it can be expected with certainty that a reasonable amount of receivable is generated and so the receivables cannot be for the too distant future. However, in a contract of assignment of receivables which are to be generated in the future, parties are expected to conclude such a contract by considering the cause that the receivables are generated, calculate the possibility of the emergence of the receivables under the circumstances, and intend to cover the loss which the assignee may incur by pursuing the contractual liability of the assignor. Therefore, it is reasonable to conclude that the fact that the possibility of the emergence of the receivables was low at the time of the conclusion of the contract does not necessarily affect the validity of the above contract.32

Prior to this judgment, lower courts considered the possibility of emergence of the receivables as a requirement for the validity of assignment of future receivables, causing the court to rule that the validity of assignment of future receivables was limited to one year.33 However, the Supreme Court concluded that such a requirement of certainty was unnecessary in determining the validity of assignment of receivables. Since then, the courts have maintained this position. As mentioned before, Japan recently reformed its obligational law in the Civil Code (effective from 1st April 2020). A new article was inserted to reflect the case law and to explicitly state that future receivables can be assigned: ‘Assignment of receivables does not require the receivables to exist at the moment when intention to assign is expressed’ (Article 466-6(1)).

(ii) Identification of Receivables In order to have an effective agreement for the assignment of receivables, the receivables need to be identified.34 The Supreme Court has ruled that: [I]t is sufficient if receivables to be assigned are specified, at the time of fulfilling the promise, to the extent that they can be distinguished from other receivables held by the assignor. This reasoning also applies to future receivables. Receivables to be assigned are limited to those arising from sales transactions in respect of particular goods, and their creditor and debtors are specified. Therefore, they can be deemed to be identified to the extent that they can be distinguished from other receivables … the fact that the amount of receivables was not determined at the time when the Promise was made does not affect its validity.35

In this judgment, the identity of the creditor and account debtor, and the contract from which the receivables arise are the elements to sufficiently identify the assigned receivable. In a different case,36 the Supreme Court ruled that ‘cause of their emergence and the amount to be assigned’ identifies the receivables. As these judgments show, there is no set of mandatory elements necessary for identification, but rather, a combination of some of these elements will suffice. Thus, the elements for specification could differ case-by-case. The importance is that they are ‘distinguished from other receivables held by the assignor’.

32 Supreme Court decision of 29 January 1999 [1997 (O) No 219] Minshu Vol 53, No 2, 1. 33 Eg Tokyo District Court decision of 16 June 1986 [1983 (Wa) No 6979; 1984 (Wa) No 1571] Sogetsu Vol 32, No 12, 898. 34 See VI C for over-collateralisation. 35 Supreme Court decision of 21 April 2000 [1996 (O) No 1049] Minshu Vol 54, No 4, 1562. 36 Supreme Court decision of 29 January 1999 [1997 (O) No 219] Minshu Vol 53, No 2, 1.

184 Megumi Hara

(iii) Anti-assignment Clause There has been an interesting turn of events concerning anti-assignment clauses. Before the reform of the obligational law mentioned above, when there was a clause in an agreement between the grantor and the account debtor (referred to as the debtor of the receivable in the UNCITRAL Model Law) prohibiting pledge or assignment of receivables, any pledge or assignment was considered invalid, meaning that the anti-assignment clause had proprietary effect. There were three exceptions to this rule: (i) if the pledgee/assignee was unaware of the prohibition agreement and was not grossly negligent, the pledge/assignment was valid; (ii) if the account debtor consented to the pledge/assignment, even if the contract contained a non-assignment clause, then the pledge/assignment became valid retroactively from the time of the pledge/assignment (to the extent not negatively affecting the interest of a third party); and (iii) an anti-assignment clause does not bind judgement creditors,37 and so judgment creditors are able to attach the receivable. The following example illustrates how, pre-reform, the competition between an assignee and a judgement creditor for priority to collect the same receivable would be resolved: [case 1] Assignor X assigned a receivable to Y, who has knowledge of the anti-assignment clause or is grossly negligent. Notification of assignment with fixed date38 is sent to account debtor G. After notification, judgement creditor Z, who is the creditor of X, attaches the receivable. [case 2] After the attachment by Z, in [case 1], G consents to the assignment made to Y.

In [case 1], the result is that Z has priority. This is because the assignment to Y is invalid due to the knowledge of the anti-assignment clause or gross negligence. The assignment and its notification has no legal effect since the assignment itself is void. In [case 2], Z’s attachment also prevails because the retroactive effect of consent to an invalid act cannot prejudice the third party,39 in this case the judgment creditor. In both cases, the result is that the judgement creditor, who is second in time, prevails. This result has been disputed in academia.40 Furthermore, it was contrary to the policy of facilitating financing which led to the reform of the law. Post-reform, despite the validity of the anti-assignment clause as between the assignor and the account debtor, the receivable can be legally assigned, which is a reversal from the proprietary effect of the anti-assignment clause. However, similar to the position pre-reform, upon assignment of a receivable subject to an anti-assignment clause, the account debtor has the right to invoke the anti-assignment clause against the assignee only when the assignee has knowledge of the clause or acts with gross negligence at the time of assignment.41 So post-reform, if the assignee had knowledge of the anti-assignment clause, the assignment is still effective but the account debtor can invoke his right and refuse to pay to the assignee.

37 Supreme Court decision of 10 April 1970 [1967 (O) No 1462] Minshu Vol 24, No 4, 240. 38 The perfection and priority rules as well as what fixed date means will be explained in V below. 39 Supreme Court decision of 5 June 1997 [1993 (O) 1164] Minshu Vol 51 No 5, 2053 states: ‘Even where a person has received the assignment of a nominative claim with a clause not to assign, knowing the clause or without knowing it due to gross negligence, if the account debtor has subsequently given consent to assign, the assignment of the claim shall be effective retroactively as of the time of assignment. However, in light of the purport of art 116 of the Civil Code, it is appropriate to construe that no right of a third party may be prejudiced by such assignment.’ 40 Here are some of the reasons why this conclusion received support. One, this was a natural result of an anti-assignment clause having proprietary effect. The assignment is null. Two, a more substantive reasoning, since every party involved was aware of the fact that anti-assignment clause has proprietary effect and that one needs to attach the receivables, one was encouraged to act accordingly. The assignee Y had discarded this rule, and so he loses. 41 When there is order of Commencement of Bankruptcy Proceedings for the assigner, the assignee can demand that the account debtor deposit the payment to the deposit office (Art 466-2).

Navigating the Patchwork of Secured Transactions Rules in Japan 185 When the account debtor has the right to invoke the anti-assignment clause against the assignee, and it defaults, it is only the assignor who can demand, judicially or extra-judicially, for payment from the account debtor. However, there is no incentive for the assignor to make this demand when there is no benefit for him. Thus, there will be a deadlock where the assignee cannot get paid and he cannot even demand for payment. To prevent such a situation from occurring when the account debtor defaults, once the account debtor has defaulted, the law created a right for the assignee to notify the account debtor that he should pay the assignor within a certain time specified by the assignee. If the account debtor fails to comply with this notification, the account debtor loses the right to invoke the anti-assignment clause against the assignee (Article 466, paragraph 4). For judgement creditors, the same rule as pre-reform continues to apply, so they are able to attach the receivables notwithstanding the anti-assignment clause (Article 466-4). Under the new law, in both cases 1 and 2, the assignee Y will prevail. This is because the competition is to be determined solely by the rules of priority since both the assignment and attachment have legal effect.42 In this case, Y perfected its rights as to the receivable by notification, thus the second-in-time Z has nothing to attach since the assignor no longer has any rights in the receivable. For case 1, G has the right to invoke the existence of anti-assignment clause and pay to X. X will have to remit the collection to Y. For case 2, G will simply pay to Y. Another important feature of the new law is the exception for receivables in the form of rights to payment of funds credited to a bank account. The new law provides that for such receivables, the rule on validity of anti-assignment clause does not apply (Article 466-5). The intention of the legislature was to preserve the application of the pre-reform rule, making the assignment of these types of receivables subject to an anti-assignment clause invalid.43 There are three reasons for this approach. First, inserting anti-assignment clauses for these types of receivables is a common practice that is widely known, and there is a consensus on existence of proprietary effect of anti-assignment clause. Second, financial institutions rely on the proprietary effect of antiassignment clauses. If such an assignment is recognised as valid, they would be put in a position to determine which amount is to be paid to the assignee and which to the assignor. This would be especially difficult where the balance fluctuates. Three, there is no real need to secure receivables credited to a bank account to get financed since by withdrawing money from the account, one can easily get the necessary funds. Some reasons are questionable, but the common feature is that these reasons are given from the point of view of enhancing protection for the account debtor, which is the financial institution. This is in contradiction to the UNCITRAL Model Law provision Article 15, where even if there was an agreement between the grantor and the financial institution prohibiting the creation of a security right, a security interest can still be created. The second reason stated above for granting an exception to financial institutions could have been circumvented with such protection as provided in Article 69 of the Model Law, where creation of a security right does not affect the rights and obligations of the financial institution. However, Japan did not take the same route. The problem then is, what would be the result of [case 1] and [case 2]? The natural conclusion would be that the result of the pre-reform law would apply. However, if the sole reason for creating an exception for receivables in the form of rights to payment of funds credited to a bank account was for the protection of financial institutions, it is illogical that the judgment creditor’s attachment prevails over the first-in-time assignee. This is profound especially in [case 2] where 42 Priority rule is explained in V below. 43 T Tsutsui and H Muramatsu, Ichimonittou: Minpou (Saikenkankei) Kaisei [Question and Answer: Civil Code (Obligation-Related) Reform] (Shoujihoumu, 2018) 172–73 (in Japanese).

186 Megumi Hara the account debtor, who is the one supposedly being protected by the anti-assignment clause, has actually consented to the assignment. There is a recent but pre-reform Supreme Court case that ruled that the assignor himself could not invoke an anti-assignment clause that was attached to receivables from a construction price because there was no justifiable interest to do so.44 Considering the proprietary effect of an anti-assignment clause, the assignment is void, and so theoretically, anyone can invoke nullity of assignment. Instead, here, the Court limited the persons who can invoke such nullity. The Court stated the following: The assignor assigned the receivables in breach of the agreement not to assign, and the account debtor, without claiming that the assignment was invalid due to anti-assignment clause, deposited the payment to the deposit office, on the grounds that he was unable to ascertain who the account creditor is. Consequently, the assignor has no interest in alleging the invalidity of the assignment on the grounds of the existence of the agreement not to assign, and since we cannot find any special circumstances, we must conclude that it is impermissible for the assignor to allege such invalidity.

By this logic, unless there is justifiable interest for the person invoking the nullity of assignment, one cannot do so. Considering the competition between the first-in-time assignee and the judgement creditor as in the cases above, the Court might consider in future that there is no justifiable interest for the judgement creditor to claim the invalidity of assignment. If the judgement creditor cannot claim this invalidity, in cases 1 and 2, he will not be able to justify his attachment, since there was prior assignment to Y. This means that the result of both cases would be that Y, the first in time assignee prevails. All in all, apart from in relation to receivables credited to bank accounts, the new law, although falling short of the modern principles, moves in the direction of the modern principles enshrined in Article 13 of the UNCITRAL Model Law. However, two other issues are expected to hamper the financing of receivables. First, since the anti-assignment clause is still considered to be legally valid, grantors assigning receivables can be liable for breach of contract leading to conflicts with their customers, the account debtors.45 If the cancellation of the contract is admitted, then, there is no article like Article 64, paragraph 2 of the Model Law that explicitly prohibits the account debtor to rise this defence against the assignee, which means that under Japanese law, such defence will qualify as a defence that may be raised by the account debtor against the assignee, provided for in Article 466 of the Civil Code. 44 Supreme Court decision of 27 March 2009 [2007 (Ju) No 1280] Minshu Vol 63, No 3, 449. 45 The government has been exceptionally vocal in trying to prevent such result. For example, ‘Third Report by the Council for Promotion of Regulatory Reform – For New Era to Come’ (4 June 2018), https://www8.cao.go.jp/kiseikaikaku/english/pdf/180604/toshin3.pdf issued by the Council for Regulatory Reform (established in 2013) that serves as an advisory body to the Prime Minister for deliberating regulatory reforms, mentions the following (English Version, p 92): ‘In the revision of claim-related provisions in Civil Code (Act No 89 of 1896) scheduled to take effect in spring 2020 (hereinafter referred to as the “Revised Law of Obligations”), provisions that have been pointed out as hindering the financing of SMEs by means such as using their accounts receivables will be revised. Under the revision, claims will be allowed to be assigned even in cases where a special agreement restricting the assignment of a claim (hereinafter referred to as the “Special Restriction on Claim Assignment”) has been concluded between the parties concerned (the obligee and the obligor in a contract that generates a claim) and validity of the obligor to fix the destination to perform his/her obligations will remain. However, assigning a claim imposed with the Special Restriction on Claim Assignment can result in hindering the financing efforts of SMEs by means of assigning claims due to the risks, such as having their contract being terminated because of violating such agreement with the obligor and being excluded from future business transactions. Therefore, government interpretations including the following contents concerning the assignment of claims shall be widely disseminated to the public through economic, industry and other relevant organisations based on the purpose of the Revised Law of Obligations which aims to facilitate the financing of SMEs. • The validity of the assignment of claims shall not be hindered even if the Special Restriction on Claim Assignment is attached. • Assignment of claims conducted, at least for financing purposes, shall not cause contract termination or damage compensation. Furthermore, it is extremely unreasonable to terminate a contract or cut off business relationships based on the assignment of claims conducted, which can be considered abuse of rights.’

Navigating the Patchwork of Secured Transactions Rules in Japan 187 There are academic opinions which suggest restricting the cancellation of the contract, such as the claim that such cancellation, depending on the circumstances, may constitute an abuse of power, or the claim that a breach of an anti-assignment clause does not constitute the requirement of a grave breach of duty that is required for cancellation under Article 541.46 Second, the scope of set-off has widened under the new law, enabling set-off of receivables that arose out of a contract that existed before the perfection of the assignment. This applies even when a receivable came into existence after the assignment and perfection. Timing wise, even after the account debtor receives notification of assignment, the account debtor may assert its set-off claim (Article 469). Although the scope and timing of set-off coincides with the Model Law, Article 64, paragraph 1, industry practitioners nevertheless raise this as a hindrance to the development of ABL,47 because pre-reform, the Supreme Court was unclear on its position and the favoured position of the doctrine considered that the scope of set-off was limited to instances where the due date of the account debtor’s receivable was before the due date of the grantor’s receivable.48

V. Perfection and Priority The perfection or third-party effectiveness rules are divided into two categories: i) the Civil Code method which does not require publication and ii) registration under the Act on Registration. The parties can choose which method to use. The two methods have equal standing concerning priority. The rule is that the first in time prevails, regardless of the method used. Especially for goods, which will be further explained below, the Civil Code method is not publicised and so parties are exposed to a danger that there might be unknown prior security interests. This unclear priority rule is far from the modern principles where transparent priority rules, decided in principle by registration, are key.

A. Perfection Method under the Civil Code The Civil Code method of perfection entails the following. For joto-tanpo of goods, perfection is by delivery (including the fictitious delivery described in part III A (ii) (a) above). For pledges of goods, delivery is a requirement for creation of a security interest, and continuous possession is required to maintain perfection. For joto-tanpo or pledge of receivables, perfection is achieved by notification by the assignor to the account debtor or acknowledgement by account debtor ‘made using an instrument bearing a fixed date’ (Article 467 (assignment in general), Article 364 (for pledge)). In practice, an ‘instrument bearing a fixed date’ is usually either a notification sent as certified mail, or a notification with a stamp from a notary. The priority in case of double assignment is decided on the basis of which notification with fixed date is received first (or in case of acknowledgement of account debtor, which acknowledgement is made first), it is not the date of the instrument bearing a fixed date. 46 H Nakaya et al, Kougi: Saikenhou-kaisei [Lecture: Reform of Obligational Law] (Shoujihoumu, 2017) 221–22 (in Japanese). 47 T Iizuka, ‘Saiken-jyouto Housei no Kaisei to Tousanhou’[‘Reform of Assignment of Receivables and Insolvency Law’] [2014] No 1990 Kinyu-houmu-jijyo 12; M Ikeda, ‘Jotoseigen-tokuyaku/Saikenjyouto to Sousai’[‘Anti-assignment Clause, Assignment of Receivables and Set-off ’] (2016) 21(795) Ginkouhoumu 24 (in Japanese). 48 Supreme Court decision of 8 December 1975, [1969(O) No 655] Minshu Vol 29, No 11, 1864; Y Shiomi, Saikensouron [General Provisions of Obligational Law], 3rd edn (Shinzansha, 2005) 628 (in Japanese).

188 Megumi Hara A distinction is made between perfection (effectiveness against third parties) and effectiveness against the account debtor. Under the Civil Code, to assert the assignment against the account debtor, simple notification without a fixed date suffices, whereas to assert the assignment against third parties, one needs to have a notification with a fixed date. This distinction is not so significant in a case where notification is made with a fixed date, because one notification complies with effectiveness against both the account debtor and the third parties. However, this distinction is important when dealing with perfection by registration, as a separate procedure is needed for effectiveness against the account debtor, as explained in the following section.

B. Perfection Method under the Act on Registration The Act on Registration provides for a public-notice registration system for assignments (both outright and for purposes of security) of goods and receivables, and pledges of receivables. The registration only produces a legal effect when the assignee is a corporation. For assignment of receivables, the registration achieves only third party effectiveness and it does not have any legal effect against the account debtor. When using registration as the perfection method, in order to assert an assignment against the account debtor, one must notify the account debtor with the ‘Certificate of Registered Matters’ (Act on Registration, Article 4(2)). This certificate is issued to interested parties such as assignors and assignees. It certifies information such as identification of the assignor and assignee, registration number, date and cause of registry, amount and description of the receivables. Registration co-exists with the methods of assignment that are effective against third parties under the Civil Code without registration.49 Therefore, the existing rule is that, when a corporation is the grantor, the assignment can either be registered under the Act on Registration, or alternatively, be perfected by possession or notice (acknowledgement) with fixed date. Both the Civil Code method and the registration method have equal standing, so priority is decided on the first-in-time, first-in-right basis.50 This also means that even if a creditor searches the registry and finds no prior registration of an assignment, and so registers its own assignment, this creditor would be subordinate to an earlier assignment made effective under the Civil Code. Registration is only accepted at one bureau. This is the Legal Affairs Bureau Office in the Nakano Ward of Tokyo. It has electronic capabilities, as filing and application for a certificate of registration are available online. Generic description of the collateral is not allowed. This will be further explained in part VI below. The registration fee is 7,500 yen per registration. For bulk assignments of receivables, if the number of receivables is more than 5,000, the registration fee is 15,000 yen. Bulk assignments occur when at the time of conclusion of a security agreement, the receivables are not individually specified, but they can still be identified by elements such as the cause that generates the receivables, the period within which the receivables will be generated, their amount, and/or the identity of the account debtor.51 The period of effectiveness of the registration is 10 years. Both parties must apply for registration. In practice, it is normally someone mandated by the parties, such as the judicial scrivener, who applies for a registration.

49 Civil Code Art 183: ‘If an agent manifests an intention that the thing possessed by it shall thenceforward be possessed on behalf of its principal, the principal shall thereby acquire possessory rights.’ 50 In case there is a double assignment with one receivable perfected by registration and the other receivable perfected with the Civil Code method of notice, priority will be decided based on the date of registration and the date when the notice with fixed date was received by account debtor, whichever is earlier. 51 For more detail, see VI below.

Navigating the Patchwork of Secured Transactions Rules in Japan 189 This requirement of joint application also applies to renewal of registration before its expiration. The registry record can be searched by the name of grantor. In practice, especially for goods and inventory, what generally happens is that the creditor who registers will also perfect by the Civil Code method of fictitious delivery. Fictitious delivery only requires the parties to indicate the fictitious delivery in the security agreement. For example, the model agreement form published by the Ministry of Economy, Trade and Industry stipulates the following (Article 3: Delivery):52 1.

The Grantor has completed the delivery of the Collateral on the day of the conclusion of this Agreement, by fictitious delivery. 2. The Grantor and the Creditor agree that Collateral which is to be brought to the Place in future shall be considered delivered by method of fictitious delivery as long as the Grantor has actual possession. When a natural person is the grantor, only the Civil Code method is available. For example, joto-tanpo of goods is perfected by fictitious delivery.53

C. Relationship with Bona Fide Acquisition Even if the creditor has met the requirement for perfection, there is still a risk that a buyer will acquire full and unencumbered ownership of the asset, if this buyer or other transferee meets the requirement of bona fide acquisition. A third party may cut off the security right when it acquires the asset in the ordinary course of business, ie, when it is held as inventory, but also when the acquisition occurs outside the ordinary course of business. This sub-section focuses on the latter type of acquisition. For bona fide acquisition to occur, the buyer must be in good faith and without negligence (Article 192). Even if the security interest (joto-tanpo) was registered, and the buyer did not search, this would not automatically constitute fault of the buyer, since registration is not a requirement for all transfer of goods, and it is not considered as a common occurrence that would necessitate the buyer to search. However, there are academic views according to which, depending on the nature of the object or the characteristics of the buyer (for example, if the buyer was financial institution), not conducting a search may result in fault that disqualifies the buyer from making a bona fide acquisition.54

VI. Identification Issues and Over-collateralisation A. Identification of Goods in a Registration Under the Act on Registration, registrations must describe the collateral by one of two methods: i) by the kind of asset (such as ‘MRI machine’) and its serial number or equivalent, or ii) by kind

52 Ministry of Economy, Trade and Industry, ‘Shugo-Dousan-Joto-Tanpo-Settei-keiyakusho’ (‘Agreement on Joto-Tanpo of Aggregate of Goods’). 53 S Kozuka and N Fujisawa, ‘Old Ideas Die Hard?: An Analysis of the 2004 Reformation of Secured Transactions Law in Japan and its Impact on Banking Practices’ (2009) 31 Thomas Jefferson Law Review 293, 306–07. 54 T Uchida, Minpo I [Civil Code], 4th edn (Tokyodaigaku Shupankai, 2008) 474 (in Japanese); Dougauchi (n 15) 313.

190 Megumi Hara and place (the exact address) of where these assets are situated. These identification standards are fraught with ambiguities. For the description of the kind of asset, it is still unclear how specific one must be to meet the standard of identification required. The Supreme Court has held that ‘all of the stock’ is sufficient, while ‘all household goods’ was not.55 For quantity, it is still unclear whether identification by specifying a portion of a larger quantity is sufficient. In one case, a court struck down identification referring to ‘28 tons out of 44 tons of dried onions’.56 This is one reason why the judicial scriveners who are mandated by the creditor (financial institution) to register consult with the registrar for verification on whether the description is sufficient, as general practice.57 There is a specific system for applicants to have a prior consultation with the registrar (such system does not exist for immovable registration).

B. Identification of Receivables under Registration For registration of assignments, the description must refer to the kind of receivables (such as rent or account receivables), the cause (the contract that gives rise to the receivables) and the time of accrual of the receivables, which can be a span of time. It is unnecessary to name the account debtor, but there is a difference in the requirement for registration depending on whether the account debtor is specified. In the case where the account debtor is specified, apart from the kind, cause and the time of accrual mentioned above, the number of receivables, identification of the account debtor and all the creditors, and amount of receivables are also required. In cases where the account debtor is unspecified, such as in the assignment of receivables that a credit card company has against its customer, apart from the kind, cause and the time of accrual, number of receivables (although in case where it is future receivables, receivables are counted as one), and attribute of account debtor (such as ‘client who resides in Tokyo’) are required. The amount of receivables is unnecessary in the case where the account debtor is unspecified.

C. Over-collateralisation Unless assets are sufficiently specified, issue of over-collateralisation may arise, causing the security agreement to be void for violating public policy as provided for in Article 90 of the Civil Code.58 In Japan, especially since the following judgment by the Supreme Court, the issue of over-collateralisation arises in relation to the ratio between the value of collateral and the entire value of grantor’s asset (and not the ratio between the amount of loan and the value of collateral, which is the more usual concern when over-collateralisation is the issue). If this ratio is excessive, the agreement could be nullified: [T]he validity of contract of assignment of future receivables may be denied wholly or partly on the ground of public policy and good morals, if there are special circumstances, eg the content of the contract, such as the length of the period of assignment, that imposes restrictions on the business activities of the assignor in excess of the permissible scope in light of socially acceptable norms, or causes other creditors unjust disadvantage. [This will be determined] by considering comprehensively, the

55 Supreme

Court decision of 14 October 1983 [1978 (O) No 944] Hanrei Taimuzu No 482, 80. Court decision of 15 February 1979 [1978 (O) No 925] Minshu Vol 33, No 1, 51. 57 For use of judicial scriveners, see VIII B (iii). 58 Art 90 stipulates that ‘A juristic act with any purpose which is against public policy is void’. 56 Supreme

Navigating the Patchwork of Secured Transactions Rules in Japan 191 financial status of the assignor at the time of the conclusion of the contract, prospect of the business of the assignor, the content of the contract, and the circumstances under which the contract has been concluded.59

As this chapter has detailed in previous sections, there are strict identification criteria for inventory as well as for receivables. One of the reasons for such strict requirements is the concern that by allowing a generic description of collateral, a single creditor will have absolute control over the entire asset base of the grantor.60 The concern of the court on this issue is so strong that it considers that this is against public policy.

D. Identification Criteria Theoretically, strict identification criteria for collateral are required since a security interest is a type of property right. Property rights can only exist over specified objects. However, there are other practical reasons why strict identification criteria are considered necessary. First, by identification, the grantor is able to specify which of the assets he owns form part of the collateral, so that it is clear in relation to which assets he owes duties arising from the security agreement. For example, the grantor will have a duty not to release the account debtor from payment for assigned receivables. Second, theoretically, identification of the asset in the security agreement and identification of the asset for the purpose of perfection is separate, but because fictitious delivery is admitted as a perfection method, the agreement between the parties directly and automatically affects the scope of third-party effectiveness. Thus, in the case of fictitious delivery, identification by agreement delimits perfection as well. Third, identification of assets has significance in the case of enforcement of joto-tanpo. Obviously, assets need to be specified for judicial enforcement, in case the grantor does not voluntarily hand over the assets. In judicial enforcement, the asset is required to be specified by location by the applicant. Considering the possibility of judicial enforcement, parties prepare notary deeds at the outset. Moreover, in the case of enforcement of joto-tanpo of inventory, the general understanding in practice and by doctrine is that crystallisation must have occurred. Crystallisation is when the object of enforcement is concretised to goods that constitute inventory at the commencement of enforcement, and no further fluctuation of the inventory occurs. By crystallisation, the grantor loses its power of disposal even within the bounds of his/her ordinary business. In this case, a description of assets is used to identify which asset is actually crystallised as the object of joto-tanpo, and so becomes an object of enforcement. However, there is no Supreme Court ruling on crystallisation, so it is unclear when, how or even whether crystallisation occurs.61 For these reasons, since the parties’ security agreement concerning collateral, perfection and scope of enforcement are directly linked – or inseparable, especially in case of fictitious delivery – parties are required to specify the collateral by strict identification criteria from the moment the joto-tanpo is established.

59 Supreme Court decision of 29 January 1999 [1997 (O) No 219] Minshu Vol 53, No 2, 1. 60 O Morita, Souron, Dousan-saiken-tanpo:Hikakuho no Matorikkusu [General Comments, Security Interests on Goods and Receivables: Matrix of Comparative Law] (Shoujihoumu, 2015) 14 (in Japanese). 61 There are arguments against crystallisation being necessary: O Morita, ‘Atarashii-tanpo-no-kangaekata to Shikkou-tetsuzuki’ [‘New Type of Security Interest and Enforcement Procedure’] [2006] No 1317 Juristo 206 (in Japanese).

192 Megumi Hara

VII. Enforcement The enforcement of security interests governed by the Civil Code is regulated under the Civil Enforcement Act. The enforcement is done by disposal of the collateral in an auction supervised by the court. The Civil Code prohibits self-help repossession, and any agreement entered into at the outset of the transaction permitting self-help is void (Article 349).62 However, once a default occurs, the grantor may consent to out of court enforcement.63 There is an important exception provided for in the Commercial Code where if the secured obligation arises from a commercial act, ie, an act between merchants, the Civil Code prohibition does not apply, so the grantor and the creditor can agree to enforce extra-judicially without having to enter into an agreement authorising self-help post-default. Joto-tanpo is enforced extra-judicially. There are two types of enforcement of joto-tanpo. One is the creditor taking the collateral in satisfaction of the obligation, and the other is the creditor selling the collateral to a third party. Either way, the creditor has the obligation to return the surplus if the value of collateral exceeds the amount of the secured obligation.64 The debtor can elect a defence of simultaneous performance, which means that unless the creditor performs his obligation to return the surplus, the debtor can refuse to deliver the possession of the collateral. In the case where the debtor is uncooperative, the creditor has the option of judicial enforcement, on the bases that he is the owner retrieving what he owns. However, under the Supreme Court decision, a subordinate joto-tanpo holder may not initiate enforcement. The reason is to protect the preferential satisfaction for the senior creditor, as seen in the following:65 [I]f the holder of the junior joto-tanpo is vested with the authority to enforce its rights, it would deprive the holder of senior joto-tanpo, who would be entitled to receive the proceeds if the enforcement is made pursuant to the Civil Execution Act, of the opportunity to exercise his/her preferential right.

VIII. Asset Based Lending (ABL) A. ABL in Practice Traditionally, the utility of goods (especially inventory) as collateral has been seen with scepticism. The type of collateral used for loans for business credit differ depending on whether the loan is short or long term, but the collateral did not include goods that were not regulated by special laws,66 such as inventory. For long-term loans, the loan is secured with a non-possessory security interest on individual fixed assets, which is typically immovable assets, but also certain types of valuable equipment that can be collateralised under special laws. For short-term loans (for working capital), the loan is issued without collateral.67 There was no place for goods or receivables to come into play as a collateral. 62 Art 349: ‘Pledgors cannot, either by the acts establishing pledges or by contracts made prior to the due dates for performance of their obligations, allow pledgees to acquire ownership of the Thing pledged as payment, nor promise to allow pledgees to dispose of it in any manner other than is prescribed by law.’ 63 Prohibition of self-help does not apply for mortgage. 64 Supreme Court decision of 25 March 1971 [1967 (O) No 1279] Minshu Vol 25, No 2, 208. 65 Supreme Court decision of 20 July 2006 [2005 (Ju) No 948] Minshu Vol 60, No 6, 2499. 66 See the list of special laws in III A above. 67 Guidance to the inspection manual for borrowers issued by the Financial Service Agency at www.fsa.go.jp/news/27/ ginkou/20150730-1/01.pdf (in Japanese) states the following: ‘Working capital for small and medium enterprises was

Navigating the Patchwork of Secured Transactions Rules in Japan 193 However, since approximately 10 years ago, the Ministry of Economy, Trade and Industry (METI) and the Financial Service Agency (FSA) have pushed for increase in ABL, as a way to facilitate relational banking and to decrease the reliance on traditional security interests and guarantees. Here, ABL plays a role as a means to justify monitoring of business in relational banking, instead of purely focusing on value as collateral. Even with such governmental intervention, ABL is still not popular in Japan. The reality is that ABL is limited to certain inventory: for example, jewellery, livestock, or machinery. These are assets for which secondary markets exist. After the earthquake and tsunami in 2011, particular financing for solar energy panels emerged, whereby loans were issued by using the panels and receivables arising from sales of electricity as collateral. However, there has been a policy change to reduce such benefits in selling electricity,68 thus ABL in this field has experienced a significant decrease. Figure 1 ABL in Japan: Loan Amount by Types of Asset

(Source: Teikoku Databank69).

B. Obstacles to ABL It is worthwhile to summarise the obstacles to ABL, as they are related to analysing Japanese security interest law from the perspective of the modern principles. The unpopularity of ABL is

once procured by renewing bills [tegata] providing payment for interest only. However, in recent years, such lending practices have decreased, and there are many cases where working capital is required to be paid as long-term loans. Therefore, by adding a new case (case 20) to the financial inspection manual’s separate volume [on SME financing], it shows that within the range of normal operation funds, short-term loan can be made with renewing bills.’ 68 The Feed-in Tariff Law in Japan, called the Act on Purchase of Renewable Energy Sourced Electricity by Electric Utilities, was implemented in 2012 and was amended in 2017 to reduce the purchase price. 69 Teikoku Databank, ‘Report on the Survey on the Various Financing Methods for Companies’ (March 2018 and February 2019), www.meti.go.jp/policy/economy/keiei_innovation/sangyokinyu/itakuhoukoku/04.pdf; www.meti.go.jp/ policy/economy/keiei_innovation/sangyokinyu/itakuhoukoku/06.pdf (in Japanese).

194 Megumi Hara the result of a combination of legal, psychological, economical, and regulation-related matters. This section is informed by survey research undertaken by my colleagues and me.70

(i) Legal Issues First, ABL takes the form of ownership transfer, joto-tanpo, but since there is no written law, the legal nature remains uncertain in a number of areas,71 including the treatment of proceeds, or whether or how crystallisation for inventory occur in case of enforcement.72 Second, registration has its own set of problems. The identification requirements for collateral are overly strict, as a consequence of which a security interest over all assets of the grantor is practically unavailable. Instead of all-asset security interest, ABL in Japan is, in reality, a combination of joto-tanpos: joto-tanpo for inventory and joto-tanpo for trade receivables. The registration is also restricted in its scope. It is limited to grantors that are companies, thus excluding individual entrepreneurs. Moreover, this registration system co-exists with other methods of third-party effectiveness without public notice provided for in the Civil Code.

(ii) Psychological Issues Psychologically, the bankers still feel that borrowers are hesitant to use ABL because of stigma issues.73 One bank stated that because a popular database that collects company information has a column on whether that company has registered under the Act of Registration, this could publicise any credit uncertainty of that company. Also, still predominant is the old-fashioned understanding of immovable, non-possessory security interest as the ‘queen of security interests’.

(iii) Economic Issues Economically, setting up ABL is costly compared to other types of facilities. This is due to several factors. For evaluation, many financial institutions rely on external evaluation companies. For registration, financial institutions hire judicial scriveners (shiho-shoshi). When necessary, the judicial scrivener consults with the registrar to verify whether the application for registration complies with the practice of the registry.74 The judicial scrivener must take extra precautions 70 Professor Charles Mooney, University of Pennsylvania, and Professor Kumiko Koens, Yamagata University. We have conducted interviews with financial institutions to understand the climate of financing and where ABL stands. The methodology and the complete result will be published in a separate article by the three of us in the future. I am grateful to both Charles Mooney and Kumiko Koens for enabling me to use the results of the interview. 71 This could be characterised as one negative aspect of the burden of the reform process for the Civil Code. Security interests are regulated as part of the Civil Code, the fundamental law of civil society. Not only does amending the Civil Code require thorough consideration of its necessity even to start with, once the procedure to reform commences, it is normally done by formulating a reform committee by the Ministry of Justice, consisting of scholars, judges, lawyers and other practitioners, meeting periodically, to formulate a draft. The procedure is costly and time consuming. 72 Uncertainty concerning crystallisation has been explained in VI D above. More problematic from a practical aspect is that the assets that are the object of this enforcement and assets that enter into the inventory after crystallisation must be separated, but in reality, this is difficult. Unless there is complete clarity on which assets fall in which category, the enforcement becomes void. 73 The stigma issue was stated by many financial institutions throughout the research conducted by my colleague and me. 74 In the interview with the judicial scriveners. The Registration Order on Transfer of Goods and Receivables, which is the regulation of the Act on Registration, provides for a mechanism that enables the registrants to get their application checked in advance by the registry (Art 7).

Navigating the Patchwork of Secured Transactions Rules in Japan 195 not to make mistakes, since the law does not allow amending the registration, and one must cancel the registration and re-register. The judicial scriveners from local areas sometimes are forced to travel all the way to Tokyo to register at the Bureau in the Nakano ward, if their client (the creditor) wants the registration done on a specific date, such as the day that the client concludes the loan agreement with its borrower. These all add up as costs for the parties to create ABL. After establishment of ABL, there is the monitoring process. One financial institution mentioned that monitoring can cause considerable burden to branches of the bank, since the branches are allocated with personnel necessary for traditional types of security interest such as mortgage, which do not require monitoring on the banks’ part.75 So, they lack the monitoring expertise for this kind of collateral, and external ABL monitoring is costly and time consuming.

(iv) Regulatory Issues Under the practice mandated by the Financial Service Agency’s Inspection Manual that applied until the 18th December 2019,76 the collateral was categorised as ‘good collateral’ (such as deposits, government bonds, or electronically recorded receivables) or ‘general collateral’ (such as immovable assets). Goods were neither classified as good collateral nor as general collateral under the Manual, creating yet another disincentive for the financial institutions to use ABL. FSA, as a step to promote ABL, made two revisions to the Manual, but they did not have the intended effect. In the revised version of 2007, for the first time, FSA included conditions for goods to be considered as general collateral. In order for goods to be treated as general collateral, they had to meet the following requirements: (1) appropriate method used for perfection, (2) continuous monitoring of quantity and quality, etc, (3) evaluation by objective and rational evaluation methods, (4) appropriate measures for converting the collateral, and (5) established procedures for securing the property at the time of enforcement. Goods that did not satisfy these requirements continued to be treated as additional credit support, without being recognised as collateral under the inspection manual. Furthermore in 2013, FSA published a document, ‘Promoting Active Utilisation of ABL’, as they felt that they were not seeing significant rise in the establishment of ABL. In this document, FSA provides examples of how the above five elements are to be met. However, the five elements were still constraining the banks. For example, it was constraining in a way that, the collateral must be registered to meet requirement (1) above (Civil Code methods are not recommended), banks felt that they must use an external evaluation company to comply with requirement (3) above, and there needs to be a secondary market to meet requirement (4) above. There were also uncertainties as to how often the monitoring needs to occur in order to meet requirement (2), even with the 2013 clarification. The Manual was abolished based on the fact that financial institutions strictly adhered to it, so that the Manual was preventing the banks from making flexible decisions. It might be that abolishing the Manual may have a positive effect for financial institutions to consider using ABL.

75 In the interview that was conducted as part of the research with my colleagues. 76 The supervision manual of the Financial Service Agency, ‘Inspection Manual for Deposit-Taking Institutions’, spells out how collateral should be evaluated by financial institutions. This inspection manual provided for a checklist of items that banks must comply with.

196 Megumi Hara

IX. Conclusion Even though the government policy has been to incentivise the use of ABL, in reality, secured lending lags behind other forms of credit which are more common in Japan. The obvious reason is the current financing climate that does not require ABL, which is by its nature costly and time consuming. There are also uncertainties surrounding ABL, both in its legal nature as well as the practical risk of enforcement. Such uncertainties cause financial institutions to doubt whether they will have preferential satisfaction at the end. However, reforms to address some aspects of secured lending, such as with respect to the effect of an anti-assignment clause, as well as abolishing the Inspection Manual, have been undertaken. Another positive action taken by the government is the new project launched in March 2019 involving the Ministry of Justice, to specifically consider the possibility of stipulating security interest of goods and receivables. The project is still under discussion by a research group consisting of scholars and practitioners,77 but if the project is successful with the outcome of a new legislation, the use of ABL may be expanded in Japan.

77 Dousan Saiken wo Chushin to toshita Tanpo-housei ni Kansuru Kenkyukai (Research Group on Security Interest Regime Mainly for Goods and Receivables). The deliberation of the research group can be found at www.shojihomu.or.jp/ kenkyuu/dou-tanpohousei (in Japanese).

10 Banking the Unbanked: An Examination of the Personal Property Security Act of the Philippines ANTHONY AMUNATEGUI ABAD, DAVID KINTANAR ROSARIO III AND GRISELDA (GAY) SANTOS

I. Introduction The system of using of personal property such as household goods, vehicles, and agricultural crops as loan collateral in the Philippines has been in place for more than a century. The practice is not novel or unfamiliar; however, through the years, lenders’ confidence in the system has progressively declined, limiting the flow of much-needed credit to those who need it, including entrepreneurs. Philippine households and small businesses lacking immovable assets are seen as credit risks, and are thus forced to borrow from informal lenders, who charge exorbitant interest rates, but do not require land or real property as collateral. While the Philippines is one of the fastest growing countries in the Asia Pacific region, its growth trajectory is hindered by the prevailing chattel mortgage system. The Philippine government has thus embarked on strengthening its financial infrastructure system by undertaking secured transactions reform using the United Nations Commission on International Trade Law (UNCITRAL) Guide on the Implementation of a Security Rights Registry (2013) (UNCITRAL Model Law). This chapter considers the process of reform, the reforms themselves, and their effectiveness. In 1906, the Philippine Commission, the forerunner of the Philippine Congress, passed Act No 1508 or the Chattel Mortgage Law. For over a hundred years, the Chattel Mortgage Law of 1906 remained the legal cornerstone of secured transactions in the Philippines; yet despite the best intentions of its drafters, it became clear that such a law had to be revisited in order to meet the current requirements. And so, after much deliberation, Republic Act No 11057 or the Personal Property Security Act (PPSA) was passed in 2018, creating a framework that would not only cater to the specific needs of the modern Philippines and its citizens, but also pave the way for future improvements meant to achieve greater financial inclusion. Among the considerations taken into account by the drafters of the PPSA were the inherent urgency by which movable collateral devalues, the general public’s disdain for complicated legal technicalities and formalities, the desire to modernise the Government system to enhance efficiency of service and promote transparency, and the need for clearer rules that would govern instances of default. As such, the PPSA, compared to the Chattel Mortgage Law of 1906, included provisions simplifying the procedures for disposing of collateral after default, removed several

198 Anthony Amunategui Abad, David Kintanar Rosario III and Griselda (Gay) Santos formal requirements such as notarisation and accompanying oaths and affidavits, created an online and centralised Registry for movables, and included new provisions intended to clarify prioritisation of creditors following a default. These changes to the old law, having been crafted following lengthy consultations with a wide range of stakeholders including the public, the regulators, and the financial institutions, should not be treated as a silver bullet that will solve the challenges of financial inclusion in the Philippines overnight. Instead, these changes should be treated as a clear signal of intent from the Government of the Philippines to pursue a policy of modernisation and liberalisation which should benefit a wider range of Filipinos and usher in a new age for a nation slowly transitioning into a developed economy.

A. The Business Case for the PPSA The Philippines has been among the fastest moving economies in Asia. It has posted a year on year growth in GDP of 6.4 per cent, despite the slowdown in its economy in Q4 2019. Over a five-year period from 2015 to 2019 the average GDP growth rate was at 6.5 per cent. According to the World Bank: Sound economic fundamentals and a globally recognized competitive workforce reinforce the growth momentum. Having sustained average annual growth of 6.3% between 2010–2018 from an average of 4.5% between 2000–2009, the country is poised to make the leap from a lower-middle income country with a gross national income per capita of US$3,660 in 2017 to an upper-middle income country (per capita income range of US$3,896–12,055) in the near term.1

Against this economic backdrop, there is a stable and liquid banking industry. The capital adequacy ratio in 2019 was around 15 per cent solo and the ratio of Non-performing Loans was around 2.19 per cent.2 Despite this, access to finance to majority of the Filipinos remain a challenge. According to the 2017 World Bank Findex data, looking at the adult3 Philippine population which is around 70.3 million, around 8.4 million Filipinos have access to savings while around 7.5 million have access to formal credit.4 Furthermore, World Bank Findex data shows that the Philippines ranks high when it comes to borrowing from friends and family. Almost 29 million Filipinos resort to families and friends for financial assistance versus resorting to financial institutions. This is approximately 12 per cent higher than the East Asian average. In the Philippines, 99.52 per cent of businesses are micro, small and medium sized enterprises (MSMEs).5 MSMEs contribute to around 63 per cent of total employment in the Philippines and contribute to 35 per cent of the country’s GDP.6 Despite this, MSMEs remained the most challenged group in accessing formal credit. Filipinos would prefer to resort to families and friends and, sadly, even to loan sharks rather than go to a formal financial institution because of the overwhelming process requirements of obtaining a loan and providing collateral.

1 The World Bank, ‘The World Bank in the Philippines’, www.worldbank.org/en/country/philippines/overview. 2 Bangko Sentral ng Pilipinas, ‘Banking Statistics’, www.bsp.gov.ph/statistics/stataqapbs.asp. 3 In this context, this means those over 15 years of age. 4 The World Bank, ‘Global Findex Data 2017–18 Little Databook on Financial Inclusion’, globalfindex.worldbank.org. There will be some overlap between these two classes of people. 5 https://dtiwebfiles.s3-ap-southeast-1.amazonaws.com/e-library/Growing+a+Business/MSME+Statistics/2018/2018 +Philippine+MSME+Statistics+in+Brief.pdf. 6 Makati Business Club, ‘Philippine MSMEs and Entrepreneurship’ (2016), mbc.com.ph/wp-content/uploads/MSME_ forWeb1.pdf.

Banking the Unbanked: An Examination of the Personal Property Security Act of the Philippines 199 This state of affairs warranted an examination or revisiting of the Philippines’ credit infrastructure enabling environment. The first step was to revisit the governing law. For over a hundred years, the overall legal framework for the rights and obligations of creditors and debtors under loans secured by movable assets as collateral was the Chattel Mortgage Act of 1906 (CMA).7 This law was meant to enable financing using any collateral other than land; however, the fact remained that access to finance in the Philippines especially for MSMEs remained low. There existed a mismatch between what financial institutions require as collateral (that is, land), versus what MSMEs actually have in possession (that is, mostly movable assets, such as accounts receivables). Thus, there was a need to undertake legal reform as a first step.

B. The Alignment: Initiating and Sustaining the Dialogue Across Key Stakeholders ‘Secured Transactions Reform’ is a very technical term for majority of people, as they are not legal practitioners. Understanding this type of reform, and using the right terminology to influence policy makers and stakeholders, entailed following a particular process and finding the right audience and channels through which to communicate. This section describes the way in which this was done in the Philippines. In 2015, the Philippines became the host of the Asia Pacific Economic Cooperation (APEC). Through its Asia Pacific Financial Forum under the APEC Business Advisory Council, the dialogue with the key stakeholders and policy makers was pushed further. Leveraging the impact of international fora and partnerships is especially important when resources are constrained. However, since the Philippines was a middle-income country, it was harder to find donor funding that will sustain its activities. Financial inclusion remains a challenge in the Philippines. To maintain reach and disseminate understanding among the relevant stakeholders, leveraging on the impact of international fora and partnerships have been instrumental. Under the leadership of the Department of Finance on behalf of the Philippine Government, supported by its international partners in the Asia Pacific Financial Forum, the Financial Infrastructure Development Network (FIDN)8 was launched in 2015, while the Philippines was hosting APEC. The FIDN has delivered several important results to the Philippines. First, it has established a common understanding of the key reforms that have occurred in other secured transactions and credit information systems across the relevant key stakeholders. Through the activities of the FIDN the mindset of all key relevant stakeholders has shifted. They now have a full appreciation of the business case for credit infrastructure reforms and have been informed of best practice by experts. Second, it has enabled strong partnerships to be established locally and internationally. Locally, the Department of Finance and Land Registration Authority recognised that other local agencies were also focused on the same goal of promoting financial inclusion. It therefore extended the invitation to participate in the FIDN to other relevant local government entities like the Bangko Sentral ng Pilipinas (Central Bank of the Philippines) and the Department of Trade and Industry. Both were solid partners in championing the credit infrastructure reforms and

7 Act no 1508. 8 FIDN is a public–private network that engages in sharing lessons of experiences in credit infrastructure through forums.

200 Anthony Amunategui Abad, David Kintanar Rosario III and Griselda (Gay) Santos have been very instrumental in facilitating dialogues and presentations relating to the reforms through the FIDN. On the international front, the Government leveraged its active presence and participation in the APEC Business Advisory Council9 to tap into experts in the private sector. These included Nomura Capital (Japan), GE Capital, the US State Department, the Policy and Economic Research Council, the Business Information and Industry Association as well as others. These partners have been additional champions promoting the credit infrastructure reforms in the Philippines and across Asia. Third, the Philippine Government through the FIDN effort was able to solidify the commitment and prioritisation of secured transaction reform in the government’s agenda and even the APEC’s agenda. Credit Infrastructure is now part of the roadmap of reforms to which the APEC economies are committed. This was agreed under the Philippines’ APEC leadership in 2015. The launch of the FIDN in November 2015 brought together around 300 participants, including bankers, MSMEs, lawyers, students, and the media. It was covered by around 30 media representatives across local and international networks. It was attended by around 20 APEC delegates and key officials in the Philippine Government. Since then, the Philippine Department of Finance has hosted 7 major FIDN events. The concept of the FIDN is now replicated in various APEC economies. Through the interactions resulting from the FIDN, several parallel efforts which ultimately led to the drafting and passage of the PPSA were undertaken. These efforts include stakeholder dialogues among the public and private sector, the holding of Technical Working Group meetings where the provisions of the law were discussed and crafted, and the final legislative scrutiny of the PPSA in the form of discussions and debates among lawmakers. Eventually, these efforts came to fruition when the PPSA was signed by President Rodrigo Duterte on 17 August 2018, ushering in a new legal framework for Secured Transactions in the Philippines.

II. The Legislative Background to the PPSA The PPSA was a consolidated effort among both public and private stakeholders to reform the existing chattel mortgage system of the Philippines. This effort was borne of a frustration with the existing legal system in place that failed to take advantage of numerous financial and technological advancements that had the potential to provide greater access to finances, especially to the majority of Filipinos who remained unbanked, even to this day. Through the course of several meetings involving a diverse set of stakeholders,10 it was decided that the economic development of the Philippines envisioned by the previous and current administration could only be realised by the Filipino people through changes to the existing legal regime. Although there were several different bills proposed which could play a pivotal role in reforming the Philippine financial system in order to promote greater financial inclusion,11 the 9 The private sector arm of the APEC. 10 The stakeholders mentioned include public stakeholders such as the Department of Finance, the Department of Trade and Industry, the Bangko Sentral ng Pilipinas, the Securities and Exchange Commission, and the Land Registration Authority, and private stakeholders such as banks and other financial institutions, MSMEs, and farmers. 11 These included amendments to existing laws such as the provision for the mandatory allocation of credit to MSMEs under the Agri-Agra Law (Agri-Agra Reform Credit Act 2009 (RA 10000)) and the Magna Carta for MSMEs (Republic Act 9501). For analysis of these laws, see N Khor, R Jacildo and R Tacneng, ‘Assessing Mandated Credit Programs: Case Study of the Magna Carta in the Philippines’, ADB Economic Paper Series, No 463 (November 2015), www.adb.org/sites/ default/files/publication/176822/ewp-463.pdf.

Banking the Unbanked: An Examination of the Personal Property Security Act of the Philippines 201 PPSA was singled out as the appropriate legislative cornerstone that had to be built before the other proposed laws could function. As such, the PPSA was envisioned to be an umbrella law that would later provide guidance for other reformatory legal measures including a new Warehouse Receipts Law that would cater specifically for farmers and their crops. Having realised the urgent need for the PPSA, the Technical Working Group to the PPSA (TWG)12 began studying not only the UNCITRAL Model Law but also other personal property security legislation found in other jurisdictions, as well as the effects such legislation had in the jurisdictions in which they were passed. Delving deeply into the specifics of the different legislation found in other jurisdictions, the members of the TWG found that the successful passage of modern secured transactions legislation that had its origins in the UNCITRAL Model Law was a catalyst of positive change in the other jurisdictions studied, leading to increased lending to a wider base that, in turn, translated to higher percentages of overall economic activity. Simply put, the TWG found clear evidence to show that the successful passage of a modern secured transaction law based on the UNCITRAL Model Law directly led to heightened economic activity which translated to higher levels of growth and development. It was this same recognition as to the benefits of a new secured transactions law that helped push the PPSA to become a priority bill later on in Congress. Another factor that helped cement the PPSA as a priority Bill was the overwhelming support from the different agencies of the Philippine Government. While the Department of Finance was the lead agency, other agencies such as the Department of Trade and Industry, the Securities and Exchange Commission, the Central Bank of the Philippines, and the Land Registration Authority all voiced their unwavering support for the PPSA as a catalyst of positive economic change in the Philippines. Nevertheless, the passage of the PPSA was not as painless as it seemed. Although the PPSA was one of the fastest pieces of legislation passed by the Philippine Congress, having been filed in 2016 and approved in 2018, there were still many items that had to be ironed out before the Act itself could be passed. Among the main items that had to be discussed at length was the role of the Registry. It was decided that the Land Registration Authority would maintain its supervision over the chattel mortgage registry, but that the new Registry under the PPSA would be a modern centralised registry as opposed to a fragmented structure where several branches of the registry were located all over the country. In this new PPSA Registry, registrants would now be able to directly register their right over the relevant movable property at any time. Another important discussion that took place concerned the provisions of the Recto Law which are found in the Civil Code of the Philippines,13 and which were put in place to protect buyers of movable property through instalment sales. The relevant provisions are as follows: Article 1484. In a contract of sale of personal property the price of which is payable in installments, the vendor may exercise any of the following remedies: (1) Exact fulfillment of the obligation, should the vendee fail to pay; (2) Cancel the sale, should the vendee’s failure to pay cover two or more installments;

12 The TWG was established by the Department of Finance around 2013. It is comprised of public and private sector bodies such as the Central Bank of the Philippines, the Department of Trade and Industry, the Intellectual Property Office, the Securities and Exchange Commission, the Department of Agriculture, the Small Business Corporation, the Congress Secretariat, the Cold Storage Association, various MSME organisations (such as GoNegosyo and KaEntrep), the Bankers’ Association of the Philippine and the Rural Bankers’ Association of the Philippines as well as Thrift Banks, Cooperatives Association etc. 13 Republic Act No 386 of the Civil Code of the Philippines, passed on 18 June 1949.

202 Anthony Amunategui Abad, David Kintanar Rosario III and Griselda (Gay) Santos (3) Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendee’s failure to pay cover two or more installments. In this case, he shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary shall be void. (1454-A-a) Article 1485. The preceding article shall be applied to contracts purporting to be leases of personal property with option to buy, when the lessor has deprived the lessee of the possession or enjoyment of the thing. (1454-A-a) Article 1486. In the case referred to in two preceding articles, a stipulation that the installments or rents paid shall not be returned to the vendee or lessee shall be valid insofar as the same may not be unconscionable under the circumstances.

Initially, there was a move to repeal these provisions, as shown in the earlier versions of the draft PPSA Bills filed in both Houses of Congress. The main justification behind such repeal consisted of the argument that the UNCITRAL Model Law and the modern secured transactions legislation in other jurisdictions did not appear to provide for the existence of a legal exception when movables were sold by instalment. However, the provisions were re-examined and it was decided that the provisions of the Recto Law that were incorporated into the Civil Code were there for the protection of the public against unscrupulous vendors. It was likewise put forward that the repeal of these provisions would do more harm to majority of Filipinos who relied on instalment sales in order to be able to afford necessary movables such as household appliances, machinery, large farming equipment, and automobiles. Given that these provisions were deeply rooted in the experiences of the Filipino people, and that the retention of these provisions would not negatively affect the PPSA, it was agreed that the Articles 1484, 1485, and 1486 would no longer be repealed in the final version of the PPSA.

III. The PPSA A. Scope Under the CMA,14 a chattel mortgage is described as ‘a conditional sale of personal property as security for the payment of a debt, or the performance of some other obligation specified therein, the condition being that the sale shall be void upon the seller paying to the purchaser a sum of money or doing some other act named’. The scope of the PPSA is much wider: it covers ‘all transactions of any form that secure an obligation with movable collateral’15 except for some interests in aircraft or ships. Thus, chattel mortgages, pledges, liens in personal property, sales of accounts receivables, sale of secured sales contracts, financing leases, and other agreements which created a security interest, regardless of form, are covered under the PPSA. The PPSA thus follows the functional approach followed by the UNCITRAL Model Law, and, indeed, the definition of ‘security interest’ under the PPSA16 closely tracks the definition of ‘security right’ under the Model Law.17 The rights of a buyer of accounts receivable is included in the

14 CMA

(Act no 1508 of 1906), s 3. s 4. 16 PPSA, s 3(j). 17 UNCITRAL Model Law, Art 2(kk). 15 PPSA,

Banking the Unbanked: An Examination of the Personal Property Security Act of the Philippines 203 definition of ‘security right’ (as it is under the Model Law). However, the PPSA goes further and includes the right of a lessor under an operating lease under one year, which is included in many PPSAs around the world,18 but not in the Model Law.

B. Creation The form in which a security interest can be validly executed has been simplified. The CMA imposed a number of formal requirements on the creation of a chattel mortgage.19 First, a chattel mortgage was only deemed sufficient if made substantially in accordance with the expressly prescribed form, which is set out in section 5 of the statute. In addition, the mortgagor and mortgagee must execute and notarise an affidavit of good faith (again, in the form prescribed in section 5) and the document creating the chattel mortgage must also be notarised. By contrast, the UNCITRAL Model Law provides key items which have to be in the security agreement for it to be valid.20 These items are (a) the identity of the secured creditor and grantor, (b) a description of the secured obligation, (c) a description of the encumbered asset, and (d) the maximum amount for which the security right may be enforced. After much deliberation, it was decided that the creation requirements should be simplified. The PPSA simplified the requirements by stating that a security interest shall be created by a security agreement,21 and that a security agreement must be contained in a written contract signed by the parties.22 The effect of this is that the validity of a security agreement hinges on the question of whether or not it is found within a valid contract under Philippine law. Under the Civil Code, a contract is defined as a ‘meeting of the minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service’.23 There are three requirements for a valid contract: (a) consent of the contracting parties, (b) object certain which is the subject matter of the contract, and (c) cause of the obligation which is established.24 The PPSA has, thus, effectively removed the lengthy documentary and formal requirements from the CMA, and has instead adopted a localised version of those found in the Model Law. In deciding on this change in formal requirements, the drafters took account of two main considerations. First, the majority of those who wished to mortgage their personal property in the Philippines were considerably impoverished and have a basic or less than basic degree of education. As such, the lengthy formal requirements in the CMA not only added to their costs but also confused them or were used to take advantage of them. Second, there was a move in Congress to veer away from repetitive laws that unduly amended or revised existing legislation and caused possible confusion as to what provisions of law were actually in effect. As such, in order to address these concerns, it was decided that a written contract should suffice as a formal requirement for a valid security interest, and that, since there was already a law on the validity of contracts in the Philippines, mention of the need for a written contract was enough to put beyond doubt what was required to make the security agreement valid.

18 For example, the Canadian statutes, such as the Saskatchewan PPSA, s 2(1)(y); the Australian PPSA, ss 12(3)(a) and 13; the New Zealand PPSA, s 16. 19 CMA, s 5. 20 UNCITRAL Model Law, Art 6. 21 PPSA, s 5(a). 22 PPSA, s 6. 23 Civil Code, Art 1305. 24 Civil Code, Art 1318.

204 Anthony Amunategui Abad, David Kintanar Rosario III and Griselda (Gay) Santos The PPSA requires the agreement to be signed by the parties.25 This is similar to, but not identical to, the Model Law, which only requires the signature of the grantor.26 Apart from the change in formal requirements, it is also worth noting that the PPSA explicitly includes electronic records under the definition of ‘writing’.27 As such, since the PPSA requires a written contract, this would appear to open the door to electronic Security Agreements which could be treated as a clear move by the drafters of the PPSA towards modernisation. Before the PPSA, it was not possible in the Philippines for security to be taken over assets not yet owed by the grantor of the security. Under the Civil Code, particularly Article 2124, only immovable property, alienable real rights imposed upon immovable, and movable property may be the subject of a mortgage. Furthermore, it is assumed that the party offering the property as collateral already has ownership of the same at the time of the mortgage.28 This position is reinforced, in relation to movable property, in the CMA, which provides that a chattel mortgage shall be deemed to cover only the property described in the mortgage, and not property acquired by the mortgagor after he has executed the chattel mortgage.29 In contrast, under the PPSA, it is explicitly stated that a security agreement may provide for the creation of a security interest in a future property but the security interest itself in that property will only be created once the grantor acquires rights in it or the power to encumber it.30 Thus, even before full ownership over the res is obtained, a security agreement can already be reached over the res, in anticipation of the acquisition of full ownership over the same. Moreover, under the CMA, the required form of the mortgage in relation to the secured obligations only includes obligations which can be described very precisely, and therefore does not include future obligations. The PPSA does not specifically mention that it covers future obligations, but the limit imposed by the formal requirements of the CMA is no longer present, and so it seems that the PPSA does permit a security interest to secure future obligations. There are also changes in the way in which the collateral must be described in the security agreement. Under the CMA,31 the mortgaged property must be described in a manner that can be identified by a person, after reasonable inquiry and investigation, and large cattle must be specifically described. In contrast, under the PPSA, any description, whether specific or general, is allowed provided it reasonable identifies the collateral.32 It is expressly stated that descriptions such as ‘all equipment’, ‘all inventory’, and other similar generic statements are permitted provided the collateral can be reasonably identified. This mirrors the approach of the Model Law.33

C. The Registry Having simplified the formal requirements for the creation of a security interest and reduced the amount of paperwork involved, a natural issue that would arise from such changes would be how to adequately track the security interests being created all around the Philippines. Prior to the 25 PPSA, s 6. 26 UNCITRAL Model Law, Art 6(3). A signed writing is not required if the secured creditor is in possession of the encumbered asset (Art 6(4)). 27 PPSA, s 3(k). 28 There are some exceptions to this, in Art 2127 of the Civil Code, but they concern what, under the PPSA, is called proceeds (see PPSA, s 8), such as natural accessions, growing fruits and proceeds of insurance claims. 29 CMA, s 7. 30 PPSA, s 5(b). 31 CMA, s 7. 32 PPSA, s 7. 33 UNCITRAL Model Law, Art 9(1) and (2).

Banking the Unbanked: An Examination of the Personal Property Security Act of the Philippines 205 PPSA, chattel mortgages had to be registered manually with the specific local office of the Land Registration Authority (LRA) where the property was to be found. While this may have been a perfectly adequate system at the beginning of the 20th century, when most mortgage agreements took place locally, the rapid modernisation and globalisation that has since followed has made the existing paper-based system cumbersome. For example, lenders performing due diligence on collateral had to go physically to the specific local office of the LRA where the property was registered. To remedy the situation, the drafters of the PPSA adopted an online registry system mirroring that under the Model Law. With this new system, any party performing due diligence can make an initial search relating to the collateral offered without having to visit the local offices of the LRA physically. A search can even be performed on a creditor’s mobile device, regardless of where the property is located, at any time of the day, and at the creditor’s convenience. Furthermore, the PPSA specifically provides that the electronic records of the Registry shall be official records.34 This means that any entry found in the Registry can be relied upon with confidence. While it is conceded that there is no substitute to an actual physical verification of the collateral being offered, the immediacy with which an initial search can be conducted would lessen the amount of time needed by lenders to perform due diligence before accepting the collateral. This was considered important by the drafters of the PPSA since a major issue that was discussed throughout the drafting process was how to make formal lending much more appealing to borrowers, given that informal lenders were able to provide credit substantially faster than the formal lending institutions. As due diligence on the collateral was identified to be the factor taking the most time when vetting possible mortgages, the decision to simplify this particular step was seen as a key element in enhancing the attractiveness of borrowing from formal lenders. On the other hand, the Registry also provides the formal lenders with motivation to accept movable property as collateral. This stems from the fact that the PPSA makes registration an official act by which a creditor can claim priority over the collateral once a default has occurred.35 Registration is not the only method of perfection of a security interest (that is, making it effective against third parties36) under the PPSA. A secured creditor can also perfect its security interest by taking possession of tangible collateral or by taking control of the collateral consisting of investment property or a deposit account.37 The holder of a non-consensual lien can make its interest enforceable against third parties by registration (as an alternative to taking possession).38

D. Priority The Civil Code set out the priority of claims of unsecured creditors against the moveable properly of a defaulting debtor in Article 2241. First priority went to claims of the State, including taxes, followed by claims based on misappropriation and breach of trust of public officials.

34 PPSA,

s 27(c). s 17; see also III D. 36 PPSA, s 11(b). 37 PPSA, s 12. What is meant by control is set out in s 13. 38 PPSA, ss 3(h) and 28(e). See also III D. 35 PPSA

206 Anthony Amunategui Abad, David Kintanar Rosario III and Griselda (Gay) Santos After that, the order of priority included a number of non-consensual liens,39 and, as fourth in priority, placed credits guaranteed by a chattel mortgage or pledge. Article 2241 was explicitly repealed by the PPSA.40 In terms of priority between security interests, the Civil Code provided that if there were two or more creditors with respect to the same specific movable property, they should be satisfied pro rata, after the payment of duties, taxes, and fees due the State or any subdivision thereof.41 Who has priority to movable property in the case of default is now determined by Chapter 4 of the PPSA. The basic rule is that priority is determined according to the time of registration of a notice or other means of perfection of the security interest or lien (such as taking possession or control) without regard to the actual, chronological order of the creation of an encumbrance.42 This rule, which mirrors that in the Model Law,43 is possible because registration of a security interest can be effected in advance of creation,44 a basic tenet of notice filing which is a feature of most reformed systems around the world.45 A lien cannot be registered before it is created (since it is not created by a security agreement) but it can be registered without the consent of the person against whom it is to be enforced.46 Thus, instead of the specified order of priority in Article 2241, priority in relation to tangible movable property will depend on which secured creditor or lienholder registered or took possession or control first.47 The PPSA also provides specific rules as to how to sort out the priority between security interests in a wide range of collateral,48 and a rule that a good faith transferee of encumbered movable property in the ordinary course of business takes free of a security interest in that asset.49 However, unlike under the Model Law and most reformed systems (where a transferee only takes subject to a security interest if it has knowledge that the transfer is in breach of the security agreement)50 under the PPSA a transferee will not be in good faith if the security interest has been registered prior to the transfer, and therefore takes subject to any registered security interest.51

E. Enforcement Another problem with the operation of the CMA was the lack of confidence of creditors that they would be able to recover on the chattel mortgage in case a default occurred, given the lengthy procedures required before a creditor could finally foreclose upon the mortgaged property. As was discussed during the different TWG meetings, the property involved in a chattel mortgage was 39 For example, a lien on goods where the price is unpaid (Art 2241(3)), a lien for repair or safe-keeping (Art 2241(5)) and a hotel-keeper’s lien (Art 2241(10)). 40 PPSA, s 66(b). 41 Civil Code, Art 2247. 42 PPSA, s 17. 43 Art 29(a). 44 PPSA, s 28(d). 45 See, eg US Uniform Commercial Code, §9-502(d); Saskatchewan PPSA, ss 43(4) and (5); New Zealand PPSA, s 146. 46 PPSA, s 28(e). 47 The rules on control relate to security interests in particular types of assets, such as deposits and investment property, and are found in PPSA, s 18. 48 PPSA, s 18 (perfection by control), s 19 (instruments and negotiable documents), s 20 (security interests arising by operation of law), s 23 (purchase money security interests) and s 24 (security interests in livestock). 49 PPSA, s 21. 50 UNCITRAL Model Law, Art 34(4). 51 PPSA, s 21.

Banking the Unbanked: An Examination of the Personal Property Security Act of the Philippines 207 personal property which, unlike land, has a tendency to depreciate in value quite rapidly. As such, while lenders such as banks have in the past generally been interested in financing borrowers who could only offer movable property as collateral, the numerous legal and technical procedures that had to be undertaken before a lender could recover in an event of a default was unappealing. Prior to the PPSA, in the event of a default, a creditor could foreclose on the movable property in accordance with the CMA, which provided for a thirty day period following the breach of the mortgage to be observed, during which no foreclosure could occur, following which a public auction conducted by a public officer was to take place.52 Apart from these immediate restrictions on the timing and manner of the foreclosure, notification of both the public and the mortgagor was required, and the officer who conducted the sale had to make a return in a particular form, register the sale in the register of deeds, and distribute the proceeds in a particular way. These provisions, being formal legal rules, necessarily had to be followed, otherwise an opposing party could put into question the validity of the entire foreclosure sale. It should be noted, however, that there was no prohibition from seeking relief from the courts if the secured creditor so wishes. As raised several times during the Technical Working Group discussions, these restrictions imposed by the CMA clearly placed creditors at a disadvantage. This disadvantage was due mainly to the nature of movable property which, as mentioned above, devalues at a much faster rate compared to immovable property. As such, for lenders to be more at ease when financing borrowers who could only offer movable property as collateral, the foreclosure process had to be altered in order to provide creditors with a fair and speedy process by which they could immediately foreclose on the mortgaged movable. In the PPSA, this clamour for change in the foreclosure process was remedied through the inclusion of Chapter 6 on the Enforcement of Security Interest Secured Creditor’s Rights.53 Apart from creating several different remedies which a creditor can take advantage of in order to collect from the borrower,54 most of which do not require judicial intervention,55 the PPSA specifically allows for a public or private sale to occur, provided the same is done in a commercially reasonable manner and all relevant parties are notified within ten days prior to the sale.56 What this essentially means is that the creditors are now afforded a better chance to recover on a movable while its value is still relatively high. This would, in effect, also benefit borrowers as a higher amount recovered during foreclosure would mean that any remaining liability that would have to be met by the borrower following the deduction of the amounts obtained through foreclosure would be much smaller. Lastly, by making commercial reasonableness57 as the standard for the validity of the public or private sale, creditors are no longer restricted by the need for a public sale conducted by a public officer in a public place, further reducing the costs of foreclosure. Guidance as to what is meant by ‘commercial reasonableness’ is given in section 50 of the PPSA. First, it is disposal of the collateral in conformity with commercial practices among dealers in that type of property. Second, a disposition is not commercially unreasonable merely

52 CMA, s 14. 53 This is the equivalent to Chapter VII of the UNCITRAL Model Law, which cover enforcement of a security right. 54 These include the taking of possession without judicial process if the security agreement so stipulates (s 47(a)), an expedited process for a possession order from the court (s 47(c)) and various out of court remedies tailored to particular types of intangible property (s 48). 55 Although there is no prohibition from seeking relief from the Courts if the secured creditor so wishes. 56 PPSA, s 49. 57 As defined in PPSA, s 50.

208 Anthony Amunategui Abad, David Kintanar Rosario III and Griselda (Gay) Santos because a better price could have been obtained by disposition at a different time or by a different method from the time and method selected by the secured creditor. Third, if a method of disposition of collateral has been approved in any legal proceeding, it is conclusively commercially reasonable. To give some insight as to what the TWG envisioned to be a commercially reasonable sale, some examples that were discussed can be given. These are the sale of mortgaged cars at a secondhand car shop, the sale of receivables on an online platform for receivables, and the sale of clothes on an online platform where clothes are normally sold. As such, the new foreclosure process contained in the PPSA was generally characterised as liberal and market-driven, enabling creditors to use various avenues to obtain the best possible value for the mortgaged property.

F. Conclusion Looking at the different provisions of the PPSA, it will immediately be noticed that it is a wider law that seeks to provide the necessary rules to govern a wider array of modern transactions than under the previous legal regime for secured transactions. While the PPSA had its origins in the CMA, many provisions were either lifted verbatim or borrowed from the UNCITRAL Model Law. As such, it can be reasonably stated that the PPSA’s provisions integrate global best practices on secured transactions58 but adapt these to ensure that they adequately address specific situations endemic to the Philippines. Through all these changes, the drafters of the PPSA sought to achieve greater financial inclusion through the simplification of regulatory measures and the use of technology in the form of the Registry. As the PPSA was crafted with the support of the lenders, borrowers, and regulators, it would appear that the PPSA has achieved a win-win situation for all involved.

IV. Early Assessment of the PPSA Based on the Doing Business index of the World Bank Group,59 there is a need for the Philippines to align with international best practice, as well as a desire to increase its Doing Business ranking. The ranking of the Philippines in the Legal Rights Index of the Getting Credit index of the 2018 Doing Business index was 1 out of 12. While improving the legal rights is important, the most important measure is operationalisation of the legal reforms.60 The question is whether the Philippines is able to operationalise the law and really achieve its spirit in increasing access to finance to MSMEs and simultaneously sustain the buy-in from all stakeholders? In enabling the market and working with the relevant stakeholders, the effort could not have gone as far as it did had those relevant stakeholders had not been willing to compromise and work together. For instance, what was preferred to be labelled as the ‘Secured Transactions Bill’ according to international standards in most jurisdictions, evolved to be called the ‘Personal Property Security Act’ in the Senate.61 In the order of things, this relabelling did not matter. What mattered most was, that stakeholders continued to work together in passing the bill both in the House of Representatives

58 See

the discussion of the modern principles of secured transactions in ch 2. ch 1 III C (ii). 60 It should be noted that the Doing Business index assessment takes into account operationalisation of legal reform. 61 Senate Bill no 1459. 59 See

Banking the Unbanked: An Examination of the Personal Property Security Act of the Philippines 209 and Senate. Currently, the PPSA is still in its infancy in the Philippines. As such, there is still a long way to go until the actual effects of the PPSA on the Philippines will be realised. However, there are several projected consequences resulting from the passage of the PPSA. One of the projected consequences is the shift towards a greater acceptance of movable collateral in the Philippines. Currently, land remains the collateral most accepted by lenders, especially banks and other financial institutions. As the Philippines is an archipelago, land is understandably scarce. When one considers that most of the land is owned by the Government and therefore cannot be readily used for private ends by the citizenry, it is clear that only a small portion of the Filipino population will have access to the real property that banks and other financial institutions require as collateral. Given this situation, the PPSA was crafted in order to provide a viable alternative to real property as collateral. By providing a transparent online registry, and clear and simple rules that govern both the relationship of the parties to the collateral and the relationship of the parties among themselves before, during, and after collateralisation, the PPSA provides an expectancy of certainty and dependability when it comes to secured transactions. As such, when a lender wishes to determine the viability of the offered collateral, it may now rely on what is found in the Registry. Similarly, when a borrower sells, trades, or transforms the collateral in order to confuse the lender, the lender may now take advantage of the provisions of the PPSA that clarify liability if the borrower sells, trades, or transforms the collateral.62 Likewise, when a borrower defaults, the lender can now choose from several simple solutions in order to recover on the collateral. As mentioned earlier, among the solutions offered is the recourse to a private sale which should allow the lender to recover on the collateral before it has significantly devalued.63 This is truly an innovative solution for recovery as the only legal criteria for a private sale to be valid is that it is done in a commercially reasonable manner. As such, and using the legal maxim absoluta sententia expositore non indiget, which means that a clear statement requires no further explanation, the previous archaic and convoluted methods of a public auction which requires technical rules that most persons outside the legal profession will not immediately understand are no longer mandatory when it comes to foreclosing on a movable after default. With the PPSA ushering in a more reliable legal system where personal property can be used to obtain much needed credit, another projected consequence is the lessening of informal lenders and the breaking of the old debt cycles which lead generations of Filipino families into poverty. Currently, many Filipinos still turn towards informal lenders. These informal lenders are understood to be unlicensed lenders who operate outside the scrutiny of regulators. While it is admitted that informal lending generally allows a borrower to obtain funds quickly (most, if not all, informal lenders do not even ask for collateral) the fact that these informal lenders operate outside of the law means that the borrowers are effectively at their mercy. As such, it is not uncommon for informal lenders to charge highly usurious rates such as the ‘five-six method’

62 For example, a security interest extends to the identifiable or traceable proceeds of collateral (PPSA, s 8). ‘Proceeds’ are defined as (PPSA, s 3(f)): ‘Any property received upon sale, lease or other disposition of collateral, or whatever is collected on or distributed with respect to collateral, claims arising out of the loss or damage to the collateral, as well as a right to insurance payment or other compensation for loss or damage of the collateral.’ Moreover, if collateral is disposed of outside the ordinary course of business, or not to a good faith transferee, the transferee takes subject to the security interest. While there is no general provision to the effect that a transferee takes subject to a security interest (unlike the UNICTRAL Model Law, Art 34(1)), s 21 of the PPSA contains the exception for a good faith transferee in the ordinary course of business, and, moreover, that a transferee is not in good faith if the security interest has been registered before the transfer. 63 See III E.

210 Anthony Amunategui Abad, David Kintanar Rosario III and Griselda (Gay) Santos wherein a borrower borrows five and pays six the following day. Likewise, it is not uncommon for informal lenders to resort to kidnapping and outright violence when the borrower is unable to pay. As such, Filipinos who resort to informal lenders actually collateralise the freedom and safety of themselves and their families. Thanks to the PPSA, Filipinos can now turn towards the formal lending institutions, who may take longer to release the funds but are much safer and humane in terms of collection. As the PPSA now makes movable collateral more enticing, Filipino borrowers can now borrow from these formal lending institutions with confidence, knowing that if they default, the worst that could happen would be for the loss of the collateral and the possibility of owing the difference between the amount owed and the amount recovered from the disposition of the collateral. Likewise, formal lending institutions, under the scrutiny of the Central Bank of the Philippines, are forbidden from employing violence and other harmful methods in a bid to collect on the debt. As such, a Filipino who collateralises his movables to the formal lending institutions can sleep safely, knowing that the liberty and security of himself and his family will not be directly threatened in case he defaults. Of course, this is not to say that the PPSA encourages borrowers to default. This very question came up during the discussion of the TWG. After discussion, it was decided that the elaborate rules crafted in case of default were crafted not to promote default but rather to ensure a speedy and orderly process in case a default occurred. In fact, the PPSA actually provides methods by which a potential default can be limited. This comes in the form of the registry which provides lenders with clear and timely information which they can use in determining whether the person to whom they are lending is likely to default or not.64 When the registry was discussed by the TWG, among the features that were discussed is that the history of all transactions involving the borrower or the collateral be available in order to help lenders better assess whether or not such a borrower or such a collateral would be lent to or accepted. In a way, this somewhat mirrors the credit history and credit rating schemes of other jurisdictions by allowing a lender to determine, based on past transactions, whether or not he should trust either the borrower or the collateral offered. Given the points made in the previous paragraphs it is likely that there will be more lending involving movable collateral but fewer defaults occurring. Provided that there is no fraud involved, and that the lenders abide by the rules set by the Central Bank of the Philippines when it comes to vetting clients, the chances of a default occurring will be much smaller than it was under the previous legal regime. Lastly, another foreseen consequence of the PPSA, which also relates to defaults, is that fewer disputes involving defaults, foreclosures, and movable collateral will find their way to the Courts. In the Philippines, it must be said that Court dockets are often clogged. A proportion of the cases which clog the dockets are cases that involve commercial disputes centring on defaults, foreclosures, and the relationship of parties to a movable collateral. The main reason why this occurs is that the previous legal regime heavily favoured creditors coming to court to seek a remedy if a dispute took place. As mentioned earlier, the PPSA solved this by allowing a private sale to take place in the event of default, with the only limitation being that the sale should be carried out in a commercially viable manner. Given this, when a default occurs under the PPSA, the parties no longer have to go to court but can instead organise their own private sale, the outcome of which

64 For a description of the due diligence a lender can perform under a reformed secured transaction regime, see UNCITRAL Practice Guide to the Model Law on Secured Transactions IIB and IIC, uncitral.un.org/sites/uncitral.un.org/ files/media-documents/uncitral/en/19-10910_e.pdf.

Banking the Unbanked: An Examination of the Personal Property Security Act of the Philippines 211 will be binding on them. Of course, there will still be some instances wherein recourse to the courts cannot be avoided, for example, if there was fraud employed at any stage of the transaction. However, these instances should also be significantly lowered by the creation of the registry, which should make detecting fraud much easier as it makes the history of the borrower and the collateral available. Furthermore, the PPSA provides clear rules as to the priority of lenders in different situations. By providing clarity as to the priority, a mechanism that was not particularly clear under the previous legal regime, lenders will no longer need to resort to the court to determine who has priority among them. As such, it is reasonably foreseeable that the provisions of the PPSA will significantly lessen the number of cases being filed in court as the root causes for concern which often lead parties to the courts have been addressed. Simply put, the expected impact of the PPSA on the Filipino people is positive. Filipinos, many of whom do not own land, can now use their personal property as viable forms of collateral in order to access much needed funds that they can utilise to better their lives. Likewise, lenders will now have a powerful new tool in the form of the registry in order to perform proper due diligence on would-be borrowers and would-be collateral. Both parties will also benefit greatly from the private sale function of the PPSA as they no longer need to go to court or undergo a public auction in order to foreclose on the collateralised movable. Given that there are many hard-working Filipinos who are either MSMEs or farmers, the creation of this new avenue to access their required funding should help spur their businesses in the right direction, allowing them a greater chance to access their full potential without fear for their safety or those of their loved ones. While the Implementing Rules and Regulations65 may have an impact on the way the provisions, as drafted by the TWG, are interpreted, many of the important provisions were drafted using a clear language which can be referred to if the Implementing Rules and Regulations do not appear to accord with the spirit and letter of the law. As such, it would be more than reasonable to conclude that the PPSA is shaping up to be one of the more successful iterations of a Secured Transactions Law found in any jurisdiction.

V. Steps Forward ‘Bayanihan’ is a Filipino virtue which is visualised as a group of Filipinos carrying together a nipa hut – in other words, helping a fellow Filipino move his or her house. The passage of the Philippines’ Personal Property bill into law was a perfect demonstration of the Filipino spirit of bayanihan. Both the public and private sectors (Government, MSMEs, the private sector and the banking community) worked together to advocate the passage of the bill into law. Today, the PPSA is in effect. It was among the fastest moving legislation in the Philippines’ legislative history. It was lodged in Congress in May 2016, lodged anew in 2017 and signed into law in August 2018. Now the bayanihan needs to be shifted to operationalising the reform to increase access to finance to MSMEs, farmers and others. How do we ensure that the law, as written, maintains its original intention of helping MSMEs, farmers, and other Filipinos in dire need of financial resources? One answer is by ensuring that any rules or regulations that are issued in furtherance of the provisions of the PPSA do not depart

65 These

were passed on 22 November 2019.

212 Anthony Amunategui Abad, David Kintanar Rosario III and Griselda (Gay) Santos from the spirit and letter of the PPSA. The good that is found in a statute often becomes lost when it comes to its interpretation. As such, those who take on the responsibility of drafting such regulations take on the burden of ensuring that what they draft does not alter the original intent of the law. A high degree of faithfulness to the original spirit and letter of the law will be necessary in order to ensure that the overriding vision that helped bring the law into being can and will be realised. To come up with a viable solution to help lift generations of Filipinos out of poverty is not easy. Yet it remains the sincere hope of all those involved in the Technical Working Group that drafted the PPSA that the provisions of the PPSA will do just that by making personal property a viable alternative to real property when it comes to its use in secured transactions. Yet it would be folly to think of the PPSA as a silver bullet that would eradicate all the problems of the Filipino people instantaneously. At best, the PPSA lays the foundations of a better financial ecosystem wherein all Filipinos can freely participate in meaningful economic activity. After all, it is still up to Filipino borrowers and lenders to take advantage of the provisions of the PPSA and make greater access to finance a reality. Lenders should therefore cast aside previous biases against movable collateral that were created as a result of the shortcomings of the previous legal regime. Likewise, borrowers should be honest and deal in good faith with lenders when offering movable property for collateral. Regulators should likewise refrain from issuing cumbersome regulations in implementing the PPSA which could unnecessarily burden the Parties to the secured transaction. If borrowers and lenders are allowed to deal with each other freely, and if they do so in good faith, it is very likely that several years down the line, the Philippine financial ecosystem will have changed for the better. Gone will be the days when many Filipinos end up enslaved by informal lenders who do not, and have never had, the welfare of those they lend to in mind. Gone will also be the days wherein lenders are paralyzed from foreclosing after a default until the Court issues a Final Decision and a Motion for Execution is granted. Gone will likewise be the days when movable collateral is deemed too risky to be used in a serious transaction involving a formal lending institution. At the end of the day, the PPSA set the stage for a brighter future for the Filipino people. Yet it is still very much up to the Filipinos themselves whether they this bright future will become a reality.

11 Korea: The Coexistence of Old and New Secured Transactions Law Regimes YOUNGJOON KWON

I. Overview on Korea’s Secured Transactions Law This chapter aims to give an overview of secured transactions law in the Republic of Korea (hereinafter Korea).1 Located in East Asia on the southern half of the Korean peninsula, Korea has a population of 51 million in a territory of 100,032 square kilometers, which is similar to the size of Portugal. Following the devastating Korean War (1950–1953), Korea was one of the poorest nations in the world, but miraculously grew to become the 12th economy in the world in terms of GDP as of 2019. In terms of a legal system, Korea belongs to the civil law tradition and thus has a statutory law system as opposed to a common law system. Therefore, the generally recommended way of understanding legal issues in Korea is to review relevant Korean statutes and the provisions therein. With regard to secured transactions law, Korea does not have an omnibus statutory law which governs the issues arising from the secured transactions in an overarching manner. Rather, security rights law in Korea is prescribed in different statutes. Among these statutes, the Korean Civil Code2 (KCC) is the one that offers the basic doctrinal framework for security rights in general. The KCC stipulates three types of security rights; the right of retention, a pledge, and a mortgage. Setting aside their detailed differences for a moment, they can be roughly distinguished in terms of the objects they each cover and the grounds on which they are established. The right of retention, which arises by virtue of law as opposed to contract, covers both movable and immovable assets. A pledge, which in principle is established by a contract, covers movable assets and rights including receivables, while a mortgage, which also in principle is established by a contract, covers immovable assets only. Other security rights in specific objects are governed by special statutes, such as the Provisional Registration Security Act,3 the Factory and Mining Assets Mortgage Act,4 and the Act on Mortgage on Motor Vehicles and

1 The Republic of Korea is often called ‘South Korea’, as opposed to ‘North Korea’ (officially the Democratic Peoples’ Republic of Korea). 2 The English translation of the KCC is provided at elaw.klri.re.kr/kor_service/lawView.do?hseq=40944&lang=ENG. 3 The English translation of the Provisional Registration Security Act is provided at elaw.klri.re.kr/kor_service/ lawView.do?hseq=44093&lang=ENG. 4 The English translation of the Factory and Mining Assets Mortgage Act is provided at elaw.klri.re.kr/kor_service/ lawView.do?hseq=29455&lang=ENG.

214 Youngjoon Kwon Other Specific Movables.5 A particularly significant statute is the Act on Security over Movable Property and Claims,6 which is discussed in more detail later. As such, security rights may be created on movable or immovable assets, as well as tangible or intangible assets, as the law dictates. In practice, security in immovable assets has been preferred over security in movable assets or receivables for several reasons.7 First, security rights in immovable assets must be registered. This is because rights in immovable assets are established upon registration in general (KCC, Article 186), and security rights in immovable assets is no exception to this principle. Registration has several merits. It presents detailed and clear information about the asset in question. For example, it offers information about the owner of the immovable asset, the type of security right over the asset, the secured creditor and the debtor, the obligation secured by the security right, and priority among competing claimants. The provision of such information enhances legal certainty for stakeholders, including a would-be secured creditor. Second, immovable assets are generally higher in value than movable assets or receivables. This makes immovable assets a preferred form of collateral. Indeed, security in immovable assets has accounted for the highest percentage of any type of security in Korea. For example, the commercial banks in Korea usually acquire security rights in immovable properties upon granting loans. In the year 2017 alone, more than 96 per cent of the collateralised loans granted by those banks were secured with immovable properties as collateral.8 These statistics show that the Korean security rights market is heavily weighted in favour of immovable assets as the object of security rights. However, security rights on movables and receivables are gradually gaining ground in the Korean legal regime. A pledge of rights as stipulated in the KCC is frequently used in practice, unlike a pledge of movables, since it does not require physical possession of the encumbered assets. Further, a particularly noteworthy statutory law in this regard is the Act on Security over Movable Property and Claims (hereinafter the Act), mentioned earlier. This statute was promulgated on 10 June 2010 and was subsequently effectuated on 11 June 2012. The Act stipulates the creation of security rights over movable assets, receivables, and intellectual property; registration and enforcement of such security rights; and the legal relationship surrounding security rights. The purpose of this Act is not to override existing types of security rights acknowledged by other statutes including the KCC but to create additional types of security rights on top of those existing security rights. This Act is regarded as the fruit of continuing legal reform efforts to modernise the regime governing security rights in Korea. The UNCITRAL Legislative Guide on Secured Transactions (hereinafter Legislative Guide) has had certain impact on this reform. Given that the substantial part of the scheme of underlying security rights of the Legislative Guide comes from Article 9 of the US Uniform Commercial Code (UCC), the Act may be evaluated as having been influenced by the UCC at least indirectly. In addition to security rights acknowledged by statutory laws, the Supreme Court of Korea has developed a legal doctrine acknowledging ‘security by means of transfer (Yangdodambo)’.9

5 The English translation of the Act on Mortgage on Motor Vehicles and Other Specific Movables is provided at elaw. klri.re.kr/kor_service/lawView.do?hseq=45100&lang=ENG. 6 The English translation of the Act on Security over Movable Property and Claims is provided at elaw.klri.re.kr/ kor_service/lawView.do?hseq=41691&lang=ENG. 7 Y Kim (ed), Commentary on the Civil Law, Property (4), 4th edn (Seoul, Korea Judicial Administrative Society, 2011) 510. 8 The relevant data is obtained from the Financial Statistics Information System (fisis.fss.or.kr/fss/fsiview/indexw. html), which is run by the Financial Supervisory Service of Korea. 9 It is also translated as ‘transfer of ownership for security purposes’. See JH Kim, ‘Development of Security Rights Law since the Codification of the Civil Code of Korea’ (2014) 13 Journal of Korean Law 271, 288.

Korea: The Coexistence of Old and New Secured Transactions Law Regimes 215 This is in response to social and economic demands for more flexible and diversified forms of security rights that suit the practical needs of the business circle.10 The legal rules on the security by means of transfer have been formed and modified for decades based on Supreme Court case law. Due to the lack of a statutory regime, the security by means of transfer has raised a number of complicated legal issues. Against this backdrop, I will provide a more in-depth account of the security rights law on movables and receivables in Korea. A pledge based on the KCC and a security by means of transfer (Yangdodambo) based on case law will first be explained. It will be followed by explanation of the new security rights law regime based on the Act. Finally, I will add analysis on the current security rights regime as a whole and make some suggestions for reform in the future.

II. Pledge and Security by Means of Transfer (Yangdodambo) A. Pledge A pledge is created on movables (movable property pledge) or rights (pledge of rights). The KCC has 16 Articles on the movable property pledge, and 11 Articles on the pledge of rights. The KCC envisages the movable property pledge as the prototype of the pledge. In line with this position, the KCC stipulates that the provisions on the movable property pledge apply mutatis mutandis to the pledge of rights (Article 355) and other forms of pledge created in accordance with other statutory laws (Article 344). However, the movable property pledge seldom plays a meaningful role in the law in action. This is due to the inconvenience arising from the requirement that a secured creditor must have possession of the encumbered assets. The pledge of rights, which does not require physical possession, plays a dominant role in practice.11

(i) Movable Property Pledge (a) Overview A pledge requires the existence of an obligation to be secured. Where such obligation does not exist, a pledge cannot be created even when a security right agreement and delivery of the encumbered asset exist. This is so because a security right is deemed subordinate to the obligation that it purports to secure. A secured obligation may exist in various forms; it can be an unconditional or conditional obligation, and it can be an obligation that is due or one that is not due. A pledgee, by definition, should always be a creditor of such an obligation. Meanwhile, a pledger may be a debtor of the obligation but can also be a third party who provides one’s asset in order to secure the obligation owed by a debtor. Therefore, a pledger may or may not be a debtor of the secured obligation. Given the existence of an obligation to be secured, a pledge is created by an agreement between a pledgee and a pledger to create the pledge and the delivery of the pledged property to the pledgee. The requirement of the delivery by the pledger to the pledgee is another expression of requiring possession of the encumbered asset by a secured creditor. The KCC

10 ibid 277. 11 Y Kim (ed), Commentary on the Civil Law, Property (3), 4th edn (Seoul, Korea Judicial Administrative Society, 2011) 477.

216 Youngjoon Kwon envisages several ways of ‘delivery’: actual delivery (Article 188, section 1),12 summary assignment (Article 188, section 2),13 agreement on possession (Article 189),14 and assignment of claim for return of the object (Article 190).15 The pledgee and the pledger may agree on the method of delivery. However, a mere agreement on possession (Article 189) is not deemed a valid way of delivery in creating the pledge, as the pledger is not allowed to hold possession of the pledged property himself or herself (Article 332). Furthermore, Article 335 of the KCC stipulates that a pledgee may retain the pledged property until he or she obtains satisfaction of his or her claim secured by the pledge in question. For the security right to become effective against third parties, it is a requirement that the pledgee must have possession of the pledged property. The rationale behind requiring the pledgee to hold possession of the pledged property is that it could impose emotional or mental pressure on the pledger thereby increasing the probability of the debtor fulfilling his or her secured obligation. The shortcoming of such arrangements, apparently, is that the pledger can no longer use or make profits from the encumbered assets. For this reason, debtors or third parties providing security are generally reluctant to provide their assets as an object of a pledge, especially when these assets are indispensable in their day-to-day business operations. Meanwhile, the pledgee generally is not interested in utilising encumbered assets other than for the purpose of security. Such non-utilisation of the encumbered assets, which could have been highly utilised by the pledger, leads to incurrence of the loss on the utility of the assets. This does not only impair the relevant parties’ interests but also reduces total social utility on the assets. Indeed, the movable property pledge is seldom used in business practice and is not likely to be widely used in the near future.16 Therefore, the movable property pledge is not significant, at least from a socio-economic perspective. From a normative perspective, however, the provisions on the movable property pledge are still of significance since these provide the basic principles for security rights in general. (b) Order of Priority Multiple pledges may be created on the same movable property. In such case, the order of priority between the pledgees becomes an important issue. Article 333 of the KCC stipulates that the order of priority in such cases shall depend upon the date of creation of the pledge. The date of creation is the point of time when the requirements for the creation, that is an agreement and a delivery, are all satisfied. In the case of actual delivery, the issue of the multiple pledges would not arise since asset can be actually delivered to only one secured creditor at a time. However, in the case of assignment of claim for return of the object (Article 190), multiple pledges over the same asset can be created since such delivery method does not require actual delivery of the asset. (c) Enforcement Article 338 of the KCC prescribes how a pledgee may enforce his or her security rights. A pledgee may sell the pledged property by auction to obtain satisfaction of his or her claim (section 1). 12 Actual delivery occurs when the transfer of possession physically occurs. 13 Summary assignment occurs when the creditor who happened to possess the encumbered asset at the time of the secured transaction is in agreement with the debtor to regard it as the receipt of the possession for the purpose of creating security right. 14 Agreement on possession occurs when the debtor continues to possess the encumbered asset while the debtor and the creditor agrees to create indirect possession for the creditor. 15 Assignment of claim for return of the object occurs when the debtor who has the right to claim the return of the object against third party agrees to deliver possession to the creditor by way of assigning the claim. 16 Kim (n 11) 480.

Korea: The Coexistence of Old and New Secured Transactions Law Regimes 217 Or a pledgee may apply to the court to have the pledged property appropriated to the satisfaction of his or her claim to the extent of its value appraised by an expert, provided there is a justifiable reason for so doing (section 2). In short, the sale of the object by way of public auction is the general form of enforcement, while appropriation by the secured creditor can also be allowed under exceptional circumstances. Meanwhile, no pledger shall, by a contract effected before the debt becomes due, agree that the pledgee shall acquire the ownership of the pledged property or dispose of it by way of satisfaction of his or her claim (Article 339). This rule of banning a forfeited pledge serves the debtor’s interest by restraining the debtor from providing his or her asset which costs higher than his or her debt itself as collateral while restraining the pledgee from exploiting excessive benefit on the occasion of encumbrance.

(ii) Pledge of Rights (a) Overview Article 345 of the KCC stipulates that a right may become the object of a pledge. This type of pledge is called a pledge of rights. Excluded from the scope of the rights as object of pledge of rights is ownership right over movable or immovable. Ownership right over movable is covered by movable property pledge, while ownership right over immovable is covered by mortgage. Another exception is the right to use and take profit from immovable. The underlying rationale of this exception is that security right on such right can be mostly served by mortgage or cheonsegwon (a specific type of right in rem acknowledged by Article 303 of the KCC). The concept of a pledge assumes that the object of the pledge may be sold or transferred to a third party upon default of a debtor as a part of liquidation process. Thus, a pledge may not be created on a claim that cannot be sold or transferred. If a claim cannot be assigned due to its nature (Article 449, section 1) or due to an agreement not to assign (Article 449, section 2), such claim cannot become the object of the pledge. The same rationale applies where the assignment of a claim is prohibited by other statutes, for instance the Labor Standards Act17 and the State Compensation Act.18 Article 346 prescribes the manner in which a pledge of rights can be created. A pledge of rights must be created in accordance with the method for the transfer of such rights, unless otherwise stipulated by law. There are special provisions on specific types of claim: Article 347 on a claim evidenced by a document, Article 348 on a claim secured by a mortgage, Article 349 on a nominative receivable, Article 350 on a debt payable to order, and Article 351 on a bearer instrument. With regard to the pledge created on a nominative receivable, ie, a claim in which a creditor is fixed from the outset, Article 349 sets out the prerequisites for making such pledge effective against the original debtor or any other third parties. Article 349, more specifically, refers to Article 450 and Article 451, which deal with the assignment of a nominative receivable. A pledger is required to give notice regarding the creation of pledge to the original debtor (meaning the debtor owing to the pledger), or obtain the original debtor’s consent to such arrangement, so as to make the pledge effective against the original debtor or any other third person

17 Labor Standards Act prohibits the assignment of the claim for compensation (Art 86). The English translation of this Act is provided at elaw.klri.re.kr/kor_service/lawView.do?hseq=31900&lang=ENG. 18 State Compensation Act prohibits the assignment of the claim to seek compensation from the State for the deprivation of life and bodily injury (Art 4). The English translation of this Act is provided at elaw.klri.re.kr/kor_service/lawView. do?hseq=45911&lang=ENG.

218 Youngjoon Kwon (Article 450, section 1). Such notice or consent must be put in writing with a certified fixed date (Article 450, section 2). Article 451 applies to the creation of a pledge on a nominative receivable mutatis mutandis (Article 349, section 2). Article 451, section 1, deals with the effect of the original debtor’s consent: if the original debtor has given his or her consent without any reservation, he or she cannot raise any defence against the pledgee that he or she could have done so against the pledger. Meanwhile, Article 451, section 2, prescribes the effect of notice: the original debtor may raise against the pledgee any defence which has arisen against the pledger prior to his or her receipt of the notice. (b) Order of Priority The provisions on the pledge of movable properties apply mutatis mutandis to the pledge of rights (Article 355). Thus, Article 333, which determines the order of priority, also applies to the pledge of rights. That is, the order of several pledges’ priority shall depend upon the date of their creation. (c) Enforcement Articles 353 and 354 prescribe the method of enforcement. In principle, a pledgee may directly collect the claim under the pledge (Article 353, section 1). The following sections in Article 353 set forth specific rules as to the collection of money or things. If the claim under the pledge is for the payment of money, the pledgee may obtain direct payment of only such portion thereof as corresponds to the amount of his or her own claim (Article 353, section 2). If such claim for the payment of money has become due earlier than the pledgee’s own claim, the pledgee may request the original debtor to deposit the amount payable with the Court Depository (Article 353, section 3). If the claim under the pledge is for the delivery of a thing, the pledgee may exercise his or her pledge over the object that has been returned to the pledger (Article 353, section 4). A pledgee may also enforce his or her security right by way of civil execution prescribed by the Civil Execution Act (Article 354).19

B. Security by Means of Transfer (Yangdodambo) (i) Overview The demand of the market for more flexible and customised security rights has increased. The business world was far ahead of the existing law in developing alternative security rights. In this context, Yangdodambo, the security furnished by means of transfer, has emerged as an alternative to the pledge of movables and the pledge of rights. There is no direct statutory ground upon which this type of security right is acknowledged. Rather it was founded based on case law. The security by means of transfer may be created on almost any asset, as long as the asset has collateral value and is assignable. For this reason, immovable, movable, and other rights can all become the object of the security by means of transfer.

19 The English translation of Civil Execution Act is provided at elaw.klri.re.kr/kor_service/lawView.do?lang= ENG&hseq=41807.

Korea: The Coexistence of Old and New Secured Transactions Law Regimes 219 Often, a set of movables or receivables, as a single pool of collateral, can also be collateralised under this type of security right.20 For example, a debtor may provide a set of movables as if they were a single object. Encumbrance of inventory is a typical example. The quantity and the total value of inventory may fluctuate. Yet, it still can function as a single object for collateral. Receivables can also be encumbered likewise. The security by means of transfer created on a set of movables or receivables with a floating value is highly useful in practice and is widely utilised. Under this type of security, detailed scope and the constituents of the set of collateral does not have to be fixed at the time of the security agreement as long as they can be specified by type, location, quantity, etc.21 (a) Security by Means of Transfer of Movable Property The security by means of transfer of movables is created upon the agreement between a creditor and a debtor, or a third person who wishes to provide the creditor with collateral on behalf of the debtor, and the delivery of the object. The delivery here refers to the four modes of delivery stipulated in the KCC: actual delivery (Article 188, section 1), summary assignment (Article 188, section 2), agreement on possession (Article 189), and assignment of claim for return of the object (Article 190). The security by means of transfer differs from the movable property pledge, in that it may be created even by way of agreement on possession.22 The debtor or the third person who provided his or her asset as collateral may hold the possession of and make use of the asset and profit from it. This becomes particularly important when a corporate debtor wishes to provide its equipment, machine, facility, etc. which is indispensable in its operation. While the agreement on possession allows the corporate debtor to operate the business with the asset, it remains uncertain who has the right to dispose of the asset pursuant to such arrangement. This stems from the drawback of the agreement on possession that one cannot figure out whether the asset has been provided as collateral or not at least from an outsider’s perspective, for the asset remains in the possession of the original owner, never being actually handed over to the creditor. As such, the debtor might collateralise the same asset to secure two or more different obligations, or create the security by means of transfer over one asset and then sell it to a third person. Under such circumstances, the legal relationship among stakeholders becomes even more complicated. Several intriguing issues arise when a set of movable properties becomes the object of the security by means of transfer. One is the question of how parties can determine the range of objects that fall within the set of movable properties provided as collateral. The Supreme Court ruled that the object of the security by means of transfer must be distinguished from other assets which belonged to the debtor, clearly enough that anyone could make a distinction between collateral and other assets based on objective criteria.23 In determining whether the set of movable properties is distinguishable and thus eligible for the security by means of transfer, various factors such as the parties’ intent, the nature of the collateralised asset, and the circumstances under which the asset is used and managed must be taken into consideration. The second and perhaps more important question is as to whether the object of the security by means of transfer naturally expands when the amount of the movable properties within the set

20 Supreme

Court Decision, 28 April 2016, Case No 2015Da221286; 22 February 2007, Case No 2006Do8649. Court Decision, 25 October 1988, Case No 85Nu941. 22 Supreme Court Decision, 28 October 2004, Case No 2003Da30463; 10 September 1996, Case No 96Da25463. 23 Supreme Court Decision, 14 March 2003, Case No 2002Da72385. 21 Supreme

220 Youngjoon Kwon increases in the ordinary course of business. The Supreme Court deems that the increased amount naturally becomes incorporated into the set originally designated by the parties as collateral.24 As such, the parties do not have to meet the requirements which are required to create the security by means of transfer in every instance when the amount of movable property increases. Thus, when the security by means of transfer was created on a set of garments stored in a particular warehouse, the security right of the creditor naturally extends to the new garments put into the same warehouse afterwards in the ordinary course of business.25 The same logic applies to the natural fruits, the products derived from a thing in conformity with the use for which the thing is intended (Article 101 of the KCC). In practice, however, the range of movable properties to which the security by means of transfer naturally extends is not always clear cut, as illustrated in the following case. The parties to a security agreement specified the object of the security at issue as ‘3,000 pigs raised in Farm X’. The parties further agreed that the debtor might hold possession of the pigs, and that the debtor should retain 3,000 pigs as long as the agreement stood valid. Later the debtor leased Farm X to a third person and sold the pigs to him. The number of pigs in Farm X had fluctuated afterwards, and the third person ended up raising more than 3,000 pigs in Farm X. The creditor filed a suit against the third person, alleging that the third person was obliged to deliver all the pigs in Farm X to the creditor. The lower instance court held that the third person had to deliver all the pigs as such.26 The Supreme Court, however, reversed the lower instance court’s ruling on the following basis.27 When the security by means of transfer has been created on a set of movable property as in this case, it is quite natural and reasonable to expect the amount of movable property will fluctuate. The amount will increase when the pigs breed, or when the possessor buys new pigs; the amount will decrease when the pigs die, or the possessor sells the pigs. As such, the pigs born or bought with the money earned from running Farm X become incorporated into the originally collateralised set of pigs. However, the pigs bought with the money from separate funds of the third person do not naturally become a part of collateral. Such pigs must be excluded from the pigs originally provided as collateral. (b) Security by Means of Transfer of Nominative Receivable Security by means of transfer of nominative receivable is created upon the agreement between a creditor and a debtor, or a third person who wishes to provide the creditor with collateral on behalf of the debtor. Either notice to the obligor or acknowledgement of the transfer by the obligor is required for taking effect against obligor. The aforementioned rules with regard to the assignment of nominative receivable set out in Articles 450 and 451 of the KCC apply to the security by means of transfer of nominative receivable. A set of nominative receivables, too, may constitute the object of the security by means of transfer. It is noteworthy that the security right does not naturally extend to the nominative receivables established after the creation of the security. Thus, the parties need to fulfil the requisites for the assignment of nominative receivable, if they wish the newly established nominative receivables incorporated into the set. A set of nominative receivables may include the claims yet to be established in the future. In such cases, the issue of assignability of future claims arises. In this regard, the Supreme Court

24 Supreme 25 ibid.

26 Seoul

Court Decision, 7 September 1999, Case No 98Da47283.

High Court Decision, 6 April 2004, Case No 2003Na60855. Court Decision, 12 November 2004, Case No 2004Da22858.

27 Supreme

Korea: The Coexistence of Old and New Secured Transactions Law Regimes 221 has set out two requisites for assigning future claims.28 Firstly, the future claim shall be identifiable at the time of agreement on the assignment of such claim. Secondly, the probability that such claim would be established in the near future shall be substantially high. When a future claim meets the abovementioned requirements, the parties may create the security by means of transfer on the set of nominative receivables including the future claim. As for the requisites for creating such security, the provisions on the assignment of nominative receivable apply here accordingly.

(ii) Order of Priority The security by means of transfer, particularly when created on movable properties by means of agreement on possession, may cause difficulties with regard to the order of priority. For instance, a debtor may provide movable property of his or her own as collateral to creditor A, delivering the collateral by the agreement on possession, and later do the same with creditor B. Since creditor A does not physically possess the collateral and there is no registration system under Korean Law to register the security by means of transfer, creditor B may not know that the security by means of transfer has already been created in favour of creditor A. The issue of bona fide acquisition (Article 249 of the KCC) arises here, for creditor B might claim to take a security right on the same asset in good faith and without negligence, by the agreement on possession without acquiring physical possession. The Supreme Court held that the movable property in such instance is not subject to bona fide acquisition, and that B cannot claim his or her security right against A.29 Indeed, the agreement on possession, as opposed to another delivery method such as actual delivery, does not meet the requirement of bona fide acquisition set forth by Article 249 of the KCC. As such, Creditor B cannot claim that he or she has priority over Creditor A.30

(iii) Enforcement Compulsory execution pursuant to the Civil Execution Act is available when the secured party holds the specific type of a notarial deed which states and confirms the consent of the debtor to the compulsory execution and thereby grants the creditor power to execute (Article 56 of the Civil Execution Act). However, the secured party may not wish to proceed with the compulsory execution, for such proceedings usually require more time and expense. The secured party generally prefers what is called ‘private enforcement’ upon default. The enforcement of the security by means of transfer is ‘private’ when it does not involve a public authority such as a court in the process of enforcement. The typical way of private enforcement is as follows. The secured party either takes ownership of the asset or sells the collateral to the third party. If the value of the collateral exceeds the amount of secured claim, the secured party pays the surplus to the owner of the collateral. Where there is an agreement not to pay the surplus to the owner of the collateral, such payment is not required. However, where the borrower of the loan has promised to transfer the movable property of his or her own in lieu of the borrowed money or object, and the value of the property

28 Supreme Court Decision, 30 July 1996, Case No 95Da7932; 25 July 1997, Case No 95Da21624; 8 April 2010, Case No 2009Da96069. 29 Supreme Court Decision, 23 June 2000, Case No 99Da65066. 30 C Yang and H Kim, Civil Law 3, 2nd edn (Seoul, Pakyoungsa, 2015) 477.

222 Youngjoon Kwon concerned here exceeds the aggregate of principal and interest, such promise is deemed null and void, pursuant to Articles 607 and 708 of the KCC. Even in this case, the security agreement itself stands valid; only the agreement on the way of enforcement is deemed invalid.31 During the course of private enforcement, the secured party bears a duty of care and due diligence (Article 681 of the KCC). If the secured party breaches such duty and sells the collateral at an unreasonably low price, he or she shall compensate the owner of the collateral for the deficit.32

III. Security Rights Prescribed in the Act As discussed above, security rights law in Korea has raised several issues that can hardly be solved without legislative measure. The law on movable property pledge, as prescribed in the KCC, has long been deemed less useful, for the debtor cannot use the property once it is provided as collateral. Security by means of transfer (Yangdodambo), on the other hand, has been regarded quite effective, in that the debtor can hold the possession of the movable property. The problem with security by means of transfer is that it is not easy for a third party to know if it has been provided as collateral. When the security by means of transfer is created on a set of movable properties, the uncertainty worsens. The aforementioned example of the group of pigs illustrates this point. Security by means of transfer of nominative receivable raises a similar problem, when created on a set of nominative receivables including future claims. As such, many commentators and practitioners have criticised the problem of legal uncertainty and instability that arises from security by means of transfer, which has highlighted the need for a new security rights law. Besides such internal need for reform, an external impetus was the legislative efforts by the UNCITRAL to come up with a modernised secured transactions law. Korean legislators and jurists were intrigued by the idea contained in the UNCITRAL Legislative Guide and felt that the regime envisaged in the Legislative Guide was something that could be implemented, at least in part, even in Korea. Against such backdrop, the Act was legislated with the aim of providing security rights law with more certainty and stability. In line with such legislative aim, the Act introduced a registration system for security rights in movable assets and receivables. Indeed, the registration system which applies to such security rights is deemed the most innovative and significant change that the Act has brought to security rights law as a whole. With only a few exceptions, registration was deemed an exclusive legal mechanism for security over immovable. The Act changed the whole landscape by allowing all types of movables and receivables to be registered. As prescribed in Article 52 of the Act, any person may pay a fee and inspect registered records or request that the competent registry office issue documents fully or partially certifying the records. In other words, the registration allows stakeholders to easily investigate which asset has been provided as collateral, and who holds priority amongst them. The security rights under the Act are not as frequently utilised as was expected at the time of the legislation, but the Act has definitely contributed to the modernisation of security rights law in Korea to a certain degree. The merits and drawbacks of the Act will be addressed below.

31 ibid

498.

32 Supreme

Court Decision, 25 March 1969, Case No 69Da112; 5 June 1973, 73Da38.

Korea: The Coexistence of Old and New Secured Transactions Law Regimes 223

A. Overview (i) Scope of the Act The Act applies to security rights acquired pursuant to a security agreement. The term ‘security agreement’ refers to an agreement for providing movable assets, receivables, or intellectual property as security in accordance with the Act (Article 2, subsection 1). The name of the security right designated by the parties is not a defining factor in judging the nature of that security right. The Act applies to any security agreement concluded as such, even when, for example, the parties have used the term ‘security by means of transfer (Yangdodambo)’. Meanwhile, the Act does not abolish the security rights law existing outside the Act, including the laws on the pledge, security by means of transfer, and the retention of the title. In other words, the Act does not hinder the parties from creating such security rights. In this case, multiple security rights co-exist. The Act applies only to a corporation or a person whose trade name is registered in accordance with the Commercial Registration Act (Article 2, subsection 5). In other words, a natural person without a registered trade name cannot create security right under the Act. This significantly limits the scope of the Act. Meanwhile, the cancellation of a trade name registration does not affect the validity of previously created security rights (Article 4). As such, the requirement as to the registration of the trade name applies only at the time of creating security rights. However, it should be noted that Article 2 of the Act was amended in 2020 to include a person with business registration under the Value Added Tax Act, in lieu of a person whose trade name is registered. This amended Act will be in effect in 2022, and is expected to expand the scope of this Act dramatically. The Act applies to the security rights in movables, receivables, and intellectual property rights. The Act, however, does not provide detailed provisions on security rights over intellectual property. Rather, most of the substantive provisions are offered by individual statutes such as the Patent Act or the Copyright Act. The Act provides special provisions regarding security rights in plural intellectual property and the relationship between pledges and security rights that are covered by this Act (Articles 58–61 of the Act).

(ii) The Claim Secured under the Act The security rights created under the Act secure principal, interest, and a claim for damages arising from non-performance of the secured obligation or defects in collateral, penalties, and expenses incurred in the course of enforcement or in the course of preserving collateral (Article 12). The parties may agree on the scope of secured claims that differ from the ones prescribed in Article 12, and such agreement is deemed valid. The amount of the claim does not have to be specified at the time of the security agreement. Article 5 of the Act prescribes the ‘keun security rights’, where a security right may be created to secure a fluctuating obligation by setting merely the maximum amount. Meanwhile, Article 5, section 1 stipulates that any claim that is discharged or transferred at a time before such claim is finally fixed shall not affect the security right already created in the movable property. Article 5 of the Act is largely derived from the KCC Article 357, section 1, where it states ‘a mortgage can be created by settling only the maximum amount of the debt to be secured and reserving the determination of the debt in the future’.33 Such ‘keun mortgage’ is the type of security most frequently used in financial transactions.34 Article 5 of the Act also resembles Article 7 of the

33 For

more explanation on ‘keun mortgage’, see Kim (n 9) 279–85. (n 9) 281.

34 Kim

224 Youngjoon Kwon UNCITRAL Model Law on Secured Transactions (Model Law), such that both provisions aim at giving a certain degree of flexibility to the concept of secured claims. However, the Act does not specify as diverse types of claims as specified in the Model Law. Article 7 of the Model Law extends the concept wider, so that the security right established under the Model Law may secure ‘one or more obligations of any type, present or future, determined or determinable, conditional or unconditional, fixed or floating’. The Act remains silent on the types of obligations that can be secured. However, it does not necessarily mean that the Act limits the types of obligations. The generally accepted view on this issue is that the parties can secure one or more obligations of any type including future obligations, conditional obligations, or floating obligations under the Act.

(iii) Rights and Obligations of the Parties (a) The Grantor A person who intends to create a security right in movable property, namely a grantor, has the duty to disclose the matters in which the secured creditor would be interested, at the time of a security agreement. Article 6 of the Act specifies such matters to be disclosed as follows: the ownership and any other rights existing upon the property to be provided as collateral. Article 6 of the Act resembles Article 57 of the Model Law, which prescribes the grantor’s representation as to the security right in a receivable. Of course, the two provisions differ with regard to the scope of their application; Article 6 applies to security rights in movable properties and to security rights in receivables mutatis mutandis, while Article 57 of the Model Law only applies to security rights in receivables. The grantor is under duty to retain and preserve the collateral with due care. Such duty is not explicitly mentioned in the Act itself, but can be derived from the security agreement or from the good faith principle (Article 2 of the KCC). Meanwhile, the fruits or profits which stem from the collateral belong to the grantor. After the attachment of collateral or the request for delivery, however, such fruits or profits go to the secured creditor (Article 11 of the Act). This provision will be discussed in more detail below. (b) The Secured Creditor The secured creditor is entitled to collect his or her claim from the collateral, prior to other creditors (Article 8). He or she may collect the remainder from other assets that belong to the debtor only when the secured creditor fails to collect the full amount of his or her claim from the collateral assets (Article 15, section 1). However, the secured creditor can satisfy his or her rights from the proceeds of other assets when such assets becomes subject to enforcement, mainly due to enforcement measures taken by other creditors (Article 15, section 2).35 In such case, other creditors can request the secured creditor to deposit the proceeds from other assets (Article 15, section 2). This is to ensure that other creditors can claim their due share in case the secured creditor gets his share from collateral assets. This is also to ensure that the secured creditor does not receive or retain the proceeds that exceeds his or her own claim. The security rights of the creditor cover things adhered to the collateral and its accessories, unless otherwise provided by law or the agreement (Article 10).

35 Commentary on Act on Security over Movable Property and Claims (Ministry of Justice, 2010) 58–59 (Commentary).

Korea: The Coexistence of Old and New Secured Transactions Law Regimes 225 The duty of the grantor to retain the collateral with due care corresponds to the right of the secured creditor prescribed in Article 17. This provision gives the secured creditor the right to inspection: the secured creditor may request the grantor to allow him or her to inspect the current status of collateral. The grantor may not turn down such request unless he or she has just grounds to do so. Article 17 also provides the secured creditor with the right to claim for recovery or supplement. When the value of the collateral has been decreased due to a cause attributable to the grantor, the secured creditor may seek recovery of the collateral or supplementation to the original collateral to the extent so that he or she may retain the value of the collateral that existed at the time of security agreement.

(iv) Transferability of the Security Rights The Act does not hinder the secured creditor from transferring the security rights to a third party. However, the Act does limit the transferability of security rights by requiring the security rights to be transferred with the secured claim (Article 13). Therefore, merely transferring the security rights without transferring the corresponding claim that is being secured is not allowed under the Act. The transfer of security rights created under the Act must be followed by the registration in order to take effect. As for the secured claim, the parties (assigner and assignee) must send the notice to the obligor of the claim or the obligor should acknowledge such transfer, in order to make the transfer effective against debtor of the claim. The secured creditor does not have to obtain the consent of the grantor as to the transfer of the security rights unless otherwise agreed.36

B. Registration of Collateral Security The parties can and should register the creation, transfer, alteration, cancellation, or extension of a security right under the Act in the collateral security registry (Article 38) in order for these to have legal effect. In regard to administration, the district courts, their branch courts or registry offices designated by the Chief Justice of the Supreme Court have jurisdiction over the collateral security registry (Article 39, section 1). Of particular importance here is that the registration under the Act is catalogued according to the person giving the security, whereas the registration of real property is catalogued according to each property that forms the security, eg land, building, etc.37 In regard to the security rights created under the Act, such registration system is effective, as any stakeholder may search or browse the register using the name of the person who wishes to create the security right under the Act. In contrast, it would be extremely difficult to create a catalogue listing each item of movables or receivables, let alone to search for them, considering the extremely diverse and high volume of movables or receivables. The Supreme Court Regulation on the Registration of Security over Movable Property and Claims provides detailed information on the jurisdiction, procedure, and management of the registration. The procedure of the registration under the Act and the above Regulation is not substantially different from that of the real property registration. The grantor and the secured creditor should, in principle, jointly file the application for the registration of the security right (Article 41, section 1). Article 41, sections 2 and 3 set out certain exceptions to the principle

36 ibid 37 ibid

54. 29.

226 Youngjoon Kwon manifested in section 1. One is the application for alteration or correction of the registered person; the registered party may file the application by himself or herself. Another exception is the application for registration based on a court’s decision. The party who won the case and obtained a court order for registration may file the application by himself or herself. Lastly, the application for registration of inheritance or other comprehensive succession may only be filed by the party entitled to registration. In any case, the party or parties are supposed to file the application either in person or using the method of electronic filing (Article 42). The applicant should submit or transmit the following documents: an application in the form prescribed by the Supreme Court Regulations; a document proving the grounds for registration; a document proving a third party’s permission, consent, or acceptance with respect to the grounds for registration if such permission, consent, or acceptance is required for registration; a document proving that the agent has been granted the power to represent the applicant; and other documents prescribed by the Supreme Court Regulations which can specify the relevant parties (Article 43, section 1). The registration takes effect at the time the application for the registration is filed, provided that the registration officer completes the registration (Article 45, section 2). Meanwhile, an application for registration is deemed to have been filed and becomes effective at the time the relevant items – the purpose of registration, the applicant’s name or trade name, and other information specified by the Supreme Court Regulations – are recorded in the electronic information processing system (Article 45, section 1).

C. Security Rights on Movable Property (i) Collateral for Security Rights in Movable Property The Act does not define the concept of ‘movable property’. Article 2, subsection 2 merely stipulates that the concept includes two or more movable assets or a movable asset expected to be acquired in the future. This subsection further states that the movables that are encumbered must be specified based on the types, places for storage, quantity of the assets, or in any similar manner. Particular types of movable properties are excluded from the scope of the Act (Article 3, section 3). The first category of this kind is movable properties the registration of which is regulated by other statutes: a ship registered under the Ship Registry Act, a construction machine, motor vehicle, aircraft, or small ship registered under the Act on Mortgage on Motor Vehicles and other Specific Movables, a business asset registered under the Factory and Mining Assets Mortgage Act, and so on. The second category of movable properties to which the Act does not apply is the movable asset listed in a carriage note, bill of lading, or deposit certificate. Lastly, an unregistered bond or other security specified by Presidential Decree is also excluded from the scope of the Act.

(ii) Effect of Registration as to Security Rights in Movable Property The party to the security agreement may acquire the security right in movable property only after the acquisition is registered accordingly. Not only the acquisition, but also the loss or alteration should be registered as such, so as to make such arrangement effective (Article 7, section 1). In this regard, the Act contrasts with the Model Law, which does not require registration for the

Korea: The Coexistence of Old and New Secured Transactions Law Regimes 227 creation or extinguishment of a security right (Articles 6 and 12).38 The registration under the Model Law renders the security right effective against third parties (Article 18, section 2), but the security right itself may be created or extinguished regardless of the registration. The registration determines the order of priority: the order of registration is deemed the order of priority of security rights created in the same movable property (Article 7, section 2). When there are two or more secured parties involved, and the collateral has been registered under the name of one party and also delivered to another for the purpose of pledge, the issue of priority becomes complicated. Registration and delivery are deemed to have the same effect under the Act: the priority is determined by the order of the event (Article 7, section 3). For instance, if the collateral was delivered to A for the purpose of pledge and later was registered under B’s name for the purpose of creating security right under the Act, A enjoys the priority over B. The same type of issue can arise between security by means of transfer (Yangdodambo) and security right under the Act, and the same priority rule applies.

(iii) Rights of the Secured Creditor The secured creditor is entitled to exclude any interference that diminishes the value of the collateral or hinders its enforcement. When a third party has possession of the collateral, the secured creditor has the right to claim the return of the collateral in issue. In such case, the third party should return the collateral to the grantor (Article 19, section 1). The secured party may request the third party to deliver the collateral to him or her under circumstances where the right to possess the collateral has been reserved to the secured creditor or when the grantor cannot hold the possession of the collateral for some reason (Article 19, section 2). Of course, the third party does not have to return the collateral to anyone, if he or she is entitled to possess the collateral on a justifiable legal ground (Article 19, section 3). The secured creditor’s right to exclude is not confined to the aforementioned instance where a third party has the possession of the collateral. In line with this, Article 20 prescribes the secured creditor’s right to claim for removal or prevention of any nuisance to the collateral. The secured creditor may demand anyone to cease or remove the nuisance. The secured creditor may also prevent anyone from interfering with his or her security rights, and further, claim for damages that might arise from such interference.

(iv) Enforcement (a) Auction The Act recognises two different methods of enforcement. One is to put up the movable property over which security rights have been created for sale at an auction (Article 21, section 1). This may be labelled as ‘public enforcement’, as opposed to ‘private enforcement’. The Act stipulates that the relevant provisions of the Civil Execution Act apply mutatis mutandis to the auction commenced by the secured creditor (Article 22, section 1). Thus, the secured creditor shall submit the documents attesting the existence of his or her security rights upon filing a request for auction (Article 264, section 1 of the Civil Execution Act). When the grantor possesses the collateral, the auction is commenced with the attachment of the collateral (Article 22, section 2).

38 Y

Kwon, Research on UNCITRAL Model Law on Secured Transactions (Ministry of Justice, 2018) (in Korean).

228 Youngjoon Kwon (b) Private Enforcement Another way of enforcement is ‘private enforcement,’ the meaning of which was discussed earlier. Private enforcement involves the risk of the secured creditor taking profit which exceeds the value he or she is entitled to take from the collateral, as the secured creditor values the collateral him or herself. Thus, the Act sets out several requirements with regard to private enforcement. First, private enforcement is allowed only when the secured creditor has reasonable grounds to justify such arrangements (Article 21, section 2). For instance, when the value of collateral is not high enough to be put up for auction, the secured creditor may collect his or her claim through private enforcement. If the market price of collateral can be valued outside of court in a fair and reasonable manner, private enforcement may be allowed.39 This requirement, however, can be contracted out of in advance (Article 31, section 1). Another requirement is set out in Article 21, section 2: the secured creditor has to obtain consent from other right-holders or secured creditors who have priority over him or her. The secured creditor who seeks private enforcement is not required to search for other right-holders or secured creditors; consent from those whose rights are registered on the registry or those who are known to the enforcing secured creditor would suffice. Further, Article 23 sets out the procedural requirements with regard to private enforcement. The secured creditor who wishes to take or sell the collateral himself or herself should notify the debtor or other stakeholders within the secured creditor’s knowledge (section 1). The secured creditor may commence the private enforcement after a one-month period from the time that the notification reached the above stakeholders. When the collateral is highly likely to be destroyed or damaged, or the value of the collateral is likely to be diminished for whatever reason, the secured creditor is exempted from the one-month period regulation prescribed in Article 23, section 1. Information that must be included in such notification are: the method of private enforcement (section 1), the amount of the secured claim, the estimated value of the collateral or the proceeds from sale, and the reason why the secured creditor wishes to proceed in the manner of private enforcement (section 2). In instances where the secured creditor sells the collateral to a third person and collects his or her claim from the proceeds, the secured creditor should pay the surplus to the debtor, grantor or other right-holders who have priority over the enforcing secured creditor (Article 23, section 3). The same rule applies to the instances where the secured creditor takes over the ownership of collateral for the purpose of enforcement. However, the secured creditor acquires the ownership of the collateral only after he or she pays the surplus (Article 23, section 4). This is to protect stakeholders who have legitimate interest in receiving surplus and to compel the secured creditor to pay the surplus. When the purchaser in the case of auction or the secured creditor in the case of private enforcement acquires ownership of the collateral, the right of secured creditor and other rights that are subordinate to the right of secured creditor are extinguished (Article 24). Although subordinate right-holders cannot assert priority against the enforcing secured creditor, they can claim their rights on the surplus of the proceeds. When there are multiple subordinate right-holders, they can exercise their rights in accordance with their respective priority. When the enforcing secured creditor takes the ownership of the collateral and must pay the surplus, these subordinate rightholders can request the enforcing secured creditor to pay the surplus to them within the scope of their rights (Article 26, section 1).

39 Commentary

(n 35) 71.

Korea: The Coexistence of Old and New Secured Transactions Law Regimes 229

D. Security Rights in Receivables (i) Collateral for Security Rights in Receivables As for the concept of ‘receivables’, the Act explains that it refers to ‘a nominative receivable which includes two or more receivables or a prospective one for the payment of money’ (Article 2,subsection 3). The Act does not exclude the right to payment evidenced by a negotiable instrument, of funds credited to a bank account, or under a non-intermediated security. However, Article 3,section 3,subsection 3 excludes bearer bonds, and other types of rights that are enumerated in the Presidential Decree. Article 2 of the Presidential Decree to the Act prescribes that asset-backed securities pursuant to the Asset-backed Securitization Act, and securities pursuant to the Financial Investment Services and Capital Markets Act shall not be eligible for registration of collateral security under the Act. Meanwhile, Article 34, section 2 of the Act speculates that two or more receivables, including the ones which are yet to be established, regardless of whether the obligor has been identified or not, may be provided as collateral and further registered as such. Of course, such future receivables should be identifiable, by specifying the type of the receivable, the cause and date of its creation, and any element of similar nature that specifies the receivable that is being encumbered.

(ii) Effect of Registration as to Security Rights in Receivables The effect of registration here is quite similar to the effect of registration with regard to security rights in movable properties. The parties can and should register the acquisition, loss, or alteration of a security right in a receivable (Article 35, section 1) if they want such legal effect. The security right becomes effective against third parties upon registration, except the debtor of the receivable on which the security right has been created. In order for security right to take effect against the debtor of the receivable, the secured creditor must notify the debtor of such receivable by way of delivering the certificate of registration, or the debtor should acknowledge such security right (Article 35, section 2). When the security right is transferred to a third person, the same rule applies to the transferor or the transferee. The order of registration determines the order of priority, as in case of security rights in movable properties. The issue of priority becomes a bit complicated when two or more stakeholders are involved. For instance, the creditor of the nominative receivable at issue may create security rights under the Act, pledge under the KCC, or even assign the claim to any third person. The order of priority in such instances is determined pursuant to the order of any events which make the creation of security right or pledge, or assignment of the nominative receivable effective against any third party other than the debtor of the claim at issue (Article 35, section 3). There is one Supreme Court decision where the issue of priority of security rights in receivables was addressed.40 The creditor of a nominative receivable registered the security right created pursuant to the Act on behalf of secured creditor A. Afterward, the same grantor (the creditor of a nominative receivable) assigned the same receivable to assignee B. Assignee B sent notification of the assignment to the debtor of the receivable. Afterwards, secured creditor A belatedly sent notification to the debtor of the receivable. The dispute in this case involved priority between Secured Creditor A and Assignee B. The Supreme Court presented the following rule. If the debtor of the

40 Supreme

Court Decision, 14 July 2016, Case No 2015Da71856, 71863.

230 Youngjoon Kwon receivable paid back to the creditor of the receivable after receiving notification from assignee B but before receiving notification from secured creditor A, then the debtor is deemed to have fulfilled his duty and is exempt from enforcement of the security right. However, the debtor of the receivable is subject to security right after receiving notification from both A and B if the debtor had not yet paid to either of them. This means that secured creditor A has the priority and that the debtor is not discharged from his or her obligation even when he or she paid to B. To sum up, secured creditor A who has security right on the receivable enjoys priority by registration that precedes the notification by assignee B (Article 35, section 1) as long as he or she notifies, even when it was notified later than the notification by assignee B, the registration to the debtor of the receivable (Article 35, section 2).

(iii) Enforcement The security rights in receivables contrast with those in movable property with regard to the method of enforcement. The secured party here may collect the payment directly from the debtor of the receivable (Article 36, section 1). The secured creditor cannot collect the amount which exceeds the secured claim. If the payment of the receivable on which the security right has been created pursuant to the Act becomes due earlier than that of the secured claim, the secured creditor may require the debtor of the receivable to deposit the due amount into the court (Article 36, section 2). After the due amount is deposited, the secured creditor may exercise his or her security right in the deposited money and retrieve it when it is due. While the security rights in receivables are enforced by collection of payment in most cases, the secured creditor may exercise his or her right in accordance with the execution proceedings prescribed by the Civil Execution Act (Article 36, section 3). As such, the secured creditor may request the court to issue a collection order or an assignment order (Article 229, section 1 of Civil Execution Act). The proceedings pursuant to the Civil Execution Act may be commenced upon the submission of documents attesting the existence of the security right, in other words, the certificate of registration or the original copy of the relevant registry (Article 273, section 1 of the Civil Execution Act).

IV. Prospect for Future Reform in Korea As discussed earlier, the security rights under the Act are not widely utilised by the parties in practice even though expectation was high at the time of its enactment. Instead, taking security over immovable assets is still preferred despite the introduction and implementation of the Act which had the ambitious aim of promoting security rights in movable assets. In other words, the Act has not been quite helpful for the small and medium enterprises (hereinafter ‘SMEs’) that are generally not able to afford sufficient immovable property as collateral.41 There may be a myriad of reasons as to why the Act is not as effective as once expected: the non-familiarity among business entities with the new security rights regime; the lack of valuation techniques as well as lack of relevant data regarding movable properties and receivables that might make valuation more accurate; a shortage of experts who are capable enough to provide quality services with regard to the management and maintenance of collateral; and the existence

41 Kwon

(n 38) 264.

Korea: The Coexistence of Old and New Secured Transactions Law Regimes 231 of other security right devices for SMEs that can readily be utilised. The alternative security devices that are available include not only the security right by means of transfer that had long been in place but also the government-led guarantee system. It should be noted that various governmental measures to paternalistically support SMEs are functioning as highly meaningful substitutes to security rights. For instance, Korea has a specific government department solely aimed at protecting and promoting SMEs and startups; the Ministry of SMEs and Startups.42 Besides the Framework Act on Small and Medium Enterprises43 that provides an overarching legal framework in support of SMEs, there are several statutes that are intended to facilitate SMEs in their efforts to secure funding such as the Credit Guarantee Fund Act,44 the Korea Technology Credit Guarantee Fund Act,45 the Act on the Credit Guarantee for Farmers and Fishermen,46 and the Regional Credit Guarantee Foundation Act.47 These statutes provide various forms of guarantees by the special foundations established to promote financial accommodation for SMEs. These guarantee systems enable SMEs to secure funding without collateral and consequently enlarge credit availability while reducing the need for security rights on movable and receivable. Therefore, insufficient utilisation of the current security rights regime is not fully attributable to its incompleteness. However, one cannot deny the need for additional legislative efforts for further reform to make a better security right regime. A better security right regime is the one that is more flexible, effective and reasonable. It is also one that can keeps pace with the ever-changing business practices that are formed to suit practical needs. As the Model Law, which purports to enhance such value, was the one which contributed to the creation of the current Act in Korea, it can also further continue to play an important role in future efforts for reform in Korea. At this point, it is worthwhile to note that the Model Law is based on the assumption that the immovable property and other properties subject to the Model Law are different in nature and should be approached from a different perspective. As such, the Model Law, in many aspects, contrasts with the existing security rights law which mainly deals with immovable properties and sets out different rules for movables and receivables. On the other hand, the Act in Korea assumes that the legal rules on security rights in immovable properties, and mortgage in particular, may and shall apply to the security rights in movable properties and receivables. For instance, the registration system introduced by the Act closely follows the registration system and rules regarding immovable properties. Consequently, a security right cannot be claimed against a grantor or any third parties until the registration is complete. Further, the secured party cannot file the application for registration by himself or herself, as the Act requires that the parties to the security agreement jointly apply for the registration, albeit with a few exceptions. The application for registration is examined by a registrar. Without examination, security rights cannot be registered. Therefore, registration requires time, effort and costs. The Model Law, on the other hand, does not require the parties to complete the registration in order to create the security rights. Rather, the security rights may be created by a security agreement (Article 6, section 1). Therefore, the secured party may claim or exercise his or her 42 See www.mss.go.kr/site/eng/main.do. 43 See law.go.kr/lsInfoP.do?lsiSeq=149944&urlMode=engLsInfoR&viewCls=engLsInfoR#0000. 44 ibid. 45 See law.go.kr/lsInfoP.do?lsiSeq=195310&urlMode=engLsInfoR&viewCls=engLsInfoR#0000ibid. 46 See law.go.kr/lsInfoP.do?lsiSeq=195310&urlMode=engLsInfoR&viewCls=engLsInfoR#0000ibidSee law.go.kr/lsInfoP. do?lsiSeq=150104&urlMode=engLsInfoR&viewCls=engLsInfoR#0000. 47 See law.go.kr/lsInfoP.do?lsiSeq=195310&urlMode=engLsInfoR&viewCls=engLsInfoR#0000ibidSee law.go.kr/lsInfoP.do? lsiSeq=150104&urlMode=engLsInfoR&viewCls=engLsInfoR#0000See law.go.kr/lsInfoP.do?lsiSeq=183680&urlMode= engLsInfoR&viewCls=engLsInfoR#0000.

232 Youngjoon Kwon right against the grantor, even prior to the registration. The Model Registry Provisions, which provide in-depth provisions on the registration system under Model Law, also allow the secured party to file the application for registration without the cooperation of the grantor by employing the concept of notice registration (Article 2, section 5). Registration of an initial notice becomes effective with respect to a security right when it is authorised by the grantor in writing (Article 2, section 1). However, the Model Registry Provisions do not require the proof of such authorisation in the registration process. Further, a notice is not subject to the examination of its content by the Registry (Article 7, section 3). With such merits, the notice registration system under the Model Law and the Model Registry Provisions is deemed more effective in creating security rights. Such effectiveness in terms of cost and time may lead to wider utilisation of the security right system. It implies the need for the reform of the current Korean security right system, in particular the newly implemented system based on the Act. However, future reform is likely to require patience. The provisions on the effect of registration, Articles 7 and 35 of the Act in particular, will not easily be revised. As discussed earlier, the Act is based on the assumption that the security rights created pursuant to the Act shall be given the same status as the security rights in immovable properties. Thus, the issue concerning the effect of registration is intertwined with the law governing the registration system as a whole. Considering that Korean security rights law and other laws with regard to property rights generally require registration upon creation, extinguishment, and any other important events (KCC Article 186), it may not be easy to recognise an exception to this rule. Moreover, the provisions on the effect of registration have their own merits, in that any stakeholders can easily find out the current state of the property in question with a certain degree of trust in the authenticity of its content due to the examination system. On the other hand, the notice registration system has more merits and may be introduced to Korean security law if legislators can accept the necessity of distinctive legislation on the registration of security rights on movables and receivables for a more efficient security right regime. The registration of notices can be found in many instances of international model laws on security rights. The current registration system in Korea often takes time, which does not quite fit with the case of creating security rights in movable properties and receivables. Movable properties and receivables are harder to identify and cost much less in most cases, compared to immovable properties. As such, it may not be quite effective to put the security rights in movable properties and receivables under the current registration system. It is true that the notice registration system is something that is foreign to Korean legislators and jurists. The following comment by one prominent scholar, who also took part in the initial legislative process of the Act, reveals such sentiment.48 The registration system of security rights of movables and receivables originated from the United States, but unadulterated acceptance of such system is neither possible nor desirable. In order to ensure that the new system takes roots within the Korean legal environment, adjustments were made by, for example, differentiating effectiveness of registration for each type of security rights. Provisions that are thought to be sufficiently rational but possibly inconsistent with the Civil Code were opted against this time, hoping that they may be included in the next round of amendment to the Civil Code.

As can be inferred from the above quote, a fundamental reform including the adoption of a notice registration system may not be seriously discussed and conducted in a short period of time. Legal reform involving foreign elements is something that cannot be unilaterally and swiftly

48 Kim

(n 9) 297–98.

Korea: The Coexistence of Old and New Secured Transactions Law Regimes 233 implemented with ease. To provide a foundation for such reform, more scholars and jurists may need to become more aware of the international trend surrounding security right law. It will also take more in-depth deliberation on how Korea can harmonise the internal coherence of the legal system which is deeply rooted in the continental tradition with the practical need for a more efficient security right regime which seems to be largely rooted in the UCC, as well as the increasing demand to reduce gaps and inconsistencies among multiplicity of regimes around the world. Although there may be some short-term disarray and costs, the long-term benefit after such patent efforts will end up with an improved secured transactions law regime.49 The introduction of the UNCITRAL Model Law (2016) as well as its Guide to Enactment (2017) that is primarily directed to executive and legislative branches of Governments considering reform of the secured transactions laws, may urge the Korean legislature to move forward to that direction in the future.

49 Y Kwon, ‘An Overview on the UNCITRAL Model Law on Secured Transactions and its Implication’ (2017) 24 Comparative Private Law 599, 631 (in Korean).

234

12 Law Reform of the Secured Transactions Regime in Taiwan: Modernisation, Controversies, and Prospects ANDREW JEN-GUANG LIN

I. Introduction Taiwan’s secured transactions regime is undergoing reform, mainly because it has not adopted the floating charge. The country’s ranking in the World Bank Doing Business Survey’s Ease of Getting Credit Index, particularly in the Strength of Legal Rights Index,1 indicates that Taiwan has much room for improvement on its secured transactions regime. In response, the Taiwanese Government has proposed reforms and initiated studies on its personal property secured transactions regime since 2007. This chapter first introduces the current state of Taiwan’s Personal Property Secured Transactions Act (PPSTA) and considers Taiwan’s distance to the frontier in the Doing Business Survey to see what aspects Taiwan has to improve on. It will also introduce the recent reforms initiated by the Financial Supervisory Commission, the competent authority of PPSTA, and recommendations proposed by four most recent research reports funded by the government agencies. Finally, the chapter will identify the contemporary issues, controversies and prospects of the reform. Taiwan, the official name of which is the Republic of China, is a civil law country located in East Asia and Pacific with high income GNI per capita (US$) 25,501. Its legal system was chiefly influenced by the Japanese and German legal systems. Because of the geographic linkage and the introduction of Japan’s legal system during Japan’s protectorate and annexation between 1895 and 1945, Taiwan’s Civil Code and several other major statutes were heavily influenced by Japan. However, in the business and financial law field, Taiwan has imported many concepts from the Anglo-American legal system in recent years, especially from the United States. It is necessary to mention that significant regulatory reforms in other countries, including but not limited to Australia, European Union, Japan, United Kingdom and United States, and model rules and regulations proposed by international organisations, such as OECD and United Nations, are always followed and studied by scholars and competent authorities in order to improve Taiwan’s financial regulatory system.

1 See

ch 1 III C (ii).

236 Andrew Jen-Guang Lin The regime of secured transactions in real property is well developed in Taiwan. It is mainly governed by the Civil Code.2 There is also a separate legislation entitled the Personal Property Secured Transactions Act (PPSTA) governing secured transactions in personal property.3 The topic of secured transactions came to the attention of the government in the last decade mainly because of the Doing Business Survey conducted by the World Bank.4 Although the contents and methodology of the survey have been modified several times, its focus has not changed. The focus is ‘on promoting regulatory reform that strengthens the ability of the private sector to create jobs, lift people out of poverty and create more opportunities for the economy to prosper’.5 According to the 2020 Doing Business Survey, Taiwan’s overall ranking was 15 among the 190 economies.6 However, Taiwan’s ranking on the ‘getting credit’ index was 104, dropping from 90 in 2018, its worst ranking in history since 2004.7 Taiwan’s rankings on ‘getting credit’ in the period from 2007 to 2020 were 48 (2007, 2008), 68 (2009), 71 (2010), 72 (2011), 67 (2012), 70 (2013), 73 (2014), 52 (2015), 59 (2016), 62 (2017), 90 (2018), 99 (2019), and 104 (2020). Taiwan’s ranking improved in the 2013–14 period (as shown in the Doing Business Survey 2015) owing to the amendment of Civil Code which codified the law on ‘Line of Credit Mortgages’ in 20078 and improvement of the depth of credit information from 5 to the full score 8. However, without making any changes or improvement on Strength of Legal Rights Index, Taiwan’s ranking dropped to 104 in the 2020 Survey. This also indicates that many countries have improved their regulatory regimes related to getting credit so that Taiwan’s ranking has fallen. The Doing Business Survey on the topic of getting credit focuses on two aspects: the strength of credit reporting systems and the effectiveness of collateral and bankruptcy laws in facilitating lending. To be more specific, it evaluates the credit information system and ‘movable collateral law’.9 There are two indexes under the topic of getting credit, ie, the Strength of Legal Right Index and the Depth of Credit Information Index.10 Beginning from the Doing Business Survey 2015, Taiwan has received full score on the depth of credit information index, ie, 8 points out of 8.11 Therefore, the aspect that needs to be improved is the Strength of Legal Right Index wherein Taiwan received only 4 points out of 12 in 2015–17 and only 2 points out of 12 in 2018–20.12 Because the getting credit indicator under the Doing Business Survey focuses on improving the regulatory regime of secured transactions, Taiwan’s reform on secured transactions has 2 See Pt III (Rights In Rem) and Ch 6 (Mortgage). 3 The Personal Property Secured Transactions Act was enacted 0n 5 September 1963 and was last amended on 11 July 2007. 4 See ch 1 III C (ii). 5 Doing Business 2018, iv. 6 Doing Business 2020, 4. 7 Doing Business Report 2007, 145; Doing Business Report 2008, 154; Doing Business Report 2009, 138; Doing Business Report 2010, 156; Doing Business Report 2011, 198; Doing Business 2012, 130; Doing Business Report 2013, 199; Doing Business Report 2014, 228; Doing Business Report 2015, 222; Doing Business Report 2016, 238; Doing Business Report 2017, 243; Doing Business Report 2018, 197; Doing Business Report 2019, 207; Doing Business (Taiwan) 2020 4. 8 See IV A (ii) below. 9 Doing Business 2018 Economy Profile (Taiwan) (hereinafter DB 2018 Taiwan Report) 2. 10 See Doing Business Report 2018, 21, fn 4: ‘For getting credit, indicators are weighted proportionally, according to their contribution to the total score, with a weight of 60% assigned to the Strength of Legal Rights Index and 40% to the Depth of Credit Information Index. In this way, each point included in these indexes has the same value independent of the component it belongs to.’ 11 Doing Business Report 2015, 222. 12 ibid. Beginning from Doing Business 2015, the questionnaire regarding the legal rights index increased the questions from 10 to 12 because of the inclusion of new aspects from the UNCITRAL Legislative Guide on Secured Transactions (2007) (UNCITRAL Legislative Guide). Doing Business Report 2015, 30; Doing Business Report 2019, 207; Doing Business 2020 (Taiwan), 4.

Law Reform of the Secured Transactions Regime in Taiwan 237 been heavily influenced by the survey. In order to improve the ranking on the topic of getting credit, Taiwan must reform its laws on secured transactions in the direction that aligns with the criteria used in the survey. Specifically, Taiwan would have to adopt the floating charge or a similar concept coupled with a registration system that is integrated into a national registry so that the registration system can function properly like those adopted by the top ranking economies, such as New Zealand (ranked no 1)13 and the USA (ranked no 4).14 While the government has envisaged a need to reform the secured transactions regime, there are some impediments and uncertainties relating to the reform. Questions that must be answered include the following: Should reform should be conducted by amending the PPSTA or enacting a new legislation? Who is going to be the competent authority in charge of the new PPSTA? Should it be the Financial Supervisory Commission (FSC), which is the competent authority for the banking industry and the current PPSTA; the Ministry of Economic Affairs (MOEA) which is the competent authority for the Taiwan Company Act and company registry; or the Ministry of Justice which is responsible for the amendment of Civil Code that governs property law? Also, if Taiwan decides to modernise its movable collateral law, should Taiwan model this on the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Secured Transactions (2016) (UNCITRAL Model Law) or the law of a single jurisdiction, such as New Zealand?15 Should Taiwan use the term ‘floating charge’ or just follow the UNCITRAL Model Law in focusing on the rights and obligations that the agreement creates? There is also the technical issue of how to introduce new concepts and terminologies, such as attachment, perfection, crystallisation, and purchase money security interest (PMSI, or an acquisition security) into Taiwan. One aspect of the reform is to create more types of functionally usable movable collateral to help enterprises seek borrowing opportunities. Without legislation, lenders, particularly banks and leasing companies, cannot extend secured loans because future assets that currently do not exist are not recognised as a form of collateral under the current law. The other aspect of the reform is to enhance creditor protection to increase the willingness of creditors to extend loans. Therefore, with the addition of new types of movable collateral, the reform needs to reconsider the issue of who gets priority over the collateral and the crystallisation of floating charges. Moreover, the law regarding enforcement may also need to be modified to accommodate the reform of the secured transactions regime. It is important to note that Taiwan’s bankruptcy law is also under reform, with the intention of consolidating the law on company reorganisation and bankruptcy law.16 It has taken more than 10 years but the legislation process has not been completed. Once the reform of movable collateral law is completed, the bankruptcy law should be revised accordingly. In Part II, this chapter will briefly introduce the PPSTA, enacted in 1963. A brief summary of the problems of current PPSTA that lead to the reform will be provided so that the reader can understand the distance towards the modern movable collateral law.17 In Part III, this chapter

13 Note that Azebaijan and Brunei Darussalem are also ranked 1st. For discussion of the reforms in Brunei, see ch 15. 14 World Bank, ‘Doing Business, Getting Credit, 2020 Rankings’, www.doingbusiness.org/en/rankings. 15 For discussion of the use of models, see ch 20 III B. 16 Corporate reorganisation is currently regulated by Taiwan’s Company Act (ch 5, sub-ch 10). The Judicial Yuan initiated the reform in 2007 to consolidate the corporate reorganisation and bankruptcy regimes into one legislation. See ‘Consolidated Amendment of Corporate Reorganization, Bankruptcy Law and Winding-up Law’ (Judicial Weekly No 1326, 25 February 2007). 17 For introduction of modern principles of secured transactions law, see generally CW Mooney Jr, ‘Insolvency Law as Credit Enhancement and Enforcement Mechanism: A Closer Look at Global Modernization of Secured Transactions Laws’ (2018) 27 Norton Journal of Bankruptcy Law and Practice 673. See also ch 2 of this volume.

238 Andrew Jen-Guang Lin will discuss the impact of the Doing Business Survey, particularly the content of the Strength of Legal Right Index, on the reform. Part IV will first introduce the amendments to the PPSTA and PPSTA Enforcement Rules in the last 10 years so that readers could understand what has been done so far. It will then introduce four major government funded research projects, including two research projects in which the author participated, regarding the reform of secured transactions in the past decade. The discussion will include the recommendations and some comments from those research reports. Part V introduces the most recent proposed amendment of the PPSTA. Comments and proposals will be provided. Part VI is the conclusion.

II. Current Law on Secured Transactions in Personal Property Taiwan’s PPSTA was first enacted in September 1963 and implemented in June 1965. Thereafter, there were three amendments in 1970, 1976 and a major one in July 2007. The PPSTA defines the scope of personal property that can be used as collateral in secured transactions, including ‘machinery, equipment, tools, raw materials, semi-finished products, finished products, vehicles, forestry, fishery, agricultural and livestock products, livestock, powered vessels with total tonnages of less than 20 tons, and non-powered vessels with total tonnages of less than 50 tons’.18 Under the current law, not every item of movable property can be used as collateral. Therefore, this is the first issue that needs to be addressed in the reform. Currently, there are three types of secured transactions covered by the PPSTA: mortgage of personal property, conditional sale and possession in trust.19 In order to have legal effect against a third person, all three types of secured transactions are required to be registered.20 In other words, registration is not a required condition for the effectiveness of the secured transaction between the parties under the current law. Registrations of the secured transactions are to be filed by the contractual parties via an online registration system.21 During the period between 2011 to 2019, there were 2,594,646 cases of mortgage of personal property with a total amount of NT$5,235.55 billion (US$174.52 billion), 596,903 cases of conditional sale with a total amount of NT$574.6 billion (US$19.15 billion), and only 16 cases of possession in trust with total amount of NT$2.25 billion (US$75 million).22 We see most cases belong to mortgage of personal property. Because Taiwan sticks to the principle of legality of right in rem, unless the law expressly creates the rights in rem, there is no such rights. Therefore, under the current PPSTA, a security right cannot extend to future or after-acquired assets, nor can businesses grant a non-possessory security right in substantially all of its assets, without requiring a specific description of collateral. In the modern business operation, particularly for many startup businesses, a modern secured transactions law may help them obtain financing and grow their businesses. Although Taiwan has very good government guarantee programmes supporting small and medium enterprises to

18 PPSTA, Art 4. 19 PPSTA, Art 2. 20 PPSTA, Art 5(1). 21 PPSTA, Art 7. The registration of contractual secured transactions used to be by paper registration with the register. Beginning from 27 May 2015, contractual parties may file online on the Property Secured Transactions Online Registration and Public Inquiry System (ppstrq.nat.gov.tw/pps/identity/Identity/init.do), maintained by the Ministry of Economic Affairs. 22 Statistical numbers available at the Commerce Industrial Services Portal, Department of Commerce, Ministry of Economic Affairs (Taiwan): gcis.nat.gov.tw/mainNew/subclassNAction.do?method=getFile&pk=698.

Law Reform of the Secured Transactions Regime in Taiwan 239 access bank loans, a modern secured transactions law may provide even more flexibility to businesses. The deteriorating ranking in the Getting Credit index is another strong incentive for the government to reform Taiwan’s secured transactions law. In order to have a full picture of how far Taiwan’s current state of secured transactions law is from the frontier of the ideal state as suggested by the World Bank in the Doing Business Survey, this chapter will briefly introduce the major aspects of the current PPSTA.

A. Mortgage Lien of Personal Property The term ‘mortgage lien’ is usually used to refer to a type of security interest that is attached to real property and is recorded in the title documents that are filed with the public land office. However, this term is used under the PPSTA to refer to an arrangement whereby the mortgage lien holder, ie, the secured creditor, enjoys a security interest over the personal property of the debtor or a third person.23 The lien holder may take possession of the relevant property if the debtor defaults. In addition to the definition, Chapter II of the PPSTA sets out requirements regarding the contents of mortgage contracts and procedures for exercising the mortgage lien. In a mortgage lien, Taiwan applies the theory that the debtor or the third person providing the personal property as collateral still holds the legal title while the secured creditor holds a mortgage lien over the property. The PPSTA requires that certain information must be included in the mortgage contract. These are (1) the names and addresses of the parties, (2) the principal amount and interest rate of the mortgage lien, (3) the names, amount and special identification numbers of the collateral, (4) the location or method that the debtor or the third person taking possession of the collateral, (5) the method of exercising the right to collect debts and to enforce the mortgage lien by lien holder when debtor defaults, (6) the beneficiary of the property insurance shall be the mortgage lien holder, and (7) the date of the mortgage contract.24 The collateral in a mortgage lien can be the personal property of the debtor or a third person. There are several situations in which the lien holder may request to detain the collateral, such as the default of the debtor, or the movement, pledge, sale, or assignment of the collateral that impairs the right of mortgage lien holder.25 The PPSTA sets out procedures that the lien holder must comply with when exercising the right of detention of the collateral and the sale of the collateral. Basically, a notification to the debtor and/or the third person is required before the detention of the collateral and before the sale of the collateral.26 A lien holder shall state in the notification that if the debtor fails to pay off the debt within a specified deadline, the lien holder may sell the collateral. The law also requires that parties may not include a provision that the lien holder can automatically acquires the legal title of the collateral when the debtor defaults.27 For the protection of all other creditors, the law requires that the sale of the collateral shall be in the form of public auction according to the Enforcement Act of the Law of Obligations of the Civil Code.28 We can see that for secured transactions, the current PPSTA shows the cautious attitude of the competent authority. It sets out not only what should be included in the mortgage lien

23 PPSTA,

Art 15. Art 16. 25 PPSTA, Art 17. 26 PPSTA, Arts 18(1) and 19(1). 27 PPSTA, Art 23. See ch 6, fn 69 for discussion on the civil law ban on the pactum commissorium. 28 PPSTA, Arts 19 and 21. 24 PPSTA,

240 Andrew Jen-Guang Lin contract but also detailed enforcement procedures. It is important to note that the law protects the lien holder by granting a right to sell the collateral to recover the debt and a right to detain the property even it has been transferred to a bona fide acquirer.29 However, the law imposes civil liabilities on the secured creditor for failing to comply with the enforcement procedures.30

B. Conditional Sales The second type of secured transaction covered by the PPSTA is the conditional sale. A conditional sale is defined as a transaction whereby the buyer may take possession of the goods (subject matter) but will not obtain the legal title until the buyer has made partial or full payment of the sale price or completed specified conditions according to the agreement.31 For security purposes, the seller holds the title of the goods while the buyer may possess and use the subject matter of the sale transaction and this shall be stated in the contract of the conditional sale.32 In conditional sales, the contract shall state the method of payment, the conditions under which the buyer may obtain the legal title, and the methods by which the seller may exercise his rights.33 For the protection of the seller, the law authorises the seller to get back the subject matter and sell it when the buyer fails to make payment or complete the specified conditions.34 The seller can use the proceeds of the sale to reimburse itself, but must then return any surplus to the buyer, but can also demand any shortfall still due.35 The law also sets out the legal effect of the buyer’s default if the seller does not sell the subject matter after repossessing it, the seller is not obligated to refund the partial payment and that the original conditional sales contract is no longer valid.36

C. Possession in Trust The third type of secured transaction under the PPSTA is ‘possession in trust’. This type of secured transaction is rarely used in practice; for example, there have been only 16 cases between 2011 to 2019. It is defined to be a transaction whereby both parties create a trust in which the legal title of the subject property of the trust is to be used to create the security interest for the protection of the trustor (creditor) who provides funds or credit to the trustee.37 In a possession in trust, a trust relationship is created between the lender and the borrower. In order to secure the obligation to be performed, the borrower may use the personal property that are under its possession, but agrees in the trust deed to be filed with the registry that the lender has the legal title. The lender can repossess the property when the borrower defaults. An example of a possession in trust might be a lending transaction whereby the bank provides a line of credit or issues a letter of credit to its corporate client for the purpose of importing goods. The client may in the meantime or at a later time agree with the bank to provide its personal

29 In the case where the property acquired by a bona fide acquirer was traced and detained by the lien holder, the bona fide acquirer has a right to sue the debtor for damages. See PPSTA, Art 17(3). 30 See, eg PPSTA, Art 22. 31 PPSTA, Art 26. 32 PPSTA, Art 27, item 3. 33 PPSTA, Art 27, items 4–6. 34 PPSTA, Art 28(1). 35 PPSTA, Art 20, applied to conditional sales by Art 30. 36 PPSTA, Art 29(2). 37 PPSTA, Art 32. See, eg Taiwan Supreme Court 85 Tai-Shang-2230 Civil Judgment (3 October 1996).

Law Reform of the Secured Transactions Regime in Taiwan 241 property which are unrelated to the funds or credit obtained from the bank as security, and register the arrangement with the personal property secured transactions registry (PPST Registry) as ‘possession in trust’, indicating that the bank (trustor) has the legal title of the personal property that are in the possession of the corporate client (trustee). The bank as the trustor may repossess the property that is subject to the trust (‘subject property’) if its client as the trustee defaults in making repayment of the borrowed funds or used credits according to the line of credit loan agreement.38 Because the trustee can dispose of the subject property according to the agreement, the law expressly provides that regardless of whether it has registered, the trustor will not bear the liability as a seller.39 To prevent disputes, the law also provides that the trustor cannot assert its legal title and exercise any claim against the purchasers of the property of the possession in trust.40 If the registered trust deed includes a restriction on disposing of property or specifies the method of repayment, the trustor can exercise its rights against a purchaser who knows about the restrictions.41

III. Policy and Focus of the Reform on Secured Transactions: Movable Collateral Regime Before getting into the details of regulatory reform, we shall first look at how the Doing Business Survey influences Taiwan’s movable collateral law and what is the attitude and response of the government.

A. Impact of the Doing Business Survey As discussed earlier, the topic of ‘Getting Credit’ in the survey is directly related to movable collateral law. There are two indexes under the topic of Getting Credit, ie, the Strength of Legal Rights Index and the Depth of Credit Information Index. Because Taiwan has received full score on the latter index, the focus is now on how to improve the scores of the Strength of Legal Rights Index. In the 2018 Doing Business Survey, Taiwan received only 2 points out of 12 questions.42 The result was the same in 2019 and 2020. We will first examine the questionnaire of this indicator to get a picture of how many aspects Taiwan would have to reform in order to make its regime closer to the modern movable collateral law. We will use the most recently updated Getting Credit Methodology, ie the 12-question rather than the earlier 10-question approach. Under the current Getting Credit Methodology, the Strength of Legal Rights Index focuses on two aspects: one is the protection of rights of borrowers and lenders through collateral laws (0–10) and the other is the protection of secured creditors’ rights through bankruptcy laws (0–2).

38 ibid. See also PPSTA, Art 34. The trustor may also repossess the property if the trustee moves the subject property to another location, pledges the subject property or disposes the property in contradiction with the agreement. 39 PPSTA, Art 35(1). 40 PPSTA, Art 35(2). 41 PPSTA, Art 35(2) proviso. 42 According to the Doing Business Reports from 2006 to 2020, the scores Taiwan received under the Strength of Legal Rights Index were 4 out of 10 (2006–11), 5 out of 10 (2012–14), 4 out of 12 (2015–17) and 2 out of 12 (2018, 2019 and 2020). The number of questions used for the survey in the Strength of Legal Rights under Getting Credit was increased from 10 to 12 beginning from the Doing Business Report 2015.

242 Andrew Jen-Guang Lin The 12 aspects to be surveyed are listed below with an answer in parenthesis regarding whether Taiwan has obtained the point after each question:43 1. Does an integrated or unified legal framework for secured transactions that extends to the creation, publicity and enforcement of functional equivalents44 to security interests in movable assets exist in the economy? (No) 2. Does the law allow businesses to grant a non-possessory security right in a single category of movable assets,45 without requiring a specific description of the collateral? (No) 3. Does the law allow a business to grant a nonpossessory security right in substantially all its movable assets, without requiring a specific description of the collateral? (No) 4. May a security right be given over future or after-acquired assets and extend automatically to the products, proceeds and replacements of the original assets? (No) 5. Is a general description of debts and obligations permitted in the collateral agreements; can all types of debts and obligations be secured between the parties, and can the collateral agreement include a maximum amount for which the assets are encumbered? (Yes) 6. Is a collateral registry in operation for both incorporated and non-incorporated entities46 that is unified geographically and by asset type, with an electronic database indexed by debtors’ names? (No) 7. Does a notice-based collateral registry47 exist in which all functional equivalents48 can be registered? (No) 8. Does a modern collateral registry exist in which registrations, amendments, cancellations and searches can be performed online by any interested third party? (No) 9. Are secured creditors paid first (for example, before tax claims and employee claims) when a debtor defaults outside an insolvency procedure? (No) 10. Are secured creditors paid first (for example, before tax claims and employee claims) when a business is liquidated? (No) 11. Are secured creditors subject to an automatic stay on enforcement procedures when a debtor enters a court-supervised reorganisation procedure? Does the law protect secured creditors’ rights by providing clear grounds for relief from the automatic stay49 and setting a time limit for it? (No) 12. Does the law allow parties to agree on out of court enforcement at the time a security interest is created? Does the law allow the secured creditor to sell the collateral through public auction or private tender, as well as for the secured creditor to keep the asset in satisfaction of the debt? (Yes) Taiwan received a score for question nos 5 and 12 only. In order to increase the scores and ranking, Taiwan would have to reform its movable collateral law as well as the bankruptcy law and directly respond to those questions that are currently answered negatively by addressing

43 See Doing Business Survey, ‘Getting Credit Methodology’; DB 2018 Taiwan Report (n 9) 37. 44 In addition to security interests such as mortgages and pledges, this includes fiduciary transfers of title; financial leases; assignments or transfers of receivables; and sales with retention of title. 45 Such as machinery or inventory. 46 That is, a single registry or registration institution for the registration of security interests granted by incorporated and non-incorporated entities. 47 That is, a registry that files only a notice of the existence of a security interest (not the underlying documents) and does not perform a legal review of the transaction. 48 That is, functional equivalents to security interests; see n 44 above. 49 For example, if movable property is in danger.

Law Reform of the Secured Transactions Regime in Taiwan 243 the regime, rights and protections. Above all, Taiwan has to establish a functional approach ‘by creating an integrated or unified legal framework’ that is considered to be a good practice.

B. Attitudes of the Government The Executive Yuan, the highest administrative organ of Taiwan, has repeatedly emphasised that the government will ‘continue to review and discuss the international business and economic surveys and to modernise the relevant laws, such as Company Act, the Securities and Exchange Act, and the PPSTA, so that Taiwan’s business regulations will meet with international standards’.50 The government has regarded the Doing Business Survey as a very important matter. Beginning from 2010, the National Development Council (NDC) has gathered information from relevant government agencies and published the Taiwan Doing Business Environment Reform Report on an annual basis for the purpose of tracing the status of reforms and to better communicate with the surveyors from the Doing Business Survey and other international organisations. Although the government has put the reform of the PPSTA on the schedule, there are several reasons that the government initially was hesitant in considering whether it was necessary to reform. First, Taiwan was formerly resistant to introducing the floating charge or a similar type of movable collateral because Taiwan’s property law and collateral law were originally modelled on the continental law and is still influenced by the numerus clausus principle that has its roots in Roman law.51 The contents of the Doing Business Survey are more common law oriented. Therefore, the government considered it to be unfair for the World Bank to evaluate an economy’s business regulation heavily based on regimes of the common law system. It is also questionable whether common law floating charge or similar concept can be properly introduced and fit into Taiwan’s property law. Moreover, Taiwan already has a very good getting credit practice which is not within the survey. The small and medium sized enterprises (SMEs) in Taiwan are very lucky to have better chances at obtaining credit because there is a government supported Small and Medium Enterprise Credit Guarantee Fund of Taiwan (SMEG Fund), a non-profit organisation.52 SMEG Fund provides guarantee services to small and medium enterprises. The maximum amount of guaranteed loans is NT$100 million (US$3.33 million) for an SME under the Indirect Credit Guarantee and Direct Credit Guarantee. At that time, many questioned whether the floating charge or a similar concept of secured transaction may provide better opportunities of getting credits for SMEs. Obviously, the Doing Business Survey does not take into consideration the special feature of the SMEG Fund in evaluating Taiwan’s getting credit environment although this has been communicated to the surveyors. 50 Council for Economic Planning and Development (CEPD), Executive Yuan (Taiwan), ‘2012 Annual Performance Assessment Report’ (9 May 2013) 63. Because of government reorganisation, the CEPD merged with other government agencies and is now called National Development Council (NDC). The Regulatory Reform Centre of NDC ‘carries out research, planning, and coordination for regulatory reforms related to … regulatory reform projects related to national competitiveness; administers regulatory reforms for the improvement of investment environment, facilitates international cooperation on regulatory reform issues’; see National Development Council, ‘Introduction to NDC’, www.ndc.gov. tw/en/cp.aspx?n=459AC4A538309231&s=A22AE6662FD6571E. 51 Y Chang and HE Smith, ‘The Numerus Clausus Principle, Property Customs, and the Emergence of New Property Forms’ (2015) 100 Iowa Law Review 2275. 52 The SMEG Fund was established in 1974 to provide guarantee services, including direct credit guarantee, indirect credit guarantee and portfolio credit guarantee to small and medium enterprises. For more information please visit website of SMEG: www.smeg.org.tw/index.aspx.

244 Andrew Jen-Guang Lin

IV. Regulatory Reform and Research Reports in the Past Decades In this Part, we will discuss what has been done so far, including major amendments of the PPSTA and the PPSTA Enforcement Rules and the launch of an integrated national online PPSTA registry. Also, we list four major research projects funded by the government aiming for the reform of movable collateral law.

A. Major Amendments of Personal Property Secured Transaction Law We observed that Taiwan has made several attempts to reform its law in response to the Doing Business Survey, including amendment of the PPSTA in 2007, amendment of Civil Code that officially codifies line of credit mortgages into the statute, and amendment of the PPSTA Enforcement Rules that allows the registration of categories of assets as collateral. It is necessary to note that the FSC, in March 2010, submitted a draft bill to amend the PPSTA attempting to introduce the floating charge but this was not sent to the Legislative Yuan.53

(i) 2007 PPSTA Amendment Several provisions were revised and a new provision was added in the 2007 PPSTA amendment.54 The major changes include the clarification of the rights embodied in the repairman’s lien, registration-related matters and the removal of criminal liability for violation of PPSTA obligations. Article 7-1 was added into the PPSTA regarding the Registration Office’s authority to ask the registrant to supplement application documents and to dismiss the application if the applicant fails to provide the required documentation within the specified deadline. The Registration Office has the authority to review and approve the application. Article 5 clarifies the rights and priority of the repairman’s lien. A repairman lien holder has a right to recover the expenses of improving the value of personal property and has priority over other secured creditors for these expenses so long as they are within the scope of increased value of the property. This amendment is to align the rule of the PPSTA with Article 928 of the Civil Code regarding the same subject matter. Article 6 was amended to integrate the registration system. There are still different registration offices but registration will have the effect of publicity nationwide. In order to modernise the registration system, the requirement to publish the registration in the government gazettes was abolished and replaced with online publication. Moreover, balancing the convenience of searching and the protection of privacy, the Registration Office publicises the names of contractual parties, description of collaterals, the amount of secured debt, dates of contract made and termination. This deals with the publication of registration information only. Contractual parties and other persons may check and copy the registration information at the Registration Office or obtain it online.

53 See X-X Lu, ‘Modernising the Law of Secured Transactions in Taiwan – Introduction of Floating Charge’ (Master’s thesis, National Taiwan University, 2018) 40–42. 54 The amendment came into force on 13 July 2007.

Law Reform of the Secured Transactions Regime in Taiwan 245 Under the current PPSTA, in a personal property mortgage, the collateral may be provided by the third person. The second paragraph of Article 9 was amended to require the Registration Office to notify the third person who provided the collateral when the creditor applies for extension of the registration period. If the debtor has paid off the debt, the creditor has an obligation to provide the document proving this so that the debtor or the interested person may apply to the Registration Office to cancel the registration. Before the amendment, if the creditor failed to provide the document of proof, the creditor would have to pay NT$50 (US$1.66) and damages to the debtor or the interested person on a daily basis for each day of delay. Because this could lead to the confusion that creditor would have to pay NT$50 only for each day of delay and this amount in no way had any deterrence function, the law was amended to remove the daily NT$50 payment, and the amount that the creditor would have to pay is now assessed under the law of damages.55 Moreover, in this amendment, the provisions (Articles 38 to 40) regarding criminal liabilities for violation of the PPSTA were repealed. The reason for the repeal of the criminal liability provisions is that the nature of secured transactions is based on the debtor-creditor relationship. The amendment emphasises that it is the obligation of creditors to make credit assessments of debtors before making the loans. Immediately after the amendment went into force, it was reported that the removal of the criminal liability provisions was a big shock to creditors because those provisions were considered an effective weapon to force debtors to solve the debt issues.56

(ii) 2007 Civil Code Amendment: Introducing the Line of Credit Mortgage In July 2007, the Legislative Yuan completed the amendment of the property law provisions under the Civil Code such that the ‘line of credit mortgage’ was for the first time codified into the Civil Code.57 Line of credit mortgages have been used in practice for a long time since early the 20th Century.58 A line of credit mortgage is defined as a ‘a mortgage created for not more than a specified maximum amount on real property belonging to a debtor or a third party and provided thereby to secure a creditor’s unspecified claim within a specific scope against the debtor’.59 It is therefore a security interest over immovable property, which secures a revolving credit whereby a borrower can borrow money when he needs it and pay it back when he does not, but where the outstanding loan cannot exceed a specified amount. In 1986, Taiwan’s Supreme Court in an internal meeting adopted a resolution regarding the legal effect of line of credit mortgages that the security interest of the mortgage applies to the principal, interest payment, and damages arising from default.60 This resolution is now codified into Article 881-2 of the Civil Code. The codification of line of credit with clear definitions, and provisions such as those on the rights and obligations of debtors and secured creditors is also viewed by the Doing Business Survey as a reform of the collateral law because it officially

55 PPSTA, Art 10. 56 L-J Huang, ‘The Repeal of PPSTA Article 38, Industry Anguishing for Decriminalization’ (Liberty Times, 13 August 2007). 57 The amendment came into force on 28 September 2007. In this amendment, Pt III ‘Property Rights’ was significantly revised. Ch 6 ‘Mortgages’ was divided into three sections for the purpose of introducing ‘line of credit mortgage’. There are 17 provisions (§881-1 to §881-17). This is the first time that line of credit mortgage was codified into law. 58 Y Chang, ‘Is Freedom of Property Form Principle Efficient? Interpretations of Article 757 of the Taiwan Civil Code and the Underlying Theory’ (2010) 7 Technology Law Review 119, 162–63. 59 Taiwan Civil Code, Art 881-1. 60 Taiwan Supreme Court, the 10th Civil Court Meeting Resolution (31 May 1986).

246 Andrew Jen-Guang Lin recognised that a line of credit mortgage can secure a future debt.61 Although this is not a reform of the PPSTA and is not related to movable property law,62 this is still a good sign for the future reform of the PPSTA.

(iii) 2014 & 2015 PPSTA Enforcement Rules Amendment While major amendment to the PPSTA is pending, the FSC decided to amend the Enforcement Rules which is relatively easier because it can be done by the FSC alone. In both the 2014 and 2015 amendments, it was expressly pointed out in the General Explanation of the draft bill of the PPSTA Enforcement Rules that one of the purposes for amending the Enforcement Rules was to raise Taiwan’s ranking in the Doing Business Survey.63 The major amendments in response to the Doing Business Survey were found in the 2015 Amendment, and included the following aspects: First, the abolition of the ‘Table of the Personal Property Classifications for Secured Transactions’. Beginning from 1963, the Executive Yuan published the Table listing different types of personal property that can be the subject property to be registered with the Registration Office as collateral. Because of this Table, the Registration Office would deny registration if the property to be registered as collateral were not within the scope of the Table. This practice has been criticised by the Doing Business surveyors as ‘one of a kind’ practice in the world.64 This practice also shows how awkward it was in the past, when even if parties agreed, the Registration Office would deny the registration. Because it does not conform with modern practice, the amendment abolished this practice. Second, registration must be filed with the Registration Office of the location of the subject property to be used as collateral. Online registration has been possible since the 2015 Amendment, whereas registration was filed in person at the Registration Office before the 2015 Amendment. After the 2015 amendment, the Registration Offices have been consolidated into 6 types, each responsible for registrations based on location and special types of personal property and registration online has been available via the Property Secured Transactions Online Registration and Public Inquiry. The Enforcement Rules were amended so that the digitised documents were legally recognised and can be filed online.65 Except for automobiles, motorcycles and trailers that should be registered with the Directorate General of Highways, and power-driven ships of under 20 gross tonnages or non-power-driven ships of under 50 gross tonnages that should be registered with the Maritime and Port Bureau, all of the other types of personal property shall be registered with designated Registration Offices based on the location of the property.66 Registrants using the online registration system will still need to set up an account and link with relevant Registration Office for the first time. This practice demonstrates that although the online registration system has been integrated, registrants will still need to choose the relevant Registration Office in which to register. This state of affairs reflects the issue of the allocation of registration fee incomes. In the past, the registration fee incomes belonged to the city and county governments. Because the allocation of fee income has not been agreed upon between the local 61 There is, therefore, a positive answer to question 5; see III A above. 62 As mentioned above, the line of credit mortgage can only be taken over immovable property. 63 The General Explanation of the Amendment and amended provisions can be downloaded from the FSC website: www.fsc.gov.tw/ch/home.jsp?id=96&parentpath=0,2&mcustomize=news_view.jsp&dataserno=201506020004&toolsflag =Y&dtable=News. 64 M-Y Chen, ‘Table of the Personal Property Classifications for Secured Transactions Will Be Repealed by the End of the Month’ (Liberty Times Net, 21 May 2015). 65 PPSTA Enforcement Rules, Arts 3(3) and 4(2). 66 PPSTA Enforcement Rules, Art 2.

Law Reform of the Secured Transactions Regime in Taiwan 247 and the central governments, local governments expect to continue receiving the registration fees. This is why the amendment has had to divide the Registration Offices based on the location of the personal property to be registered and the registrant still has to choose Registration Office accordingly. Third, registration can be done by one of the contractual parties of the secured transaction. Before the amendment, the registration had to be completed by the creditor and the debtor (and/or third person providing the property for collateral) together.67 The 2015 amendment modifies the requirement by removing the word ‘together’ to allow one of the contractual parties alone to complete the registration.68 In the explanation of the amendment, it is stated that in practice the application is filed by one of the parties alone. In order to accommodate online registration filed by one of the contractual parties, the amendment removed the requirement that the filing should be made by contractual parties together. However, it is necessary to note that both parties must sign or stamp the application form. Fourth, in the past, the Registration Office could conduct a merit review of the application. The Doing Business Survey recommends that it is not appropriate for the Registration Office to conduct a merit review, particularly regarding the legality of the secured transaction. After this amendment, the Registration Office will conduct a review only to see whether all relevant documents are filed.69 Fifth, the Registration Office no longer has to issue certificates of registration nor is it necessary to stamp the registration number on the property.70 These practices have been abolished because of the implementation of online filing.71 We observed that government has been devoted to improving the regime of movable collateral law and the registration system from this amendment. However, the reform is fragmented and much more needs be done to meet the standard of the Doing Business Survey. This chapter suggests that the FSC should seriously study the UNCITRAL Legislative Guide and the UNCITRAL Model Law in order to provide guidance for an overhaul of the PPSTA or the enactment of a new Personal Property Securities Act to replace the PPSTA.

B. Major Research Projects on the Reform of Personal Property Secured Transactions The Doing Business Survey is the triggering force for regulatory reform. There are four major research projects funded by the government agencies for reforming the PPSTA. From these research reports, we found interesting changes of government attitudes towards the reform and the difficulties in coming up with a draft bill without objections. Among the different research projects, we also observed that the recommendations may have some relationship with the researchers’ academic backgrounds. It is necessary to note that although the researchers were independent in reaching their conclusions, the designated scope of research and the requirements in each government research report may have affected the outcome of the research conclusions.

67 The PPSTA requires the secured transactions to be in writing and that the filing shall be made by contractual parties of the secured transaction: PPSTA Arts 5(1) and 7(1). The Enforcement Rules echo these provisions accordingly. 68 PPSTA Enforcement Rules, Art 3(2). In order to have one party alone to file application, it is required in the application form that the creditor or debtor must authorise the debtor, creditor or agent to make the filing. 69 PPSTA Enforcement Rules, Art 5(2). 70 PPSTA Enforcement Rules, Arts 11 and 12 (Old Enforcement Rules before the 2015 amendment). 71 Arts 11 and 12 of the PPSTA Enforcement Rules were repealed in the 2015 amendment.

248 Andrew Jen-Guang Lin

(i) 2011 CEPD Research Project In 2011, a research project titled ‘A Study On the Formulation of Modern Chattel Secured Transactions Law’ was funded by the Council of Economic Planning and Development (CEPD) and conducted by a research team of Fu-Jen University School of Law led by Professor Jung-Lung Chen.72 The major problems with the PPSTA identified this research report, included (1) restricting the freedom of the parties in negotiating the security agreement; (2) that the collateral is limited to current and tangible assets;73 (3) the legal rules relating to priority of creditors are unclear; (4) the secured creditor may not automatically acquire the legal title of the collateral when the debtor defaults; and (5) the lack of a unified and integrated national website and database for credit information.74 This project proposed amendment to the PPSTA, PPSTA Enforcement Rules and secured transactions registration system. In the research report, it studied the UNCITRAL Legislative Guide and the secured transactions regimes of Germany, Hong Kong, Japan, Korea, and Singapore, and proposed a draft bill for amending the PPSTA. The draft bill included 100 provisions, divided into 8 chapters. The proposal revised the title of the PPSTA to ‘Chattels, Obligations, and Intellectual Property Securities Act’.75 Some commentators discussed the issues relating to reform as follows: First, should the law define the scope of personal property? The research report proposed removing the definition but at least one commentator opined that it is necessary to restrict the scope so that only valuable property can be used as collateral.76 Another commentator indicated the different nature of different types of personal property and the different methods of publicity that are used for intellectual property, debt obligations, and other movable property.77 Second, what should be the legal effect of registration? In secured transactions under the PPSTA, the general principle is that Taiwan adopts the model of registration antagonism rather than registration effectiveness. The Principle of registration effectiveness means that registration is required for a property right to be created. According to the Taiwan Civil Code, the general principle of rights in rem on real property adopts the registration effectiveness principle.78 In contrast, registration antagonism means that in order to exercise your right against the third person, one must register one’s right with the competent authority so that the right is publicised. If more than one person registers a right against the same collateral, priority is determined by the time the registrations filed unless the law expressly directs the priority differently. However, registration is not required for the creditor to create the security right. Even without registration, the creditor may still enjoy the security rights against the debtor, such as under the current PPSTA.79 In contrast, under the Civil Code before the amendment in 2000, a contractor of a construction project was not required to register a mortgage to acquire and enjoy the mortgage of real property

72 The research report was published on 24 February 2012. Professor Chen obtained his PhD degree from Fu Jen University (Taiwan). 73 Under the current PPSTA, intangible property such as book debts cannot be used as collateral. It can be pledged according to Civil Code but not according to the PPSTA. Civil Code, pt 3 (Rights in Rem), ch 7 (Pledges), s 2 (Pledge of Rights), Arts 900–10. 74 J-L Chen et al, ‘A Study on the Formulation of Modern Chattel Secured Transactions Law’, chaired by Professor Jung-Lung Chen, Fu Jen University (24 February 2012) 2. 75 ibid 156. 76 ibid 259–60. 77 ibid 262–63. 78 Taiwan Civil Code, Art 758(1): the acquirement, creation, loss and alternation of rights in rem of real property through the juridical act will not effect until the recordation has been made; Taiwan Supreme Court 94-Tai-Shang-1018 Civil Judgment (2 June 2005). 79 PPSTA, Art 5.

Law Reform of the Secured Transactions Regime in Taiwan 249 as a secured creditor. In 2000, Article 513 was amended and adopts the principle of registration effectiveness that requires registration for the contractor the acquire the mortgage.80 A commentator warned that the legislature must be very cautious in drafting the legal effects of registration so that it can protect the secured creditors while ensuring the safety of transactions, particularly the protection of the bona fide purchaser.81 Third, one commentator suggested the abolition of ‘possession in trust’ mainly because the definition is in contravention to the concept of trust and the transaction has rarely been used.82 The commentator and the research report both suggested using the German style ‘Sicherungsübereignung’ to replace ‘possession in trust’.83 However, another commentator pointed out that security law under Taiwan’s Civil Code was modelled on the German law but the PPSTA was modelled on the US Uniform Commercial Code. It would become more complicated to adopt the German regime to replace the US style ‘possession in trust’ in the PPSTA.84 While there were disagreements or different opinions regarding whether to introduce the German style ‘transfer of security interest’, another commentator suggested not to introduce the German ‘transfer of security interest’, regime but to adopt the UNCITRAL model.85

(ii) 2012 FSC Research Project In 2012, a research project titled ‘How to Improve Taiwan’s Ranking on World Bank Doing Business Survey: The Strength of Legal Right of Getting Credit’ was funded by the Financial Research, Training and Development Fund, a think tank of the FSC, and conducted by a research team from the National Taiwan University College of Law led by Professor Ming-Cheng Tsai (hereinafter 2012 FSC Research Project).86 This project was specifically devoted to examining for what aspects under the Strength of Legal Rights Index of Getting Credit Taiwan did not get positive scores and how to improve. The main purpose of the Research is to understand fully how the Doing Business Survey is conducted, particularly the Strength of Legal Rights Index and to propose strategies in response to the survey. It analysed the regulatory regimes of other economies that obtained higher scores in Strength of Legal Rights Index in the Doing Business Report 2012. The FSC did not require the researchers to prepare a draft bill for the amendment of the PPSTA. Instead, the FSC hoped that the research report can be used as a medium of communication with the Doing Business surveyors. The message that the FSC wishes to convey to the surveyors is that Taiwan has a very friendly getting credit environment, which is even better than the modern secured transactions regimes promoted by the UNCITRAL Model Law and therefore no need for amending the PPSTA. Small and medium enterprises can easily obtain credit by using the government guarantee program. As a result, the persuasion failed because the Doing Business surveyors could not change the survey methodology because there are no alternative ways of giving scores.

80 Taiwan Supreme Court 103-Tai-Shang-573 (27 March 2014). 81 2012 CEPD Research Report (n 74) 260. 82 ibid 261. 83 ibid 84–85; See also K-M Wu, ‘A Study of the Non-possessory Personal Property Security’ (2010) 56 Military Law Journal 2, 39–40. 84 2012 CEPD Research Report (n 74) 264–65. 85 ibid 268. 86 The research project was conducted by Professor Ming-Cheng Tsai and Professor Andrew Jen-Guang Lin from January to September 2012.

250 Andrew Jen-Guang Lin

(iii) 2015 FSC Research Project Following the 2012 FSC Research Project, the FSC funded a new research project entitled ‘A Study on the Regulatory Reform of Constructing a New Movable Collateral Concept’, conducted by a research team of the National Taiwan University College of Law, led by Professor Ming-Cheng Tsai.87 Because New Zealand has maintained the first place in the ranking of ‘getting credit’, this research devoted more time to study the New Zealand system. In August 2015, two professors of the research team visited the New Zealand Registrar of Personal Property Securities (PPSR), the Registrar of Companies, and the Ministry of Business to get to know whether there were any problems during reform.88 Two New Zealand professors who specialised in the PPSA, property law and equity law were visited to exchange ideas on the PPSA.89 The regulatory philosophy of the New Zealand PPSR is to provide a good registration system and have less intervention by the government. Another important message is that it is important to educate the industry and the public before the launch of the new law so that in the transitory period there will be fewer abusive practices. Members of the research team also visited Japan and Singapore to learn about the operation of movable collateral law.90 The visit to Japan was meaningful because both Taiwan and Japan are civil law countries and it provided an opportunity to get to know what a Japanese scholar thought of the pros and cons, and obstacles, of modelling a reform on the structure recommended by the UNCITRAL Model Law and whether there is alternative way to reform the current secured transactions regime. The research report contains a proposed draft bill to amend the PPSTA. However, the FSC knew that it could be a long process to amend the PPSTA, particularly to overhaul the whole piece of legislation, and realised that some of the improvement could be conducted by the FSC alone by amending the PPSTA Enforcement Rules. Therefore, the FSC began to amend the PPSTA Enforcement Rules and completed these amendments in December 2015.91 One of the proposals suggested by the 2015 FSC Research Report was to create a national online registration system. Because this was covered by the PPSTA Enforcement Rules, the FSC decided to introduce a national online registration system first by amending the relevant provisions of the Enforcement Rules without needing to wait for the amendment of the PPSTA. The rest of the proposal of the 2015 FSC Research Report deals with the PPSTA only. It intended not to touch the existing three types of secured transactions. Accordingly, it proposes to add a new chapter (Chapter 4-1) titled ‘Personal Property Security Interests’ into the PPSTA. There are 9 provisions (proposed Articles 37-1 to 37-9) under the proposed Chapter 4-1. Article 37-1 defines ‘personal property security interests’ and states that ‘for the purpose of securing its obligation, the debtor may contract with the creditor that the creditor has the security interest and has priority over the personal property agreed between the parties when

87 This research project was conducted by Professor Ming-Cheng Tsai (Justice of the Constitutional Court from October 2015 to October 2023), Professor Andrew Jen-Guang Lin and Professor Ching-Ping Shao, from February to September 2015. Professor Ming-Cheng Tsai earned his PhD from University of Munich, Germany; Professor Andrew Jen-Guan Lin, SJD from Duke University, USA; Professor Ching-Ping Shao, SJD from UC Berkeley, USA. 88 The research visit to New Zealand was conducted by Professor Ming-Cheng Tsai and Professor Andrew Jen-Guang Lin from 19 to 28 August. 89 One is Professor Peter Devonshire of University of Auckland School of Law and the other is Professor Barry Allan of University of Otago School of Law. Professor Allan is the author of two books on personal property securities law. The two books authored by Professor Barry Allan are Personal Property Securities Act 1999: Act & Analysis (Wellington, Brookers, 2010) and Guidebook to New Zealand Personal Property Securities Law (Auckland, CCH, 2002). 90 Professor Ming-Cheng Tsai visited Japan and Professor Ching-Ping Shao visited Singapore to conduct research. 91 See IV A (iii). The 2015 FSC Research Report was completed in October 2015 and the amendment of the PPSTA Enforcement Rules was completed on 17 December 2015.

Law Reform of the Secured Transactions Regime in Taiwan 251 the debtor defaults’.92 It also echoes the Civil Code and borrows the same scope of personal property as defined in Article 67 of the Civil Code, which includes everything except for real property.93 To incorporate the concept of the floating charge, Article 37-2 sets out the methods by which parties may agree upon the scope of personal properties as collateral. In addition to the traditional description of specific personal property, parties may also agree to the scope of the subject collateral (1) by the kinds, items or names of the property and specify the scope; (2) to include all of debtor’s present and future acquired personal property; or (3) to use the description stated in (2) above and exclude certain kinds, items or names of personal property.94 It further sets out the legal effects of personal property security interests in Article 37-3. If the collateral is sold or disposed, the secured creditor continuously enjoys the security interest against the proceeds.95 Article 37-4 refers to New Zealand law and sets out the general rule of the order of priorities of security interests, depending on the time of filing or of taking possession of the collateral.96 It also provides that the filing shall be done by the creditor. This can be compared with Taiwan’s current law allowing any of the contracting parties to register. Article 37-5 sets out the order of priorities among different types of security rights, including PMSI. The rest of the articles deal with the enforcement of the security interests.

(iv) 2017 NDC Research Project In 2016, the National Development Council (NDC) consolidated ideas from the past discussions and recommendations of the various research projects and came up with a draft bill named ‘Enterprise Securities Act’, including 7 chapters with a total of 36 provisions.97 In order to ensure that it was feasible, a research project titled ‘A Study on the Feasibility of the Enterprise Securities Act’ was funded by the NDC. It involved a research team of the Soochow University School of Law led by Professor Tsay-Chuan Hsieh, who was a former Grand Justice of Taiwan’s Constitutional Court, the former Vice-President of the Judicial Yuan and a commentator of the other three research projects.98 The research team proposes a ‘Draft Law on Enterprises Securities Act’, containing 7 chapters with a total of 51 provisions. It basically follows the structure recommended by UNCITRAL.99 The framework of the draft bill includes (1) General Principles, (2) Creation of a Security Right, (3) Filing, (4) Legal Effect and Priority of Security Rights, (5) Enforcement, (6) Penalties, and (7) Supplementary Provisions. The special features of the draft bill include the following: First, the debtor and grantor is limited to an enterprise only.100 It does not apply to an individual grantor, whereas the grantor under the current PPSTA can be an individual. Second, it adopts a noticebased filing system. Third, the competent authority is the Ministry of Justice.101 Interestingly, the 92 M-C Tsai et al, ‘A Study on the Regulatory Reform of Constructing a New Movable Collateral Concept’ (October 2015) 109 (hereinafter 2015 FSC Research Report). 93 ibid. See also Proposed Art 37-1, para 2. 94 2015 FSC Research Report (n 92) 109–10. 95 ibid 113. 96 ibid 114. 97 T-C Hsieh et al, ‘A Study on the Feasibility of the Enterprise Securities Act’ (23 February 2017) III (hereinafter 2017 NDC Research Project or Report). 98 In addition to Professor Tsay-Chuan Hsieh, the research team includes Professor Tsung-Chien Chen, Professor Yie-Yun Chang, and Professor Wen-Hui Chiu. The 2017 NDC Research Project was conducted from September 2016 to February 2017. 99 See ch 4. 100 Proposed Enterprise Securities Act, Art 6. 101 Proposed Enterprise Securities Act, Art 2.

252 Andrew Jen-Guang Lin competent authority is neither the current competent authority of the PPSTA, ie, the FSC, nor the competent authority of the Company Act, ie, the MOEA. This may create more controversial issues over three different registries, the company registry, the PPSTA registry and the proposed new enterprise security rights registry. Fourth, the methods of publicity include filing and taking possession or control over the collateral, and the time of publicity determines the order of priorities. The filing of the security right shall be conducted by the secured creditor alone.102 Commentators raised many questions regarding the proposed Enterprise Securities Act. One of the foremost concerns is the potential conflict among the security right under Enterprise Securities Act and the property right and security right under the Civil Code. Professor Chen of the research team pointed out that the rule regarding publicity needs to be reconsidered carefully. Currently, an enterprise may create different types of security rights on the same personal property according to different laws and with different methods of publicity.103 He suggests to carefully evaluate those rules and harmonise the conflicts.104 Regarding registration, although one party (debtor or creditor) of the secured transactions may now complete the filing alone after the 2015 Amendment of PPSTA Enforcement Rules, that party still needs to obtain the signature or stamp of the other party in the registration form. There must be a clear rule in the PPSTA or proposed Enterprises Securities Act providing that the creditor has the right to make the filing alone. There is the question of who serves the function of verifying the accuracy of information and how the secured creditor’s right is to be protected?105 This is the common concern of many people in Taiwan who are not familiar with common law collateral law. Therefore, more effort is needed to explain how common law secured transactions work, and how to integrate this into Taiwan’s property law, registration practices and the legal effects. The relationship of this ‘Draft Law on Enterprises Securities Act’ and the existing PPSTA is also a matter of concern.106 As of May 2020, we have not seen any new development of this proposed Draft Law.

C. Launching of Online Personal Property Secured Transactions Registry While an amendment of PPSTA or a new legislation to modernise the movable collateral law is pending, the Department of Commerce of the MOEA launched a national online secured transactions registry called ‘Property Secured Transactions Online Registration and Public Inquiry’ (PSTRQ) system and began public inquiry services on March 26, 2014.107 The online registration system was open for users to file secured transactions in several stages. The first stage was implemented on May 27, 2015.108 The second stage, adding more Registration Offices into the PSTRQ system, was implemented on December 21, 2015.109 The registration system is for the registration

102 Proposed Enterprise Securities Act, Art 14. 103 2017 NDC Research Report (n 97) 99. 104 ibid. 105 ibid. 106 ibid 102. 107 See Department of Commerce, ‘Online Application of Security Right Is Now Available’ (MOEA, 27 May 2015), ppstrq.nat.gov.tw/pps/web/Show/news5.do. 108 ibid. 109 See Department of Commerce, ‘Property Secured Transactions Online Registration and Public Inquiry System Completing Second Stage Providing More Convenient Online Application Service’ (MOEA, 21 December 2015) at ppstrq.nat.gov.tw/pps/identity/Identity/init.do.

Law Reform of the Secured Transactions Regime in Taiwan 253 of security rights according to the current PPSTA and PPSTA Enforcement Rules. We support the government’s effort in launching the new online registration system. However, it is more important to seriously think of how to modernise Taiwan’s movable collateral law.

D. Most Recent Draft of PPSTA Amendment (30 November 2018)110 Taiwan is still in the process of drafting a new version of the PPSTA in order to meet international standards. The most recent unpublished version of a draft bill on PPSTA revisions prepared by the FSC surfaced on December 28, 2018. The major features of this proposed amendment (Proposed Bill) includes the following aspects: 1.

Overall, the Proposed Bill is not an overhaul of the PPSTA but is mainly to introduce a ‘floating lien’ into the PPSTA as a new type of secured transaction.111 Accordingly, the Proposed Bill amends Article 2 to include floating lien as one of the types of secured transactions. To accommodate the introduction of the floating lien, the Proposed Bill also broadens the scope of personal property that can be used as collateral by removing the list of property prescribed in Article 2 of the current PPSTA. We suggest that the competent authority should reconsider an overhaul of the PPSTA. The current approach adopted in the Proposed Bill is to create a new form of secured transaction, ie, floating lien. However, it leaves the current three types of secured transactions intact.112 2. Creating a new Chapter 2-1 to introduce the floating lien, including 7 provisions. This Proposed Bill contains 7 provisions to cover the floating lien, including (1) definition; (2) items required to be included in floating lien contracts; (3) prescribing how the collateral can be used by the grantor; (4) secured creditor’s right to inspect the collateral and the cash flows of the designated bank account; (5) matters regarding crystallisation of the floating lien; (6) matters regarding the secured creditor’s right to restrict the withdrawal or transfer from designated bank account in case of the grantor’s default or the occurrence of crystallisation matters; and (7) providing that the law of personal property mortgage in the PPSTA and the law of rights lien in the Civil Code shall be applied mutatis mutandis. 3. Article 25-1 of the Proposed Bill defines the term ‘floating lien’ to be an arrangement whereby the grantor, the debtor or a third party provides its current or future personal property or receivables as collateral without transferring possession thereof. It also provides that only a corporate entity can be a party to the floating lien contract. 4. Article 25-2 of the Proposed Bill also sets out items that must be stated in a floating lien contract. Because the Proposed Bill considers the floating lien as a new type of secured transaction, Article 25-2 is modelled on Article 16 (the Mortgage Lien of Personal Property) to provide what should be stated in the floating lien contract, such as the rights of the debtor, the grantor, and the creditor. 5. Because the floating lien is a new concept in Taiwan, Article 25-3 of the Proposed Bill sets out the legal effects of the floating lien and the rules regarding the use of, collecting profits

110 There has not been an updated draft of this proposed amendment since November 2018. 111 Preface of the Draft Bill of PPSTA (28 December 2018). 112 For an introduction of the three current types of secured transactions, see the discussion on the current law on secured transactions in personal property at II above.

254 Andrew Jen-Guang Lin from, and transfer of the collateral. Because there are other types of secured transactions under the PPSTA, Article 25-3 of the Proposed Bill prohibits the personal property that have been used as collateral in a floating lien from being collateral in other types of secured transactions. 6. Article 25-4 of the Proposed Bill grants rights to the floating lien creditor to examine the collaterals and the cash flows of the designated account. The grantor cannot refuse when the creditor conducts the said examination. 7. Article 25-5 of the Proposed Bill states a list of factors triggering the crystallisation process. Upon the occurrence of triggering factors, the floating lien creditor shall file a crystallisation registration with the Personal Property Secured Transactions Register (PPSTR). The registration agency notifies the debtor and relevant obligors. The floating lien creditor cannot exercise its right against the collateral until the crystallisation registration has been completed. 8. Article 25-6 of the Proposed Bill authorises the floating lien creditor to inform the financial institution to restrict the withdrawal or transfer from the designated account and to notify the debtor and relevant obligors in writing within 3 days. If the floating lien creditor fails to notify the debtor and relevant obligors within the stated period of time or fails to apply to the court for compulsory enforcement within one month after notifying the financial institution, the aforesaid restriction imposed on the designated account will be removed. 9. Article 25-7 of the Proposed Bill sets out that certain provisions shall be applied mutatis mutandis to the floating lien. Specifically, Articles 17 to 24 of the PPSTA, regarding the regulation of the personal property mortgage lien, shall be applied to the floating lien generally, and Articles 900 to 910 of the Civil Code shall be applied to floating lien if receivables are used as collateral.

V. Issues and Recommendations A. An Inevitable Reform is Driving Toward an Unknown Destination Regulatory reform of the movable collateral law is difficult in Taiwan because many people are all concerned with this subject. It is difficult because of different views and different standpoints among different government agencies. It is difficult because Taiwan is a civil law country whose property law under the Civil Code is continental law orientated, while the PPSTA is common law orientated. It is difficult because scholars with different academic backgrounds may have different views towards what the law should be. Even among scholars that have similar academic backgrounds, there may still be different opinions regarding the legislation approach. For example, among the four government-funded research projects discussed in this chapter, the academic backgrounds of participating scholars include those trained in common law countries, continental law countries, and domestic universities. Because they are all government sponsored, they all have to go through mid-term and end-of-term oral report and Q&A procedures. We found that researchers of these research projects are also commentators in other research projects. Therefore, we can see from the meeting minutes that their academic backgrounds do have impact on the research reports. This to some extent is good because the movable collateral law reform involves an implantation of the common law concept of a floating charge and security rights into civil law property law. It is important to view this issue seriously and solve the potential conflicts in advance. By doing so, it will also reduce the barrier of legislation.

Law Reform of the Secured Transactions Regime in Taiwan 255 Although reform appears difficult, we are optimistic about the reform. The UNCITRAL Model Law, the Doing Business Survey, and several pieces of good legislation, such the New Zealand PPSA and UCC Article 9, to name just a few, are all good models to learn from. Because all research reports are now easy to access and all issues have almost surfaced to the table, this should be the final stage and a decision should come up anytime soon. Of course, the competent authority should take all recommendations and comments into consideration and take the lead to decide what the law should be. This would prevent a bumpy landing for the new legislation.

B. Should Taiwan Introduce the Floating Charge or a Similar Concept Under Taiwan’s current PPSTA and other secured transactions law, one of the core issues is that the collateral must be present, specific and identifiable.113 Therefore, the first step is to amend the law to allow a general description of collateral to include present and future assets. As discussed earlier, Taiwan has codified a long historical practice of line of credit mortgage so that the collateral can secure the current, future and floating obligations of debtors.114 It should not be too difficult to introduce a concept similar to the floating charge allowing the use of current and future property to secure current and future obligations. Whether the property to be subject to the charge are valuable shall be determined by the creditors before extending the loan through their credit assessment procedures. It should not be difficult to introduce such a floating collateral concept into the law. However, more complementary rules, such as how to register, the relationships between the grantor, debtor, and secured creditors, and issues relating to floating and fixed charges must be addressed and codified into the statute.115 Even in common law countries, there are disputes arising from floating charges, and the rules in the US and UK are also different.116 Because Taiwan is not a common law country, there is no precedent for the court to refer to. This is an issue that must be carefully addressed in the legislation. Moreover, after the introduction of the floating charge, the legislature will also need to modify the bankruptcy laws so that liquidators or administrators know how to deal with the rights of a secured creditor under a floating charge. From the score of the Doing Business Survey and the outdated PPSTA, there is no doubt that Taiwan does need a reform of its movable collateral law. Although there are concerns that the new regime could possibly create more fraudulent lending practices and more litigation, and some are skeptical about the use of the floating charge in Taiwan, these concerns would eventually be eased with a well-designed personal property security regime. However, the main issue is how to introduce a common law regime that has been in operation for such a long time into a civil law country that does not have similar concept of floating charge and no judicial decisions in the past. Even among common law jurisdictions, the floating charge or floating lien regime may operate differently because of different business cultures, customs, and jurisprudence. 113 See ch 6 III D in relation to the treatment of this issue in the civil law generally. 114 See IV A (ii) above. 115 See discussion of the issues arising in relation to the floating charge in common law countries in ch 15 and ch 19 (Singapore). There will be disputes on whether the security right created is a fixed charge or a floating charge. The issue is whether the debtor has control over the collateral and whether the debtor has the power to dispose the collateral in the ordinary course of business which will be a difficult task for the Taiwanese courts to decide. Even in the US and UK, there may be different interpretations. See LM LoPucki et al, ‘Optimizing English and American Security Interests’ (2013) 88 Notre Dame Law Review 1785, 1808. 116 ibid 1839 (discussions in IV. Floating Charges Compared with Article 9 Floating Liens).

256 Andrew Jen-Guang Lin Despite the UNCITRAL Model Law, how to transplant new concepts into the local law remains a challenge in Taiwan.

C. Whose Personal Property can be Used as Collateral There is also an issue regarding whether the grantor can be someone other than the debtor. This possibility is well recognised under Taiwan’s current laws, in the mortgage under the Civil Code or other types of security rights under the PPSTA. However, in relation to the floating charge, the issue of whether a firm can create a floating charge to secure the debt of another firm has not been fully discussed. According to the latest draft bill ‘Enterprise Securities Act’ proposed by the research team of the 2017 NDC Research Project, the grantor can be the debtor or any enterprise other than the debtor. The question of whether a floating charge created by a firm other than the debtor will create even more complicated issues, and if so, how these should be solved, will also need to be answered. Under the UNCITRAL Model Law, a grantor can be the debtor or a person other than the debtor.117

D. Priorities and Enforcement The issue of priority exists in both the new law and the existing law. For example, the concern is whether the same property can be used to create different types of security rights according to different pieces of law, such as the Civil Code, the PPSTA and the new personal property securities law if legislated. This is why the Doing Business Survey suggests to have ‘an integrated or unified legal framework for secured transactions that extends to the creation, publicity and enforcement of four functional equivalents to security interests in movable assets’.118 One benefit of a unified regime119 is that there is only one set of priority rules applying to all possible security interests in a particular asset. The definition of the security interest in the new legislation is also important because it will affect the operation of the whole regime, particularly when floating charge comes into play. A commentator pointed out that many things are very difficult to define in advance and, if necessary, a broader definition and fewer restrictions will make the new movable collateral more user-friendly.120 However, we believe that a definition will still be needed. When a secured creditor has a security interest over bank deposits according to Civil Code and the bank deposits are also subject to floating charge enjoyed by another creditor under the new PPSTA, it will be difficult to determine the priority unless the new PPSTA has clearly set out the priority rules and best of all to create a unified registration system.121 In order to ensure publicity and priority, the secured party may file the security right, take possession of or control the collateral. There should be more explanation about the law and enforcement rules regarding how it works. This issue is also pointed out by an industry representative.122 117 UNCITRAL Model Law, Art 2(o)(i). 118 Doing Business Survey, ‘Getting Credit, Strength of Legal Rights Index’, Questionnaire 1. 119 For other benefits, see ch 2 IV B (i). 120 2017 NDC Research Report (n 97) 104–05. 121 Under the current law, the certificate of deposits and stock may be used to create a pledge of rights according to Art 900 of the Civil Code. 122 See, eg 2017 NDC Research Report (n 97) 105–06 (question raised by representative of the Taipei Leasing Association, ROC).

Law Reform of the Secured Transactions Regime in Taiwan 257

E. Issues Surrounding Registration of Security Interests Registration is an important part of the focus in introducing a modern secured transactions regime. There are several issues relevant to registration that need to be solved.

(i) Function of Registration There must be a decision on what legal effect is to be given to registration. The first approach is that the creditor’s security interest takes effect at the time of filing. The second approach is that the filing is not the effective time of creation of the security interest but filing grants the creditor a right to assert his security interests on the collateral against the third party. As mentioned earlier,123 Taiwan’s existing law adopts the model of registration antagonism rather than registration effectiveness, ie, the second approach prevails.

(ii) Review Based on Merit or Form? What should be role of the registration office? Should it review each registration based on merit or based on form? The registration office is responsible for maintaining the registration system, including reviewing the filing, maintaining the records of registration, and developing a userfriendly, efficient and reliable online registration system. Beginning from the 2015 Amendment of the PPSTA Enforcement Rules,124 the policy was changed from a review based on merit to a review based on form. This policy is in line with the modern movable collateral law that less government intervention is appreciated. However, what registration should do remains a concern of the future legislation. We have pointed out earlier that commentators in some research report meetings have raised concerns about who should be responsible for the accuracy of information filed in the online registration system. Further, the registration office used to conduct a review, which is considered a protection for the parties. There is also discussion on whether ‘filing’ or ‘registration’ should be used because it represents different strength of involvement of the registration office. We suggest that the accuracy of information should be verified by the parties before filing. Since the creditor is the one responsible for filing, he/she has the responsibility to make sure all information filed is correct. There are procedures for correction of information and penalties for misrepresentations. Moreover, a well-designed online filing system will help reduce the occurrence of mistakes and enhance the accuracy of information.

(iii) The Legal Effect of Publicity In many systems, filing and taking possession and control of the collateral are both means of publicity. What should be the legal effect of publicity? It could have a legal effect on the order of priority125 or it could have the legal effect of enabling the secured creditor to assert his right against a third person.126 The PPSTA provides that, ‘[u]nless registered, a personal property secured transaction (or other matters) shall not be effective against a bona fide third party’.127

123 See

IV B (i). IV A (iii). as under the Modern Principles (see ch 2 IV B (ii)) and the UNCITRAL Model Law (see ch 3 VII). 126 Such as under English law; see ch 15. 127 PPSTA, §5. 124 See

125 Such

258 Andrew Jen-Guang Lin In many provisions of the Civil Code, including the registration of mortgage lien and superficies, it is stated that an agreement or a right ‘shall not be effective against a third party unless it has been registered’.128 It is still debated whether the new legislation should adopt registration effectiveness approach rather than the current registration antagonism. However, Taiwan’s Supreme Court has ruled in several cases that a contractor’s security interest is not effective until it is registered.129 When adopting a modern secured transactions law, this issue will need to be clearly addressed to avoid controversy.

F. General Comments on the Most Recent Proposed Bill It is good to see that the competent authority is willing to modernise the PPSTA. However, the current Proposed Bill is too simplified and several aspects need to be reviewed carefully. First, the Proposed Bill creates a new chapter introducing the floating lien. There are two provisions in Chapter 1, General Principles, that are modified to accommodate the introduction of floating lien. All of the rest of the provisions in the current PPSTA are not modified. We think that in addition to creating a new type of secured transaction, the existing three types of secured transactions should be reviewed so that the whole piece of PPSTA can be modernised. So far, this Proposed Bill is still far away from an ‘integrated or unified legal framework’ as suggested by the World Bank Doing Business Survey. Specifically, instead of categorising secured transactions into three or four types, the reform may consider modelling the law on the UNCITRAL Model Law, focusing on how a security interest is created and perfected, how to decide its priority, and the procedures for enforcement, and also allowing the security interest to be attached to specific property or a class of assets and future assets. Second, the Proposed Bill does not include a purchase money security interest (PMSI) or acquisition security interest. Third, the Proposed Bill does not include enough provisions to clearly deal with priority issues when there are competing security rights created. One of the reasons could be that the Proposed Bill prohibits personal property that has been used as collateral for a floating lien from being used as collateral of other types of secured transactions.130 Although Article 25-7 of the Proposed Bill does provide that Articles 900 to 910 regarding pledge of rights shall be applied mutatis mutandis to the floating lien, the rules regarding competing security rights and enforcement are still not clear enough. We suggest that to modernise the PPSTA, it is necessary not merely to introduce the floating lien but also to coordinate with other types of secured transactions. Therefore, Chapter V of the UNCITRAL Model Law governing the priority of security rights should be studied carefully and the whole piece of the PPSTA should be reviewed. Fourth, the Proposed Bill does not deal with intellectual property rights, securities (equity and debt) and derivatives. Also, currently pledges of stocks and intellectual property rights are governed by different laws and overseen by different government agencies or institutions. Therefore, it remains an issue whether these assets can be used as collateral in a floating lien secured transaction. Fifth, one of the major focuses of a modern secured transactions regime is to allow the security interest to be attached to any present or future asset. Although the ‘floating lien’ introduced by the Proposed Bill encompasses such an idea, the use of the ‘floating lien’ or

128 See, eg Taiwan Civil Code, §§836-1, 836-2, 838, 841-2, 850-3, 873-1, 913 and 1008. 129 For discussion, see generally C-C Huang, ‘The Effect of Registration of the Mechanic’s Lien – Registration Effectiveness or Registration Antagonism’ (2010) 25 Chung Yuan Financial & Economic Law Review 113. 130 Proposed Bill, §25-3, para 3.

Law Reform of the Secured Transactions Regime in Taiwan 259 ‘floating charge’ may create more issues. This is a concept that is not yet adopted in the Taiwanese legal system. Our concern is that to simply use provisions for a floating lien may not make this regime work.

G. Prospects of the Personal Property Secured Transactions Law From the above discussion, in order to modernise Taiwan’s personal property secured transactions regime, many things need to be reconsidered and rearranged. The PPSTA needs to be overhauled in order to remove the outdated regime and create an integrated and unified framework. The competent authorities usually do not like the overhaul of a piece of legislation because it has to go through more complicated and difficult legislative procedures. The Research Report 2015 suggests the addition of a new chapter in the PPSTA that introduces concepts similar to the UNCITRAL Model Law, and this is adopted by the most recent Proposed Bill. Although this approach may be considered by the Doing Business Survey as making progress, it is still far from a truly modernised secured transactions regime. The Research Report 2017 which suggests a new legislation for the introduction of a modern secured transaction regime may be a good start. However, while this approach creates a new framework, the current PPSTA remains intact. A separate piece of legislation may be a practical and an expedient approach that helps move the reform forward. The new legislation as proposed in the 2017 NDC Research Report, may be able to exist along with the existing PPSTA but it can also create potential conflicts. We suggest the creation of ‘an integrated or unified legal framework that extends to the creation, publicity and enforcement of functional equivalents to traditional security interests in movable assets’ so that it can eliminate having different pieces of legislations to regulate different types of secured transactions.131 The first step is to review the current regime, not just the PPSTA, and model after the UNCITRAL Model Law to enact a single piece of legislation that covers all rights in personal property that secure the performance of obligations of the debtor. The different types of secured transactions become less important, if not immaterial. Therefore, Taiwan has to reconsider the approach whether to enact a new legislation to replace the existing PPSTA or to overhaul the PPSTA. Under the current PPSTA, the three types of secured transactions have been used for a long time. A radical change may have great impact on the business society as well. Accordingly, we suggest using this opportunity to revise the current PPSTA and make the new PPSTA a good piece of legislation in secured transactions. In doing so, it can avoid the creation of multiple registration systems and potential conflicts among different pieces of legislation. When interpreting the PPSTA, one sometimes has to refer to the Civil Code because the Civil Code contains fundamental principles of security interest law. If there are two pieces of legislation both governing the personal property secured transactions, it will become more complicated when disputes arise. Of course, a new legislation for personal property secured transactions may be plausible if it repeals the existing PPSTA. In the reform, the first thing that almost all research reports have consensus on is that the title of the PPSTA should be modified to ‘Personal Property Security Act’ (PPSA) so that it can reflect more accurately the concept and spirit of modern movable collateral law, focusing on

131 World Bank Group, ‘Doing Business, Getting Credit Good Practices’ (2018), www.doingbusiness.org/data/ exploretopics/getting-credit/good-practices.

260 Andrew Jen-Guang Lin the description of security interests rather than types of secured transactions. If the title of the law is modified to PPSA, the Enforcement Act will be renamed to PPSA Enforcement Rules accordingly. Secondly, the law should include more detailed rules about of floating liens. It is a good sign that the FSC has been aware of the importance of this regime and amended the PPSTA Enforcement Rules in 2015 to let the financial industry begin to use floating charge.132 Nevertheless, an amendment to the PPSTA or a new legislation PPSA is still necessary because Taiwan is a civil law country and bound by the numerus clausus principle. As observed by a scholar, ‘when the numerus clausus principle under-supplies property forms, the market could come up with deal structures that mimic property forms and there is pressure for the government (or the court) to recognise them’.133 For example, the line of credit mortgage was one form of property right that had been used in Taiwan for a long time, was recognised by the courts and eventually became statutory law.134 The floating charge can take the same route but it may take too much time to have the court recognising it. It is expected that since the FSC has agreed to the direction of reform, to avoid more problems arising from ‘floating charge’ or ‘floating lien’, the best approach would be to pattern after the UNCITRAL Model Law to propose a draft bill and to have several rounds of discussions among the different government agencies, such as the FSC, MOEA, Ministry of Justice, Judicial Yuan, Supreme Court judges, and representatives from banking industry. Hopefully a good result will come up soon.

VI. Conclusion Taiwan’s regulatory reform on its personal property secured transactions regime was primarily triggered by the Doing Business Survey. Reviewing the past reforms and government funded research projects regarding the regulatory reform of movable collateral law, we may roughly break them down to several stages. At the first stage, while conducting studies and research, the strategies were to improve the understanding of Taiwan’s movable collateral law and to promote the advantages of alternative SMEG Fund program, hoping that the surveyors and the surveyed institutions (law firms) filling the questionnaire can reflect the bright side of Taiwan’s getting credit environment. The government was hoping that the ranking could be improved without significant reform. The government wanted to convey a message that even compared to economies with high rankings in the Doing Business ‘getting credit’ index, Taiwan’s environment for getting credit is very friendly to SMEs. Of course, this proved to be futile. At the second stage, the government began to realise that a serious reform was necessary if it intended to improve Taiwan’s ranking in the getting credit index. In order to minimise the impact of the reform, the proposed reform regarding the strength of legal rights focused on the introduction of new forms of property rights, such as the floating charge, into the Company Act without overhauling the PPSTA and without much impact on the Civil Code. Meanwhile, the focus was on the improvement of the depth of credit information index which was an easier task. No specific action was taken in this stage. The third stage of the reform began to focus on broadening the scope of collateral to cover any present and future personal property. The proposed reform was to add a new

132 Z-L Peng, ‘Banks’ Floating Charge Business Proposed to Open up’ (Commercial Times, 7 January 2014). (Government will amend Enforcement Rules of PPSTA to allow banks to do floating charge business.) 133 Chang and Smith (n 51) 2304. 134 See IV A (ii) above.

Law Reform of the Secured Transactions Regime in Taiwan 261 Chapter 4-1 ‘Personal Property Securities’ into the PPSTA hoping to modernise the secured transactions law.135 Instead of introducing the ‘floating charge’, the proposal introduced the modern concept movable collateral law after studies of the Personal Property Securities Act 1999 of New Zealand, the Australian Personal Property Securities Act, the UNCITRAL Legislative Guide, the US Uniform Commercial Code Article 9, and the Canadian Personal Property Securities Act. Because the existing three types of secured transactions under the PPSTA (Chapters 2 to 4) remain intact, there may still be confusion and conflicts. This chapter suggests using a modern secured transactions regime to replace the existing three types of secured transactions. Although there is some resistance against reform, we observe that Taiwan has conducted its reform towards that direction. At the fourth stage, because of the difficulty of amending the PPSTA, a new proposal came up with a brand-new draft bill titled ‘Enterprise Property Securities Act’ which completely disregarded the existence of the PPSTA, with the hope that it would meet the standards of the Doing Business Survey. After the research report came out in February 2017, we have not seen any follow-up actions. Of course, even if this proposal went through and results in legislation, it may still create confusion and conflicts with the current PPSTA. As discussed earlier, an integrated and unified Personal Property Secured Transactions Registration and Inquiry Online System, has been implemented based on the PPSTA and the Enforcement Rules of the PPSTA. We believe that the competent authorities would need to settle the issue of how to deal with the reform seriously and work out a solution. In the fifth stage, we saw that the FSC proposed a Draft Bill that surfaced to the table at the end of November 2018. As discussed earlier in this chapter,136 the FSC realised that it is not that easy after the FSC invited scholars and experts to discuss the Draft Bill. We still hope that the FSC would based on that Draft Bill and continue to modify toward the modern secured transactions law. This chapter agrees that the introduction of a modern personal property secured transactions regime will not only benefit enterprises, particularly SMEs, in obtaining more funds, but also influence the practices of lenders in extending and managing their secured lending businesses and influence consumers in purchasing large items of movable property. Overall, the reform is worth doing. The remaining major issue that needs to be solved is to decide whether to enact a new legislation or to overhaul the PPSTA. Of course, it is also high time to reconsider which government agency should be the competent authority of the integrated and unified personal property securities Act. This chapter suggests that the fundamental work that needs to be done is to seriously study the UNCITRAL Legislative Guide and the UNCITRAL Model Law and be devoted to the overhaul of PPSTA or the enactment of a new Personal Property Securities Act so that the movable collateral law regime can truly be improved.

135 See 136 See

2015 FSC Research Report (n 92) 105–24. V F above.

262

13 Implementation of International Standards on Secured Transactions into the Thai Legal System: Possibilities and Proposals* PARAWEE KASITINON

I. Introduction Thailand is an upper middle income economy in South-East Asia.1 Service and industrial sectors mainly constitute the Thai GDP, 55.6 per cent and 36.2 per cent.2 The major source of employment is service and agriculture, 51.5 per cent and 31.8 per cent.3 Thailand’s economy growth reached a peak of 7.5 per cent per year during 1960 to 1996, dropped to 5 per cent because of the Asian Financial Crisis between 1999 and 2005, and is also contracting in 2020 because of the COVID-19 pandemic.4 The inadequacies of Thai laws on secured credit were highlighted because of the lack of access to finance of small and medium sized enterprises (SMEs), comprising 99.7 per cent of all enterprises, 80.3 per cent of employment, and 39.6 per cent of GDP.5 According to the OECD, in 2015, less than half of Thai SMEs had access to formal finance.6 Moreover, in 2013, loans granted to SMEs were only 38.7 per cent of the total amount business loans.7 Furthermore, in 2012,

* This chapter is part of the author’s dissertation: P Kasitinon, ‘Implementation of International Standards on Secured Transactions into Thai Legal System: Possibilities and Proposals for Law Reform in Civil Law Countries’ (SJD Dissertation, University of Pennsylvania, 2019). 1 Upper middle-income economies refer to countries with a Gross National Income (GNI) per capita between $3,996 and $12,375: see World Bank, ‘World Bank Country and Lending Groups’, datahelpdesk.worldbank.org/knowledgebase/ articles/906519-world-bank-country-and-lending-groups. 2 Central Intelligence Agency, ‘The World Factbook’, www.cia.gov/library/publications/the-world-factbook/geos/ th.html. 3 ibid. 4 World Bank, ‘The World Bank in Thailand Overview’, www.worldbank.org/en/country/thailand/overview. 5 Office for Small and Medium Enterprises Promotion of Thailand (สำ�นักงานส่งเสริมวิสาหกิจขนาดกลางและขนาดย่อม), ‘Plan for SMEs Promotion No 4 (2017–2021)’ (แผนส่งเสริม SMEs ฉบับที่ 4 2560–2564), www.sme.go.th/th/download.php?modulekey=12. 6 Organization for Economic Co-operation and Development (OECD), ‘Financing SMEs and Entrepreneurs 2015: An OECD Scoreboard’ (2015), read.oecd-ilibrary.org/industry-and-services/financing-smes-and-entrepreneurs-2015_ fin_sme_ent-2015-en#page7. 7 Y Amornkitvikai and C Harvie, ‘The Impact of Finance on the Performance of Thai Manufacturing Small and Medium-Sized Enterprises’, ADBI Working Paper 756 (2016), papers.ssrn.com/sol3/papers.cfm?abstract_id=2799523.

264 Parawee Kasitinon the survey conducted by the Office for Small and Medium Enterprises Promotion of Thailand revealed that the major cause for rejections of loan applications was a lack of collateral.8 The secured transactions law reform in Thailand, dating back to 1998 as a result of the financial crisis of 1997 and leading to the Business Security Act, 2015, was incentivised by the needs of modern business and financing practice. Nevertheless, because the Business Security Act does not comply with internationally accepted standards, to enjoy reputational benefit from the World Bank’s Ease of Doing Business ranking,9 Thailand, with the assistance of the World Bank, has more recently made an effort to unify Thai laws on secured credit and several asset-based ownership registries. This chapter will demonstrate how Thai laws on secured credit have been developed and the fundamental principles underlying this development. The next part will offer an overview of Thai law on secured credit. Non-compliance of Thai laws with international standards, and the inadequacies will be explored in part III. In part IV, the rationales for Thailand’s non-adoption of such international standards will be analysed. Part V will scrutinise compatibility of international standards with the Thai Legal System. Proposals for implementation of a functional approach into Thai legal system will be offered in part VI. In part VII, feasibility of further adoption of the modern principles in Thailand will be assessed. Finally, several lessons learned from Thai law reform will be extracted.

II. An Overview of Thai Law on Secured Credit A. Civil and Commercial Code The Civil and Commercial Code (CCC) has long played the key role in asset-based lending in Thailand. The devices in relation to secured transactions provided by the CCC consists of possessory/non-possessory and consensual/statutory devices. Despite functioning as security, those devices are regulated by different requirements and produces different legal consequences. Security devices include the pledge and the mortgage. The pledge is used to create security rights in movable assets by delivering possession of the pledged property to the pledgee.10

8 Important causes for rejection of loan applications are a lack of collateral (24.02%), a lack of business planning (19.94%), no credit history/newly established businesses (15.11%), and insufficient ability to repay loans (12.82%): see Office for Small and Medium Enterprises Promotion (สำ�นักงานส่งเสริมวิสาหกิจขนาดกลางและขนาดย่อม), ‘Survey on Debt Burden and Access to Credit conducted by Office for Small and Medium Enterprises Promotion’ (ผลการสำ�รวจภาระหนี้และการเข้าถึงแหล่งเงินทุนขอ งSMEs) (2012), www.sme.go.th./upload/mod_download/รายงานการสำ�รวจภาระหนี้และการเข้าถึงแหล่งเงินทุนของ-SMEs-2555.pdf. 9 Thailand’s Ease Doing Business ranking before and after the Business Security Act (enacted in 2015 and in effect in 2016) improved from 49th to 46th in 2017, from 46th to 26th in 2018, and from 27th in 2019 to 21st in 2020. See World Bank Group, Doing Business 2016: Measuring Regulatory Quality and Efficiency (2016), www.doingbusiness.org/ content/dam/doingBusiness/media/Annual-Reports/English/DB16-Full-Report.pdf; World Bank Group, Doing Business 2017: Equal Opportunity for All (2017), www.doingbusiness.org/content/dam/doingBusiness/media/Annual-Reports/ English/DB17-Report.pdf; World Bank Group, Doing Business 2018: Reforming to Create Jobs (2018), www.doingbusiness. org/content/dam/doingBusiness/media/Annual-Reports/English/DB2018-Full-Report.pdf; World Bank Group, Doing Business 2019: Training for Reform (2019), www.worldbank.org/content/dam/doingBusiness/media/Annual-Reports/ English/DB2019-report_web-version.pdf; World Bank Group, Doing Business 2020: Comparing Business Regulation in 190 Economies’ (2020), www.doingbusiness.org/content/dam/doingBusiness/country/t/thailand/THA.pdf. 10 CCC, s 747. A right represented by an instrument can be pledged by delivering the instrument to the pledgee and notifying the debtor of such right: see CCC, s 750. For a pledge of an order instrument, an instrument by name not transferable by endorsement, a registered share or bonds, a warehouse receipt and warrant, bills including a bill of exchange, a promissory note, and cheques, see CCC, ss 751–53, 777, 785, 926, 985, 989 and 1129.

Implementation of International Standards on Secured Transactions into the Thai Legal System 265 Enforcement of a pledge via extrajudicial procedure is allowed.11 Security rights in immovable assets can be created by a mortgage which requires a written document and registration with the competent registrar.12 Mortgages of movable assets are possible in relation to vessels of five tons or more, floating houses, beasts of burden, and any other types of movable assets for which the law provides registration.13 A mortgage may be enforced via judicial process14 and via extrajudicial process.15 To use claims not represented by an instrument in financing transactions, the parties need to rely on the provisions on transfer of claims.16 A transfer of claims must be in writing; otherwise it is not valid.17 To be effective against the debtor of the claim and third parties, such debtor must be notified of the transfer or give consent to the transfer.18 If a single claim is transferred more than once the first transfer to which the debtor of claim consented to or the first transfer notified to the debtor of claim has priority.19 However, the CCC provisions on transfers of claims apply to an outright transfer of claim, rather than to creation of a security right in a claim or a pledge of a claim. Despite not being considered as a security right, the CCC also acknowledges that, without the requirement of delivery of possession, ownership can be retained or transferred for security purposes and applicable to both movable and immovable properties. Two types of transactions intended to retain ownership for security purposes are hire-purchase20 and conditional sale.21 Sale with a right of redemption can also be used to transfer ownership for security purposes.22 In addition to consensual rights, the CCC recognises statutory property-based rights, preferential rights and a right of retention. Based on specified grounds,23 a preferential right is granted to certain creditors by virtue of law on the debtor’s properties to obtain the value of the property realised to satisfy their debts in preference to other creditors.24 A right of retention is granted to a person having possession of the other person’s property and having an obligation in his favour with regard to such property to retain the property until the performance of such an obligation.25

11 CCC, s 764. 12 CCC, ss 702 and 714. 13 CCC, s 703. 14 CCC, ss 728 and 729. 15 The process is initiated by the mortgagor who requests the mortgagee to dispose of the mortgaged property by a public auction extra-judicially: see CCC, s 729/1. 16 The term ‘claim’ refers to a right to performance, based on different sources of obligation, not limited to a contractual right to payment. 17 CCC, s 306. 18 ibid. 19 CCC, s 307. 20 Hire-purchase is a contract whereby a hire-purchaser hires a property from the owner of the property, a hire-seller; and the hire-seller agrees to sell such property or allow the hire-purchaser to become the owner of such property if the hire-purchaser pays all agreed instalment payments: see CCC, s 572. 21 A sale may be subject to a condition for a transfer of ownership. If payment of the sale price is specified as a condition, the ownership of the sold property will not be transferred until the price is paid: see CCC, s 459. A conditional sale is similar to a hire-purchase, but, while, under a hire-purchase agreement, the hire-purchaser may terminate the contract and stop paying instalments anytime by returning the property, the buyer in a conditional sale agreement may not: see CCC, s 573. 22 Under a sale with right of redemption, the seller and buyer enters into a sale contract subject to the seller‘s right to redeem the property in the future: see CCC, s 491. If a right of redemption is exercised within the agreed redemption period, the ownership of the property will be transferred to the person exercising such right: see CCC, s 492. But, if the seller fails to exercise the right of redemption within the redemption period, the buyer can no longer claim such right against the buyer. 23 CCC, ss 253, 259 and 273. 24 CCC, s 251. 25 CCC, s 241.

266 Parawee Kasitinon

B. Acts Supplementary to the Provision of Mortgage To address the deficiencies of non-possessory security devices and correspond with the needs of modern financing, the solution readily available in the CCC is an expansion of the types of assets eligible to be mortgaged.26 Thus, several Acts have been enacted to enable machinery,27 seaworthy vessels28 including vessels under construction,29 leasehold rights for a lease of an immovable property for a period of more than 30 years to 50 years,30 and motor vehicles31 to be mortgaged. The provisions relating to mortgages under the CCC apply to mortgages of such properties, without there being any contrary provisions in the special Acts. In spite of those Acts, several types of asset are not covered, such as inventory,32 trade receivables, bank accounts, and leasehold rights not subject to the special Act. Therefore, the lenders who, in practice, accept these types of assets as collateral in financing transactions are not considered secured creditors under the CCC security regime.

C. Business Security Act BE 2558 To eliminate the restrictions in the CCC security regime regarding delivery of possession, the limited types of eligible assets, the lack of a registry system for movable properties, and the ineffective enforcement process, the Business Security Act (BSA), establishing a new security regime, was enacted in 2015.33 According to the BSA, security rights can be created and made effective against third parties by entering into a security agreement which must be made in writing and registered without the need to deliver possession of the asset.34 Both steps are necessary for creation as well as to make the security rights effective against third parties. If a grantor dishonestly removes, destroys, hides or transfers the asset to other persons and this leads to the secured creditor being unable to enforce his rights, the grantor shall be fined and imprisoned.35 The secured party under the BSA must be a financial institution as defined by the Act36 and other persons or entities specified by ministerial regulations.37 Despite there being no restrictions 26 Any types of movable assets for which the law provides registration may be mortgaged: see CCC, s 703(4). 27 Machinery Registration Act B.E. 2514 1987, s 5. 28 Vessel Mortgage and Maritime Lien Act B.E. 2537 1994, ss 6 and 7. 29 Vessel Mortgage and Maritime Lien Act B.E. 2537 1994, s 21/1 as added by the Vessel Mortgage and Maritime Lien Act, No 2 B.E. 2558 2013. 30 Rental of Immovable Property for Commerce and Industry Act B.E. 2542 1999, ss 3 and 6. 31 Vehicle Act B.E. 2522 1979, s 17/1 as added by Vehicle Act No 15 B.E. 2551 2008. However, according to the cabinet resolution issued on May 6, 2009, the Draft Ministerial Regulation Specifying Requirement, Procedure, and Fee Rate for Hypothecation of Vehicles, Trailers, Rollers, and Tractors was withdrawn according to the request of the Ministry of Transport and has not yet been reissued. 32 See CCC, s 769(2). 33 See the note attached to the BSA. Under s 2 of the BSA, the Act was in effect 240 days after declaration in the Government Gazette on 2 July 2016. 34 BSA, ss 5 and 13. 35 BSA, s 86. 36 BSA, ss 3 and 7. Financial institution refers to a financial institution according to the law governing financial institution business, a life-insurance or non-life insurance company, and a bank or a financial institution established under any specific law. 37 Under that Ministerial Regulation on Specifying the Types of Lender under the Business Security Act B.E. 2558, B.E. 2559 2016, ss 1–6 (Ministerial Regulation 1), the secured party can be a juristic person having the objective of

Implementation of International Standards on Secured Transactions into the Thai Legal System 267 on the type of borrowers, as shown by the title of the Act, the BSA is originally intended to apply to business credit, rather than consumer credit.38 In terms of the type of assets, the BSA provides a comprehensive list of asset types eligible to be used as collateral, which are businesses,39 claims,40 movable properties used by the grantor in business operations such as machines, inventory, and raw materials used in production of goods, immovable properties used in real estate businesses, intellectual properties, and other types of asset prescribed by ministerial regulations.41 Moreover, unlike the CCC, the BSA allows future property to be used as security.42 Registration of security rights is simpler than that of mortgages because submission of a security agreement is not required and the registrar has no responsibility regarding accuracy and completion of the provided information.43 The secured party registering security rights according to the BSA is considered a ‘secured creditor’ according to the law regarding bankruptcy.44 Among the secured parties registering their rights in the BSA registry or registering mortgages in other special registries, a first- to-register rule applies.45 Enforcement of security rights under the BSA can be executed according to the types of the encumbered properties, particular properties or businesses. Security rights in a particular properties can be enforced via both extra-judicial46 and expedited judicial procedures.47 If a business is granted as security, one or more licensed security enforcers must be appointed48 to operate the business, assess the value of the business, determine the suitable means to dispose of the business, and distribute the proceeds.49

involving in securitisation transactions, a trustee of a trust under the law governing trust for transactions in capital market, a securities firm, a mutual fund, a bondholders’ representative under the law governing securities and exchange, a juristic person operating derivative trading business, an asset management company, and a juristic person having the objective of conducting factoring business. Under the Ministerial Regulation on Specifying the Types of Lender under the Business Security Act B.E. 2558, No 2 B.E. 2561 2018, ss 7–10 (Ministerial Regulation 2), the secured creditor under the BSA can be the Office of the Permanent Secretary of the Industry Ministry dealing with the SMEs Civil Development Fund, a foreign commercial bank involving in syndicated loans, a juristic person having the objective of operating hire-purchase or leasing businesses, and a juristic person having the objective of providing credit. 38 Interview with Suda Visrutpitch, Associate Professor, Thammasat University (Bangkok, 20 July 2017). 39 The term ‘business’ refers to the properties the grantor used in business operation and the rights relating to such operation which are encumbered by the grantor and may be transferred in a way that the transferee may resume operation of the business without any interruption: see BSA, s 3. One licensed security enforcer or more must be appointed if all assets of a business are granted as collateral: see BSA, ss 12 and 18(4). 40 The term ‘claim’ refers to rights to performance and other rights, but does not include a claim represented by an instrument: see BSA, s 3. 41 Perennial plants can be used as collateral under the BSA: see BSA, s 8(6); Ministerial Regulation on Specifying the Types of Encumbered Properties under the Business Security Act B.E. 2558, B.E. 2561 2018. 42 BSA, s 9. 43 BSA, s 16. A registration requires specification of the secured obligation, details of the encumbered asset including its type, quantity, and value, a statement that the grantor assigns the registered property to the secured party to secure performance of an obligation, and events of default under a security agreement: see BSA, s 18. 44 BSA, s 17. 45 BSA, s 33. 46 If the grantor or the person having possession refuses to deliver the encumbered property, the secured party is able to proceed with the expedited judicial process: see BSA, s 46. 47 If the grantor or the person having possession of the encumbered property is willing to cooperate with the secured party by delivering possession of such property to the secured party, extrajudicial enforcement is allowed: see BSA, s 39. 48 BSA, ss 12 and 13. Under ss 54 and 55 of the BSA, a person eligible to be a security enforcer must have knowledge, expertise, and experience in law, accounting, economics, business administration, or property valuation and receive a licence from the BSA registration officer. 49 BSA, s 73.

268 Parawee Kasitinon

III. Non-compliance of Thai Law with International Standards Compared with several international instruments, the Thai current laws on secured credit are very similar to the Uniform Act of the Organisation for the Harmonisation of Business Law in Africa (Organisation pour l’Harmonisation en Afrique du droit des affaires, OHADA)50 in that various traditional devices are preserved.51 Moreover, the Uniform Act’s priority rules applicable to pledges and liens are comparable to those applicable to pledges and preferential rights under the Thai CCC and BSA.52 At the same time, the Thai BSA is parallel to the European Bank for Reconstruction and Development (EBRD) Model Law in terms of the BSA’s original scope of application limited to business credit.53 Moreover, the idea of using all the assets of a business as a going concern as security is analogous to the enterprise mortgage under the EBRD Model Law.54 However, the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Secured Transactions (2016) (UNCITRAL Model Law), the most recent modern standard for international principles on secured transactions, is used here as the main comparison for evaluating Thai laws on secured credit. One of the most significant principles of secured transactions law recognised by the UNCITRAL Model law is that any transaction aiming to secure payment of an obligation should be treated in the same manner, regardless of its name or form, a functional approach.55 Therefore, the utilisation of ownership for security purposes is integrated in a unified law on secured transactions, despite ownership traditionally not creating security rights. Moreover, this approach also subjects the outright transfers of claims for money or ‘receivables’ to a security regime, in spite of not securing credit.56 Nevertheless, this approach has never been implemented into the Thai legal system.

A. Non-integration of Ownership-Based Devices and Related Inadequacies (i) Secrecy of Ownership-Based Creditors’ Rights Under the CCC, security rights in movable properties are publicised by the transfer of possession to the creditor. Registration of security rights in movable properties is available only for certain types of movable assets eligible to be mortgaged. Moreover, in the case of ownershipbased transactions regarding movable properties57 which do not require delivery of possession of the properties or for which registration may not be possible, no means is available to publicise the creditor’s right. Even with the BSA, this issue is not solved. The reason is that, although juristic persons having the objective of operating hire-purchase or leasing businesses58 are e ligible 50 For detailed discussion of the OHADA Uniform Act: see M Dubovec and L Gullifer, Secured Transactions Law Reform in Africa (Oxford, Hart Publishing, 2019) ch 10. 51 The differences between pledge, mortgage, right of retention, retention and assignment of title, and liens, comparable to preferential rights in the Thai CCC, are maintained. 52 OHADA Uniform Act, Art 226; BSA, s 34; CCC, ss 282, 278 and 287. 53 EBRD Model Law, Art 2; Visrutpitch (n 38). 54 EBRD Model Law, Art 5.6, 25; BSA, ss 8(1), 12, 18 and 61–79. 55 UNCITRAL Model Law, Art 2(kk)(i). 56 UNCITRAL Model Law, Arts 1 and 2(kk)(ii). 57 They include hire-purchase, leasing, conditional sale, and sale with right of redemption of movable properties. 58 Due to the BSA’s limitation on the types of eligible secured creditors resulting in the inability of natural persons or unincorporated entities to register their rights, the problem of secrecy of the creditors’ ownership retention and security rights may be escalated.

Implementation of International Standards on Secured Transactions into the Thai Legal System 269 to register security rights under the BSA,59 they are not allowed to register their rights in the properties in which they retain ownership. Thus, a false impression that the debtor holds an unencumbered property possibly leading to fraud may ensue.60 The absence of publicity might not seem to be harmful for such creditors because ownership is generally superior to the rights of creditor. But, the rights of subsequent good faith purchasers under the CCC may prevail over the right of the owner if an asset is acquired in a public auction sale ordered by the court or the receiver in bankruptcy, in a market sale, in a sale by public auction, or from a vendor who sells such asset in the ordinary course of business.61

(ii) Enrichment Possibly Gained by the Creditor Retaining Ownership of an Asset Since, in the case of a hire-purchase transaction, ownership is used to secure payment of the purchase price, the property’s ownership is not transferred from the hire-seller to the hirepurchaser if the hire-purchaser defaults.62 Moreover, upon the hire-purchaser’s default, the hire-seller, as an owner, is entitled to regain the property and is entitled to keep the instalments previously paid,63 thus resulting in enrichment possibly gained by the creditor retaining ownership.64 Similarly, with regard to sale with right of redemption, despite being subject to the seller’s right of redemption, the buyer becomes the owner of the property.65 Therefore, if the seller does not exercise the right to redeem by paying the redemption price as agreed by the parties,66 such seller will lose the property, regardless of the amount of the redemption price owed. It is true that the consumer protection law partially addressed the problem of surplus in case of ownership retention because the hire-sellers of electric appliances, vehicles, and motorcycles are required to dispose of the property in case of the hire-purchasers’ default, apply the proceeds to pay the amount owed, and return any surplus.67 But, such provisions are not intended to address the issue of surplus resulting from ownership-based transactions in general.

59 Ministerial Regulation 2, s 6. 60 See UNCITRAL Legislative Guide on Secured Transactions (2007) (UNCITRAL Legislative Guide), para 65 at 119; SL Harris and CW Mooney Jr, Security Interests in Personal Property, 5th edn (New York, Foundation Press, 2011). 61 If the good faith purchaser acquires the property from a public auction sale ordered by the court or the receiver in bankruptcy, the good faith purchaser’s right is not affected even if it is proved that the defendant, judgment debtor, or bankrupt was not the owner of the property: see CCC, s 1330. Moreover, if the good faith purchaser acquired the property in a market, in a sale by public auction, or from a vendor who sells such asset in the ordinary course of business, the good faith purchaser is not required to return the property to the true owner, unless the owner makes a payment of the amount equal to the purchase price to such purchaser: see CCC, s 1332. 62 CCC, s 572. 63 CCC, s 574. 64 See UNCITRAL Legislative Guide, paras 193–94 at 369. 65 CCC, s 491. 66 If the redemption price is not specified, the amount equal to the sale’s price may be paid to redeem the property. But, the redemption price must not be greater than the amount of the sale’s price plus the profit of fifteen percent per year: see CCC, s 499. The redemption price may be paid by a lump sum or instalments: see Supreme Court Dika 1979, 12 The Thai Bar Association 2210–13. 67 Consumer Protection Act B.E. 2522 1979, Art 35bis as amended by the Consumer Protection Act, No 2 B.E. 25411998; Royal Decree on Specification of Rules and Procedures regarding identification of businesses and terms of contracts under supervision of the Committee of Contracts B.E. 2541 1999, Arts 3 and 4; Notification of the Committee of Contracts concerning Hire-Purchase Business as a Business under the Committee’s control, B.E. 2555 2012, Art 4(4); Notification of the Committee of Contracts concerning Hire-Purchase of Electric Appliances as a Business under the Committee’s Supervision, B.E. 2544 2001, Art 3(10); Notification of the Committee of Contracts concerning Hire-Purchase of Vehicles and Motorcycles as a Business under the Committee’s Supervision B.E. 2561 2018, Art 4(5). (Consumer Protection Law regarding Hire-Purchase of Electronic Appliances and Consumer Protection Law regarding Vehicles and Motorcycles).

270 Parawee Kasitinon

(iii) Inability of a Grantor to Use the Entire Value of an Asset to Obtain More Credit Under the CCC, the debtor under ownership-based transactions68 may not pledge or mortgage the property subject to retention of ownership,69 since a pledgor or mortgagor is required to be the owner of the property.70 In other words, since the ownership is vested in the creditor, no other lenders can take junior security rights in the property.71 The BSA does not have this restriction and allows the use of assets to be acquired in the future according to any agreement or juristic relationship as collateral.72 Therefore, it is possible for the debtor expecting to acquire an asset pursuant to an ownership-based transaction73 to use the asset to be acquired (once the debt is fully paid)74 to secure more loans. However, because security rights in future assets granted as collateral are created only when the grantor acquires such assets,75 the risk that might occur is that if the debtor does not acquire the asset because of default or non-exercise of the right of redemption, the security right in the asset is deemed to have never been created. Because of the risk of becoming unsecured, the chance of getting more loans is adversely affected. Although, as discussed above, the hire-seller is required to return the surplus to the consumer/ hire-purchaser in case of a hire-purchase of electric appliances, vehicles, and motorcycles,76 such provisions do not enable the hire-purchasers to use the whole value of assets, especially the value for which they have paid and exceeding the price owed, to secure more credit, if no concurrent junior security interests can be created in such properties.

(iv) The Lack of Competition Among Credit Providers In the absence of an equal treatment of various sources of credit, competition will not be created, thus causing high cost of credit.77 If ownership is vested in a particular creditor resulting in inability to obtaining more loans from other credit providers by granting a junior security interest in the same property, the grantor will have to rely on the only source of credit, which is the creditor retaining ownership, for any further loans.78 Thus, due to the lack of competition, the interest rate or the contract terms may not be the most favourable to the grantor even if that creditor is willing to grant more credit. Eventually, the grantor’s ability to obtain credit at a lower cost may be impaired. Although the debtor may be able to find a refinancing lender who will pay off the debt and grant a new loan based on the same asset, refinancing credit may not always be available or

68 These include a hire-purchaser, conditional buyer, and seller with right of redemption. 69 They include a hire-purchase, a conditional sale, or a sale with a right of redemption agreements. 70 CCC, s 705; Senee Pramot (เสนีย์ ปราโมช), ‘Lecture for Undergraduate on Guarantee and Security under the Civil and Commercial Code Book III’ (คำ�สอนชั้นปริญญาตรีี ประมวลกฎหมายแพ่งและพาณิชย์ บรรพ 3 ประกันด้วยบุคคลและทรัพย์) (Thammasat University, 1964) 183. 71 See UNCITRAL Legislative Guide, para 20 at 50 and para 94 at 53. 72 BSA, s 9. 73 This term refers to a hire-purchaser, conditional buyer, or seller with a right of redemption. 74 It includes all instalments, sale price, or the price of redemption. 75 BSA, s 9. 76 Consumer Protection Law regarding Hire-Purchase of Electronic Appliances and Consumer Protection Law regarding Vehicles and Motorcycles, Arts 3(10) and 4(5). 77 UNCITRAL Legislative Guide, para 105 at 56; SV Bazinas, ‘The UNCITRAL Legislative Guide on Secured Transactions – Key Objectives and Fundamental Policies’ (2010) 42 Uniform Commercial Code Law Journal 123, 128–29. 78 UNCITRAL Legislative Guide, paras 49–50 at 330.

Implementation of International Standards on Secured Transactions into the Thai Legal System 271 preferable. But, with equal treatment between ownership-based and security devices, aside from the refinancing option, the debtor could grant a junior security right in the same property and benefit from the competition created. It true that an incorporated entity dealing with hire-purchase or leasing business and financial institutions can, instead of retaining ownership, take security rights in the assets they finance by registering their rights under the BSA regime and will be treated as creditors. But, because the creditors retaining ownership in assets under the CCC regime are treated as owners, they do not choose to be BSA secured creditors by registering their rights as they would enjoy less benefit as BSA creditors than they would being CCC owners without having to comply with the registration requirement.

B. Non-integration of Outright Transfers of Receivables (i) Characterisation of Transfers Difficulties concerning the denomination of a transaction and determination of the applicable law may arise79 because of the similarities between outright transfers and security transfers in terms of function,80 collection/ enforcement of receivables,81 priority over other creditors in bankruptcy,82 and the degree of risk sharing between transfers with recourse and security transfer.83 Before the BSA, complexity regarding rules applicable to a particular transfer did not arise since all transfers were based on the CCC which only allowed outright transfers of receivables. Therefore, most of Thai court decisions focused on whether the relevant receivables had been transferred by considering if all requirements of the CCC were satisfied, rather than dealing with a true sale- security right dichotomy. However, if a court had had to consider the problem of a true sale-security right dichotomy, it is possible that it would have relied on the traditional security right concept. That concept is that the secured party is allowed to enforce the right in the encumbered property only if the grantor is in default and, without default, the grantor is to enjoy all rights of ownership. The right to receive payment from the debtor of the receivable would have been taken into consideration, but it was not always a distinguishing factor. If the grantor was entitled to the surplus remaining after all debts are fully paid and grants such surplus as security to secure performance of an obligation, the court prior to the BSA did not characterise this transaction as an outright transfer.84

79 Harris and Mooney (n 60) 400–01. 80 Both transfers as security and outright transfers, especially in case of factoring, are used in transactions that have the functional equivalence of providing cash to the transferor based on the value of the receivables: see MG Bridge et al, ‘Formalism, Functionalism, and Understanding the Law of Secured Transactions’ (1999) 44 McGill Law Journal 557, 567 and 580. 81 The way in which receivables are collected in case of outright transfers and the way in which security rights in receivables are enforced are indistinguishable: see UNCITRAL Legislative Guide, para 25 at 37. 82 Both the creditor and transferee are able to collect particular receivables in preference to other creditors in bankruptcy: see Bridge et al (n 80) 580. 83 The distinctions between a transfer with recourse and a security transfer and between a transfer without recourse and an outright transfer are not easy to identify because the degree of credit risk sharing between the transferor and transferee is quite comparable: see Harris and Mooney (n 60) 400. 84 Supreme Court Dika 1971, 1 The Thai Bar Association 526–39 (Thai). However, due to the non-recognition of creation of security rights in claims before the BSA, the court considered this transaction as an appointment of agent to receive payment.

272 Parawee Kasitinon Moreover, if a receivable was transferred with recourse, before the BSA, the court did not consider such a recourse obligation as a factor for not classifying a transfer as an outright transfer.85 It seems the approach applied by Thai courts to characterise a transfer is comparable to a property-based approach86 in that retention of some interest by the transferor in the transferred receivables coupled with an obligation secured by the receivables is an essential factor of security interests securing obligations and that a recourse obligation may not be an indication of retention of a property interest in receivables.87 Nevertheless, under the BSA, the issue of characterisation might gain more importance and become a concern especially as to a true sale- security right dichotomy because an outright transfer is regulated by the CCC, but the creation of a security right in a receivable is subject to the BSA.

(ii) Secrecy of Transfers Exclusion of outright transfers of receivables from the BSA security regime may cause a lack of transparency because registration is not required under the CCC.88 Although registration and notification to the debtor of receivables serves the same functions, achieving third-party effectiveness and determining priority, registration functions as a reliable source of information as to encumbrances in particular assets and an objective proof of the time of registration can be used to determine priority.89 Although, without registration, the prospective creditors or transferees may confirm existence of particular claims if the debtor of receivables is notified of the transfer; this would consume more time and cost, and, more importantly, require cooperation by the debtor of the receivable. Thus, if any previous effective transfer can be easily found by searching the registry, the lender’s risk will promptly be calculated accurately,90 potentially resulting in lowering cost of credit. Moreover, registration provides the public with the time of registration. Other than being used to determine priority, the time of registration is taken into consideration in the case of bankruptcy as to whether a transfer constitutes an undue preference.91 Although the time of

85 Supreme Court Dika 1959, 2 The Thai Bar Association 496–516 (Thai). 86 A property-based approach proposed by Harris and Mooney is against the reasoned and analytical approach of Aicher & Fellenhoff and the analytical methodology of Plank as to the disparity of price and value of receivables playing a major role in re-characterisation. The approach also disagrees with Pantaleo, who argues that economic recourse indicates that the receivables serve as collateral and that recourse for collectability, including a warranty of qualities, amounts to a true sale. The property-based approach also opposes Kettering’s purposive analysis which connects re-characterisation with an anti-forfeiture doctrine, confirms the irrelevance of recourse to a true sale, and considers such recourse as a warranty of timely collectability: see SL Harris and CW Mooney Jr, ‘When Is a Dog’s Tail Not a Leg: A Property-Based Methodology for Distinguishing Sales of Receivables from Security Interests That Secure an Obligation’ (2014) 82 University of Cincinnati Law Review 1029, 1047, 1069–72 and 1074; TE Plank, ‘The True Sale of Loans and the Role of Recourse’ (1991) 14 George Mason University Law Review 287, 334–37; RD Aicher and WJ Fellerhoff, ‘Characterization of a Transfer of Receivables as a Sale or a Secured Loan upon Bankruptcy of the Transferor’ (1991) 65 American Bankruptcy Law Journal 181, 207 and 210; PV Pantaleo et al, ‘Rethinking the Role of Recourse in the Sale of Financial Assets’ (1996) 52 Business Lawyer 159, 179–82; KC Kettering, ‘True Sale of Receivables: A Purposive Analysis’ (2008) 16 American Bankruptcy Institute Law Review 51, 526, 532, 538 and 539–46. 87 Harris and Mooney (n 86) 1052, 1072 and 1069. 88 An occurrence of a particular outright receivable transfer under the CCC is known only to the transferor, transferee, and debtor of claim, excluding prospective creditors and transferees: see CCC, s 306. 89 UNCITRAL Legislative Guide, para 3 at 149. 90 Bridge et al (n 80) 583. 91 The court may avoid any transfer of asset by the debtor during the three months prior to the commencement of bankruptcy case with an intention to give undue preference to a creditor: see Bankruptcy Act B.E. 2483 1940, Art 115; Bridge et al (n 80) 583–84.

Implementation of International Standards on Secured Transactions into the Thai Legal System 273 registration could be ascertained by confirming with the debtor of receivables, there are concerns about accuracy and collusion between the transferor and transferee.92

IV. Rationales for Non-adoption of International Standards A. Unsuccessful Effort to Adopt a Functional Approach The very first draft of BSA was prepared due to the 1998 economic crisis. The intention of the law reform has been to tackle with the limitations of the CCC provisions on pledges and mortgages leading to the inability of a grantor to use several types of properties as collateral, and the deficiencies of judicial enforcement of security rights, rather than to unify the law on secured credit. As a result, although Article 9 of the US Uniform Commercial Code (UCC), UK floating charges, and EBRD Model Law on Secured Transaction were used as guidance in drafting of the BSA,93 adoption of a functional approach, integration of ownership-based devices and outright transfers of receivables involving in financing transactions in the BSA security regime, were not achieved. There was an effort to integrate hire-purchase, leasing, and factoring businesses into the BSA. This was initiated by the businesses themselves because they wanted to enjoy the benefits provided by the BSA, such as the effective enforcement process,94 the measures preventing the debtor from dishonestly taking away, transferring, hiding, destroying, or impairing the encumbered properties,95 the low-cost and speedy BSA registration, and the ability to ensure the businesses’ priority in receivables by registering their rights under the BSA.96 Nevertheless, the integration was not successful because of fundamental distinctions between ownership and security rights and between outright transfers and transfers as security. Hire-purchase and leasing businesses are not treated as secured creditors as to the assets subject to hire-purchase and leasing agreements. The reason is that they retain ownership in such properties under the CCC and are thus treated as owners.97 On the contrary, they are treated as secured creditors and are able to register security rights only in assets not subject to the hire-purchase and leasing agreements. Similarly, despite the ability of factoring businesses to register security rights in receivables, outright transfers are subject to the CCC rather than the BSA.98 In contrast to the 1998 law reform, the current reform, started after the BSA had been in effect for less than one year, was incentivised mainly by a desire to achieve a better Ease of Doing Business ranking,99 especially by focusing on the Strength of Legal Rights Index.100 In spite of the BSA, Thai secured transactions law does not comply with international standards, particularly

92 CW Mooney Jr, ‘Mystery and Myth of Ostensible Ownership and Article 9 Filing: A Critique of Proposals to Extend Filing Requirements to Leases’ (1988) 39 Alabama Law Review 683, 752. 93 Thai Council of State, ‘Official’s Memorandum on the Draft Business Security Act B.E. and the Draft Amendment of the Civil and Commercial Code B.E.’ (11 August 2009). 94 Telephone interview with Jitti Wijitbanjong, Legal Officer of Kasikorn Bank (13 June 2018); telephone interview with Kanit Limpipichai, President of Thailand’s Leasing Association (5 September 2018). 95 BSA, s 86. 96 Telephone interview with Kanokkit Nawasiri, Ex-President, Thai Factors Association (12 September 2018). 97 Telephone interview with Prai Praladnetr, Legal Officer, Professional Level, Department of Business Development, Ministry of Commerce of Thailand (10 September 2018). See also III A (iii) above. 98 See III B above. 99 W Pentrakul (วิมลรัตน์ เพ็ญตระกูล), ‘Thailand and the Business Security Act’ (ประเทศไทยกับกฎหมายหลักประกันทางธุรกิจ) (2018), www.dbd.go.th/download/article/article_20180720151012.pdf. 100 See World Bank Group, Doing Business 2020 (n 9). See also ch 1 [].

274 Parawee Kasitinon in terms of integration of relevant laws to create a unified secured transactions framework.101 As a result, the World Bank recommended that, to comply with the Doing Business Legal Rights Index, Thailand repeal the BSA and prepare a new act.102 One of the significant suggestions made by the World Bank is that mortgages of movable properties, sales of movables coupled with preferential rights of the seller, hire-purchase, and assignment of receivables should be integrated into a unified law on security.103 Therefore, Thailand has been preparing a new draft act with the intention to create a single security right.104 Moreover, according to the World Bank’s recommendation, ownership-retention devices also should be embraced into a security regime.105 However, the drafters have continued to struggle with the traditional CCC principles concerning the status of the creditors retaining ownership as owners, instead of lenders. Moreover, the notion of inclusion of outright transfers of receivables in a security regime has not been adopted by the drafters.

B. Opposition to Adoption of International Standards (i) Arguments in Opposition to Equal Treatment between Ownership Retention Creditors and Secured Creditors The equal treatment idea has been doubted by Thai lawyers and credit providers and thus may be susceptible to the following opposition. First, adopting the functional approach would deprive the parties of the ability to choose any legal transaction, either security rights devices or ownership-based devices, suitable for them. But, the argument against this opposition is that, although creditors are able to take a security right in the asset they financed instead of retaining ownership, the creditors will always choose to retain ownership because being owners is preferable to being creditors. If retention of ownership is the only form of acquisition financing that is actually provided, the debtor’s ability to use the entire value of the property to secure more credit will be inevitably impaired. Second, it is reasonable that, in practice, the hire-purchaser trades off the inability to use the entire value of the property to secure more credit against the practical necessity of allowing the hire-seller to retain ownership for security purposes, because the hire-purchaser does not have any asset, other than the asset subject to the hire-purchase agreement, to secure payment of the price of that asset. However, this opposition may not be acceptable because the inability to use the whole value of an asset is caused by treating a transfer or retention of ownership for security purposes differently from a security device. Despite having other property to offer as collateral, debtors nonetheless are deprived of the ability to use the whole value of their property to support more loans. Sale with right of redemption is the example.106

101 ibid. 102 Telephone interview with Teewara Sumawong, Legal Officer, Senior Professional Level, Ministry of Finance of Thailand (28 June 2018). 103 ibid; Thai Bankers’ Association, Summary of Opinion regarding the Business Security Act in connection with the World Bank’s 29 Recommendations and DB Legal Rights index (24 July 2017). 104 Sumawong (n 102). 105 ibid. 106 Under a sale with right of redemption, sellers/debtors sell their properties in exchange for cash and receive a right to redeem such properties in the future, but the sellers/debtors may not be able to create junior security rights in the sold properties subject to the creditor’s ownership, despite the fact that the redemption price is much less than the property’s value.

Implementation of International Standards on Secured Transactions into the Thai Legal System 275 Third, according to the Thai Bankers’ Association (TBA), there is no need to integrate ownership-based devices into a security regime because creditors retaining ownership are well protected under the CCC that gives priority to owners over creditors.107 Nevertheless, this opinion may be rebutted because the CCC owners may be subordinated to subsequent good faith purchasers.108 Registration of retention of ownership in a security registry could prevent a subsequent purchaser from claiming that such purchaser has involved with the property in good faith.109 Fourth, it has been argued that the status of hire-purchase and leasing businesses, as owners, and the applicable law should not be changed merely to respond to such businesses’ desire to enjoy the more effective enforcement process provided by a new security regime.110 But this opposition may be invalid because an equal treatment does not only enable them to enjoy more effective enforcement process, but also to create transparency, to enable debtors to use the entire value of a property to secure more loans, to eliminate enrichment possibly gained by creditors retaining ownership, and to generate equal competition among all types of credit providers.111 Fifth, Thai banks are afraid that the super-priority given to acquisition secured creditors would lead them into trouble regarding valuation of the debtor’s properties if, in the future, there may be other creditors that would jump ahead and take priority in the collateral earlier taken by them.112 However, this concern may not be justifiable as banks registering their security rights in all assets of the debtor’s business will be subordinated to the acquisition secured creditors in relation to the new, after-acquired asset only, and not in respect of existing assets. Even if the functional approach is not adopted and creditors retaining ownership are treated as owners, a bank registering its security right in all assets of the debtor’s business is not able to reach assets not belonging to the debtor’s patrimony. Moreover, the acquisition secured creditors would be granted super-priority in the afteracquired assets only if certain requirements are satisfied,113 but, such requirements are not available under Thai current law. Furthermore, as the acquisition secured creditors generate both new assets and new debts, the rights of first-to-register creditors will not be impaired.114 Therefore, first-to-register creditors do not need to substantially rely on after-acquired assets.115 Sixth, treating a hire-purchase business as a creditor, instead of an owner, could cause a concern that a business would lose the right as an owner to request the return of the hired property if it is used to commit a criminal offence in which the owner has not participated.116 Nevertheless, the equal treatment idea can be adopted without changing the status of hire-purchase businesses as the owner of a hired property.117 107 Thai Bankers’ Association, ‘Summary of Opinion regarding the Business Security Act in connection with the World Bank’s 29 Recommendations and DB Legal Rights Index’ (24 July 2017). 108 CCC, ss 1330 and 1332; see also n 61. 109 See III A (i). 110 Thai Bankers’ Association’s Representative, ‘Address at International Conference on Creditors’/Debtors’ Rights and Remedies’ (17 August 2018). 111 See III A. 112 Thai Bankers’ Association’s Representative (n 110). 113 The requirements include taking possession or registration by such creditors and notification to the non-acquisition secured parties: see UNCITRAL Model Law, Art 38. 114 Harris and Mooney (n 60) 259. 115 ibid. Although, in the case of inventory, the secured creditor may rely on after-acquired property, requiring an acquisition creditor to give advance notice to such creditors could make them aware of the subsequent preferred creditor and thereby avoid their reliance on the after-acquired property: see UNCITRAL Model Law, Art 38. 116 Telephone interview with Wattanaporn Pitaksakseree, Committee Member, Legal Expert, Thai Hire-Purchase Association (27 September 2018). 117 See VI A (i).

276 Parawee Kasitinon

(ii) Arguments in Opposition to Inclusion of Outright Transfer of Receivables in the BSA The inclusion has been resisted for several reasons. First, subjecting outright transfers of receivables to a security regime is quite vulnerable to resistance because of the distinctions between outright transfers and creation of security rights.118 The argument against this opposition is that, to comply with the functional approach, outright transfers of receivables in relation to financing transactions should be subject to a security regime only with regard to registration requirement for the purpose of third parties’ effectiveness and priority,119 and should not be re-characterised as security rights for all purposes. Outright transfers and security rights in receivables are treated differently in case of enforcement if a surplus or a deficiency is involved. Second, despite there being no registration requirement for an outright transfer of receivables, Thai banks have their own measures to ensure that a receivable truly exists and the banks have never lost priority due to secret transfers.120 This opinion may not be acceptable because, rather than investigation by each credit provider, if registration of an outright transfer of trade receivables under each invoice is allowed, they will spend less on human resources to investigate whether a receivable has been transferred, thus potentially lowering the cost of credit.121 This is particularly true for Thai factoring businesses. Third, the question asked is why inclusion of an outright transfer into a security regime is suggested only in case of receivables (and not movables generally). However, compared with an outright transfer or sale of tangible properties generally evidenced by delivery of possession, receivables are intangible and cannot delivered. Therefore, registration of outright transfers of receivables is recommended to confirm the occurrence of a transfer. Although prospective creditors may rely on the debtor of receivables as to whether a particular receivable has been transferred, such debtor may not be willing to provide information or may not have any knowledge of a transfer.122 And, in case of a bulk transfer of receivables whereby notification of all debtors of receivables may be impractical, reliance on notifications to debtors of receivables is also not possible.

V. Compatibility of International Standards with the Thai Legal System A. Transplantation of International Standards on Secured Transactions into the Thai Legal System (i) Influences Affecting Transplantation The four main approaches to legal transplantation discussing whether legal transplantation is possible, how transplantation occurs, and the effects of transplantation are Legal Evolution, 118 See III B above. 119 Even under the UCC §9, adopting the functional approach, an outright transfer is distinguished from a security transfer in terms of the process of enforcement. In case of using claims as security, the debtor is entitled to surplus and liable for deficiency, but as for outright transfers, such right and liability are not relevant: see UCC §9-608(a), (b); Harris and Mooney (n 60) 683. 120 Interview with Wasan Eknum, Vice President-Legal Department of Bangkok Bank (Bangkok, Thailand, 8 June 2017); Wijitbanjong (n 94); Notification of Bank of Thailand No FPG 20/2555 Re: Permission for Commercial Banks to Conduct Factoring Business 2012. 121 Nawasiri (n 96). 122 The debtor of claim’s consent is not required to constitute a valid transfer of such claim: see CCC, s 306.

Implementation of International Standards on Secured Transactions into the Thai Legal System 277 Limited Legal Autonomy, Legal Autonomy, and System Theory.123 According to these approaches, three fundamental bases justifying the theories extracted are, first, compatibility with social and political factors, second, sensitivity to state power, and, third, non-state organised groups.124 Based on these premises, the successfulness of Thai law reform has been influenced by the roles of non-state organised groups and sensitivity to state power. As for influences of organised groups, the TBA has played a significant role in the transplantation of international standards on secured transactions to Thai legal system by the 1998 law reform, enactment of the BSA and the current law reform. The demand for non-possessory security rights in movable properties of the TBA contributed to the drafting of the BSA which establishes the BSA registry system to respond to such demand. After the BSA had been effective for less than one year, the government planned to repeal the BSA.125 The plan was opposed in particular by the TBA, the major organised group opposing this plan.126 The reason given was that it seemed to be too early to evaluate the effectiveness of the BSA.127 Nevertheless, the plan to reform was not abandoned and has been ongoing. The government has continued to rely on the World Bank’s recommendation to unify existing laws regarding security right in movables. Unfortunately, the idea to treat ownership-based devices equally to security devices and to include outright transfers of receivables into the new security regime has not been implemented.128 The strong opposition came from the TBA,129 which takes the positions that ownership-based creditors should not be treated as BSA secured parties, that they will be adversely affected by super priority of acquisition financiers, and that outright transfers of receivables are distinct from security rights and should not be subject to the BSA. No matter whether the TBA’s resistance is sound, it appears that adoption of a functional approach has been impeded. Regarding sensitivity to state power, transplantation of a functional approach into the Thai legal system is substantially affected by the way that the legislature, BSA registrars, and lawyers make, enforce, and interpret the BSA. Particularly, the Ministerial Regulation permitting hirepurchase, leasing, and factoring businesses to register are not designed to override the CCC provision. The BSA registrars also follows this path and expressed their hesitation to interpret otherwise without amendment of the BSA.130

(ii) Evaluation of the Influences Affecting Thai Law Reform Among the factors discussed above, the main determinant of whether modern principles of secured transactions law are adopted is whether this is supported by the legislators.131 The reason 123 JS Gillespie, Transplanting Commercial Law Reform – Developing a ‘Rule of Law’ in Vietnam (Aldershot, Ashgate, 2006) 18–24. See also A Watson, ‘Comparative Law and Legal Change’ (1978) 37 CLJ 313, 314–15; G Teubner, ‘Legal Irritants: Good Faith in British Law or How Unifying Law Ends up in New Divergences’ (1998) 61 MLR 11, 12; O Kahn-Freund, ‘On Uses and Misuses of Comparative Law’ (1974) 37 MLR 1, 7–8; D Berkowitz, K Pistor and J-F Richard, ‘The Transplant Effect’ (2003) 51 American Journal of Comparative Law 163, 167–68. 124 Gillespie (n 123) 26–28. 125 The plan to repeal was to render an order under the Temporary Constitution B.E. 2557 2014, Art 44. But because the order given under such provision would be final, the plan was opposed. 126 Wasan Eknum, Vice President: Legal Department of Bangkok Bank, ‘Address at the Thammasat University’s Seminar on Section 44 and the Thai Business Security Act’ (29 May 2017). The Federation of Thai SMEs and the Fiscal Policy Office of the Ministry of Finance also disagreed with the plan: see Attapon Attaworadej, Director of Legal Department, the Fiscal Policy Office of the Ministry of Finance and Tanan Watcharotayanggoon, Vice President of the Federation of Thai SMEs, ‘Address at the Thammasat University’s Seminar on Section 44 and the Thai Business Security Act’ (29 May 2017). 127 Eknum, Attaworadej and Watcharotayanggoon (n 126). 128 See III above. 129 See IV above. 130 Praladnetr (n 97). 131 This term includes other government organs in charge of law reform.

278 Parawee Kasitinon is that, first, despite possible doctrinal conflicts, if these legislators are trained or assisted by lawyers who are trained in countries adopting modern principles and recognise the benefits of the functional approach, they would be able to introduce a coherent law reform to implement the functional approach and overcome the hesitation to amend the CCC. Moreover, although similar doctrinal conflicts are shared among several civil law countries, they can be overcome. Second, the BSA registrar’s interpretation is not expected to be a major obstacle. The reason is that if the legislators adopt the functional approach and successfully solve all doctrinal conflicts, the BSA registrar is likely to interpret relevant provisions accordingly. Third, although the TBA might be concerned about competition and oppose law reform, if the legislators insist on adopting the functional approach and offer a reform coherent with the Thai legal system, the TBA would need to learn and adapt to the new system.

B. Compatibility with the Civil Law Perception of Security (i) Possible Doctrinal Conflicts A functional approach requires that any transaction aiming at securing payment of an obligation must be governed by a unified security regime. Thus, there must be a law recognising that any type of transaction intending to secure performance of an obligation creates security interests.132 But, currently, there is no such provision under Thai law. To integrate ownership-based devices which are economically and functionally equivalent to security rights into a security regime to comply with the functional approach, the major doctrinal conflict that needs to be addressed is the civil law conception of security as distinct from ownership.133 The right of ownership is a right to use, to dispose of, to obtain fruits, to follow and recover the property owned from any person not entitled to retain, and to prevent any unlawful interference with such property.134 But, a security right is the creditor’s conditional right to extract the value of the secured asset by realisation according to the process legally allowed and to get payment from the proceeds in preference to other creditors up to the amount of the secured debt.135 Therefore, equal treatment between ownership-based transactions and security rights seems to be contrary to such distinction. To comply with the functional approach, outright transfers of receivables in relation to financing transactions should be subject to a security regime with regard to registration requirement for the purpose of third parties’ effectiveness and priority.136 Nevertheless, subjecting outright transfers to the reformed priority rules may lead to a difficult doctrinal conflict with the orthodox rule (nemo dat quod non habet) in that, without registration, the earlier transferee of receivables must be subject to a subsequent secured creditor who takes such receivables as security and registers its security right. The conflict is based on the fact that, in case of an outright transfer, the receivables are moved to the transferee’s patrimony; thus, the transferor can never transfer or create security rights in the claims which no longer belong to him/her. Moreover, outright transfers are 132 Because security rights are considered property rights, creation of security rights is subject to the principle of numerus clausus, restricting private parties’ ability to create property rights: see B Akkermans, The Principle of Numerus Clausus in European Property Law (Cambridge, Intersentia, 2008) 6. This principle is respected by the CCC, s 1298 providing that real rights can be established only by virtue of the CCC or other laws. 133 See ch 6 III A. 134 CCC, s 1336. 135 Bridge et al (n 80) 652; CCC, Arts 702, 732, 747 and 767 (Thai). 136 See IV B (ii).

Implementation of International Standards on Secured Transactions into the Thai Legal System 279 subject to the CCC, but security rights in receivables are subject to the BSA. Thus, the distinction between the location of ownership137 in the case of an outright transfer and the use of receivables for security purposes138 determining the applicable legal regime must be addressed.139

(ii) Is it Possible to Overcome Doctrinal Conflicts? Ownership-based devices, especially transfer of ownership for security purposes, were historically used to obtain non-possessory rights if the laws on security interests were inadequate.140 In several civil law countries, such as Germany,141 France,142 and Netherland,143 ownership- based transactions were gradually converted to a type of security interest or recognised in a similar way as security interests. Moreover, Columbia, a civil law country, successfully adopted the idea that a security interest could be created irrespective of who retain ownership in the property under the Law 1676/2013.144 Although Thai legal scholars have accepted that the function of hire-purchase and sale with right of redemption transactions is similar to that of security devices, the idea that there should be equal treatment between ownership-based and security devices is unprecedented. Nevertheless, the problems caused by ownership-based devices have been recognised and partially solved by consumer protection law because the hire-seller of vehicles and electric appliances is required to dispose of the property upon the hire-purchaser’s default and return any surplus to the hire-purchaser.145 This corresponds with the practice of hire-purchase and leasing businesses in that hirepurchase and leasing businesses do return the surplus because of compliance with good governance and the need to protect their reputation.146 Moreover, a surplus is quite rare in practice.147 Furthermore, because granting the right to surplus to debtors in retention of ownership transactions is irrelevant to the functions of consumer protection law or justified only for certain types of properties, it should not be so restricted. In addition, this treatment indicates an effort to provide proper legal consequences to hire-purchase agreements. If the policy is sound, the doctrinal conflicts have seemed to be overlooked. Therefore, this may shed light on how to solve the remaining issue: the ability to create junior security rights in the surplus, which has never been addressed under Thai law. Including outright transfers of receivables in a security regime also can be feasible. First, under the CCC, among different transferees claiming their rights based on different transfers, 137 A claim is part of the debtor’s patrimony that creditors may be shared to satisfy their debts and may be transferred, but may not be owned: see Bridge et al (n 80) 653. However, there is not much discussion on whether intangible properties can be owned under Thai law. 138 ibid 581. 139 See III B above. 140 JH Dalhuisen, Dalhuisen on Transnational Comparative, Commercial, Financial, and Trade Law, vol 2, 7th edn (Oxford, Hart Publishing, 2019) 547. 141 1956, BGHZ 20, 88 (1956) and the development of Sinsherüngsubereignung: see JH Dalhuisen, Dalhuisen on Transnational Comparative, Commercial, Financial, and Trade Law, vol 3, 7th edn (Oxford, Hart Publishing, 2019) 105–18. 142 Civil Code (Code Civil), Arts 2367, 2371, 2372-1, 2372-2, 2372-3, 2372-4 and 2372-5 (France). 143 Civil Code (Burberlijk Wetboek), Art 3.237 (Netherlands); Parliamentary History, Introduction Statute Book III, 1197 (Dutch text), cited in Dalhuisen, vol 3 (n 141) 76. 144 L.1676/13, agosto 20, 2013, Diario Official (Colombia). 145 Consumer Protection Law Regarding Hire-Purchase of Electronic Appliances and Consumer Protection Law regarding Vehicles and Motorcycles, Arts 3(10) and 4(5). See III A (ii) above. 146 Limpipichai (n 94); Pitaksakseree (n 116). 147 Limpipichai (n 94).

280 Parawee Kasitinon the first-to-notify rule applies,148 rather than nemo dat quod non habet. Second, requiring registration as an exclusive means of third-parties effectiveness is simply a small further step from notification of the debtor of the receivable which is already required by the CCC.149 Moreover, the inadequacies of the system of notification of the debtor of receivables are widely perceived.150 Third, under Thai law, since either outright transfers or security transfers may be used in securitisation transactions,151 both are subject to the same rule regarding third-parties effectiveness prescribed by the Emergency Decree on Specific Purpose Juristic Person for Securitisation.152 It may be inferred that when outright transfers and security interest in receivables are functionally equivalent, it is possible that both can be regulated by the same legal regime. Fourth, registration of outright transfers of receivables corresponds with factoring businesses’ financing practice. In spite of the intention to buy instead of taking receivables as security, Thai factoring businesses in practice fix their priority in the receivables to be acquired in the future by registering their rights in the BSA registry.153 Thus, incorporation of outright transfers into a security regime is unlikely to create problems in practice due to unfamiliarity.

VI. Proposals for Implementation of a Functional Approach in the Thai Legal System154 To establish an integrated security regime, problems about the civil law concepts regarding the differences between security rights and ownership and between outright transfers and utilisation of receivables as security need to be solved. Moreover, coherence with the CCC security rules also must be considered. Furthermore, as has occurred in several civil law countries, the reluctance to make a substantial change to the existing Civil Code (in Thailand, the CCC) needs to be addressed. This section examines various alternative solutions, which take into account the issues mentioned in this paragraph.

A. Alternatives for the Integration of Ownership-Based Devices and Outright Transfers of Receivables (i) Alternative 1: Establishment of a Security Regime for Business Credit with a Slight Modification of the CCC This alternative recommends, first, that a functional approach be implemented by enacting a special law to establish a separate non-possessory security regime for business credit with a 148 CCC, s 307. 149 CCC, s 306. 150 See IV B (ii) above. 151 Securitisation refers to being a transferee of receivables or being granted receivables as collateral by a specific purpose juristic person in order to issue and sell securities to investors and forward the proceeds to the seller of receivables according to the parties’ agreement. Repayment to the investors buying securities is contingent on any income flowing from the receivables: see Emergency Decree on Specific Purpose Juristic Person for Securitisation B.E. 2540 1997 as amended by the Act Amending the Emergency Decree on Specific Purpose Juristic Person for Securitisation B.E. 2540, B.E. 2558 2015, s 3 (Securitisation Transaction Law). 152 Securitisation Transaction Law, s 15. 153 Nawasiri (n 96). 154 Other alternatives have been proposed to deal with the distinctions between ownership and security right and the indivisible right of ownership: see Bridge et al (n 80) 657. Other options have been suggested to subject outright transfers of receivables to a registration requirement and priority determined by a first-to-register rule are inclusion of outright

Implementation of International Standards on Secured Transactions into the Thai Legal System 281 registry system for security rights in movable properties, while only security rights in connection with non-business credit remained regulated by the CCC. Second, ownership-based devices for business credit would be included into this newly established regime. However, to achieve this result, the significant conceptual conflicts needed to solve are the differences between a right of ownership and a security right and the concept of unitary and indivisible ownership. That is, the ownership retained by a creditor cannot be limited to the amount necessary to secure the indebtedness. At the same time, the debtor cannot acquire ownership only to the extent of the value that it already paid for.155 The solution proposed is that, first, in case of default, the creditor retaining ownership can repossess the asset and realise its value, but the surplus realised over the secured amount must be returned to the debtor. In other words, the debtor is provided with a personal right to claim surplus, which is considered an asset. Second, the debtor who has not become an owner because all instalments have not been paid can create a junior security right in such right to claim surplus. By this means, the status of hire-purchasers, as an owner, concerned by hire-purchase businesses is preserved.156 Moreover, the debtor in ownership-based transactions can create junior security rights in the assets in which the creditor retains ownership. Third, ownership creditors in the case of business credit would be required to register their rights, in the registry system for security rights that would be established by the special law proposed here, to be effective against third parties and would be subject to a first-to-register priority rule. To increase transparency and familiarity with the registration system during the transitional period, the CCC should be amended to only allow registration of the creditor’s rights created by ownership-based transactions in the case of non-business credit. However, because a functional approach would not be adopted in non-business credit, registration would not be a requirement for effectiveness against third parties. Moreover, a first-to-register rule would not apply to non-business credit. Fourth, outright transfers of receivables in conjunction with business financing would be embraced in the special security regime and required to be registered in the registry system to be effective against third parties. But, transfers not related to financing transactions157 should be exempted from the registration requirement because they are less likely to create a false wealth concern.158 This is likely to overcome the opposition to subjecting outright transfers to registration requirement, as it recognises that there is no need to register certain outright transfers, and also avoids unnecessary registration costs. Fifth, in addition to giving notice to the debtor of receivables being a method of making a transfer effective against third parties, the CCC should be amended to allow registration of an outright transfer of receivable as another optional method. This amendment would generate transparency and familiarity with the registry system. transfers in the definition of security rights: see UNCITRAL Model Law, Art 2 (k), (o), (ff), (jj), and (kk); UCC §9-109 cmt 12; UCC §9-109(d)(4)–(7). 155 Co-ownership is not possible because co-owners have a unitary ownership right in a single property. Co-owners cannot exercise their rights against each other: see S Pramot (เสนีย์ ปราโมช์), ‘Commentary on Property Law under the Civil and Commercial Code’ (คำ�อธิบายประมวลกฎหมายแพ่งและพาณิชย์ กฎหมายลักษณะทรัพย์) (Thai Bar Association, 2008) 358. 156 See IV B (i). 157 For this purposes, the list of assignments falling outside the scope of commercial finance under the UCC §9-109(d) (4)–(7) could provide a model. The list comprises: a sale of accounts, chattel paper, payment intangibles, or promissory notes as part of a sale of the business out of which they arose; an assignment of accounts, chattel paper, payment intangibles, or promissory notes which is for the purpose of collection only; an assignment of a right to payment under a contract to an assignee that is also obligated to perform under the contract; and an assignment of a single account, payment intangible, or promissory note to an assignee in full or partial satisfaction of a pre-existing indebtedness. 158 Bridge et al (n 80) 583, fn 49.

282 Parawee Kasitinon In terms of advantages, Alternative 1 is possibly less likely to be opposed than Alternative 2, and could facilitate the law reform because there would be no need to substantially amend the CCC.159 Moreover, the proposed scope of application of the special law is comparable to the scope of application of the BSA, which was originally intended to apply only to business credit. Furthermore, despite the difficulty arising if a single asset is used to secure both business and non-business credit, Alternative 1 may be adopted with the assumption that this situation may not be very common. Thus, Alternative 1 seems a probable solution to be adopted during a transitional period. However, while Alternative 1 aims to implement the functional approach only into the security regime for business credit, the CCC would apply to a non-business credit and would not be modernised. Moreover, difficulties resulting from using a single asset to secure both business and non-business credits will arise in practice. Although using an asset to support two types of debts is generally unusual, such difficulty possibly affects small businesses that are likely to use the household properties in their businesses.

(ii) Alternative 2: Substantial Modification of the Civil and Commercial Code by Enactment of a Special Law Alternative 2 aims to improve the security regime regardless of the types of credit; therefore, substantial modification of the CCC would be required. First, the debtor should be granted a right to claim a surplus from the creditor retaining ownership and should be allowed to create junior security rights in that future claim for money. However, to enable creation of junior security rights in such future receivables, it is necessary that the CCC be amended to permit a pledge of future assets. Furthermore, a pledge of future assets is not possible if a valid pledge can be created only by delivery of possession; thus, the CCC should be amended to permit either taking possession or registration to constitute a pledge. Second, to address a lack of publicity of ownership-based devices, Alternative 2 suggests that the CCC be amended to subject all ownership-based devices to a registration requirement to be effective against third parties, regardless of the types of credit. Third, the CCC should be amended to allow a pledge of intangible assets including receivables, in order to accommodate business needs. Fourth, notification made to the debtor of receivable should be sufficient for an outright transfer to be effective against the debtor of receivable and the receiver in bankruptcy without the need to register, which would lower the cost of transactions when a priority contest is unlikely to occur. However, to provide transparency and protect third parties, outright transfers of receivables need to be registered to be effective against third parties, such as subsequent transferees and secured creditors that might subsequently take security rights in receivables Fifth, registration should not be required for outright transfers not relevant to financing transactions.160 Nevertheless, in relation to a transfer which is exempt from the registration requirement, notification to the debtor of receivable is still required for a transfer to be effective against all third parties. However, registration is not prohibited. Alternative 2 should be promoted because it seems illogical to improve access to credit only for businesses. Moreover, under Alternative 2 the difficulty arising from using a single asset

159 Most 160 The

civil law countries, including Thailand, tend to be unwilling to amend the CCC. UCC §9-109(d)(4)–(7) may be taken into consideration as a model: see n 158 above.

Implementation of International Standards on Secured Transactions into the Thai Legal System 283 to secure both business and non-business credit will not arise. However, because a substantial change must be made to the CCC under Alternative 2, despite its effectiveness, it may be more vulnerable to resistance and promoting it might inhibit law reform. Nevertheless, Alternative 2 may be more preferable in the long run.

B. Capacity Building In addition to the proposed law reform, it is necessary that all stakeholders161 are equipped with the necessary capacity to guarantee the success of law reform in practice.

(i) Pre-adoption Stage During this stage, first, the government agencies in charge of the law reform162 should understand what an integrated security regime is and why adoption of such approach could improve SMEs’ access to finance. They should also identify legal issues that could possibly hinder the adoption, propose solutions coherent with That legal system, and provide other stakeholders with such information. To be able to perform those functions, they should study international instruments, learn from the experience of other civil law countries and from the legal and practical obstacles in Thailand, and rely on assistance from foreign experts163 or Thai scholars. Second, the ministries responsible for the existing asset-based registries164 should be informed of the importance of unifying source of information and cooperate in the law reform. Third, credit providers and SMEs should be supplied with the necessary knowledge as to how they could benefit from the new approach.

(ii) Post-adoption Stage At this stage, first, credit providers should develop relevant skill to benefit from opportunities provided by the new system, such as valuation expertise, the skill of administration of secured loans and monitoring collateral, and collection and enforcement of receivables.165 Moreover, they need to be alert to unprecedented exposures, such as the effects of non-registered security rights, priority rules as to ownership-based devices, and restrictions on extra-judicial enforcement. Second, in addition to learning to take advantage of the new regime, SMEs should pay attention to the factors considered by banks in extending credit, such as the ability to generate income, a good credit history and transparent accounting. The reason is that, despite the secured credit law reform, SMEs may be subject to these common grounds for rejecting credit application. Third, the Department of Business Development (DBD) should invest in modern technology and financial resources to establish a unified registry. Moreover, because registration should be simple and should not involve unnecessary delay,166 resources should be invested by the DBD 161 These may include stakeholders involved in the process of reforming the law, extending credit, supporting secured lending, granting legal advice, and enforcing the creditor’s rights. 162 They may include the Fiscal Policy Office (Ministry of Finance), the Department of Business Development (Ministry of Commerce), the Legal Execution Department (Ministry of Justice), and the Office of the Council of State. 163 They may include experts of the World Bank or International Financial Corporation. 164 They may include the Ministry of Transport, Ministry of Industry, Ministry of Commerce, and Ministry of Interior. 165 NB Cohen, ‘Capacity Building as a Key Determinant of Success in Secured Transactions Reform’, www.uncitral.org/ pdf/english/colloquia/4thSecTrans/Presentations/2ContGonST2/COHEN_Colloquium_Presentation.pdf. 166 UNCITRAL Legislative Guide, para 8 at 1.

284 Parawee Kasitinon to ensure the efficiency of the system in responding to the increased number of applications as a result of the adoption of a functional approach. Cooperation between the DBD and the Comptroller Department is also significant to facilitate payment under the registry system.167 Fourth, registration officers need more training as to the functions of the unified registry systems in order to promote certainty and transparency. They should also be trained to interpret relevant laws and regulations so as to allow ownership-based creditor and transferees of receivables to register their rights. Fifth, despite a requirement to comply with Basel III, the Bank of Thailand may reconsider the approach used to calculate risk and the types of assets which are permitted to lessen capital charges, so as to match the assets commonly offered by SMEs. It should also encourage commercial banks to collect data relating to such assets.168 Sixth, because most Thai judges are not trained in modern secured transactions, the Thai Court of Justice should provide training to judges to ensure that judges are aware of the integration of retention of ownership for security purposes and outright transfers of receivables into the security regime and the rationales for doing this.169 Moreover, judges should support extrajudicial enforcement by recognising that the delay involved in judicial enforcement would discourage debtors from delivering collateral to the secured creditor after default and incentivise debtors to delay the enforcement process by opting for judicial enforcement.170 Seventh, for most Thai lawyers who are not familiar with the modern principles of secured transaction, universities, the Thai Bar Association, and the Lawyers Council of Thailand should promote provision of knowledge through different channels. For a new generation of lawyers, education concerning modern principles of secured credit in universities and the Thai Bar Association is significant and should not be given lower priority than the traditional regime.

VII. Assessment of the Feasibility of Further Adoption of the Modern Principles in Thailand Compared with the previous law reforms, the ongoing reform in Thailand is more likely to be successful. The reason is that, as opposed to the law reform that started in 1998 which led to the BSA (and which were focused on eliminating the requirement of delivery of possession in the CC and the CCC’s limitation on the types of asset eligible to be used as collateral), the current reform has been incentivised by Ease of Doing Business index requirement of unification of laws relating to secured credit. The issues of unification of laws and the linking of existing registry systems were raised formally in a cabinet meeting in April 2019 where short-term and medium-term plans to implement in six months and three years were formulated.171 The short-term plan was executed 167 Praladnetr (n 97). 168 GG Castellano and M Dubovec, ‘Bridging the Gap: The Regulatory Dimension of Secured Transactions Law Reforms’ (2017) 22 Uniform Law Review 663, 663–66, 673–75 and 690–92. 169 EBRD, ‘Core Principles for Commercial Law Judicial Training in Transition Countries’, www.ebrd.com/documents/legal-reform/core-principles-for-commercial-law-judicial-training.pdf; I Otabor-Olubor, ‘A Critical Appraisal of Secured Transactions over Personal Property in Nigeria: Legal Problems and a Proposal for Reform’ (PhD dissertation, Nottingham-Trent University, 2017) 194. 170 Interview with Marek Dubovec, Executive Director, National Law Center for Inter-American Free Trade (New York, 31 April 2018). 171 According to the cabinet meeting on 17 April 2019, the government approved the short- and medium-term measures proposed by the Office of the Public Sector Development Commission (OPSDC) and the measures will be implemented in practice during 1 May 2019 and 30 April 2020 to comply with the Ease of Doing Business’s index with regards to Getting

Implementation of International Standards on Secured Transactions into the Thai Legal System 285 in April 2020.172 The DBD, cooperating with the Digital Government Development Agency, the Department of Industrial Works, the Marine Department and the Department of Provincial Administration, linked the BSA registry system and other mortgage registry systems.173 Thus, instead of searching in each registry, the registered mortgages and BSA securities relating to any property can be discovered by searching in the newly developed system, ‘Biz Portal’.174 Moreover, for all stakeholders175 it was agreed that, without the reform, both the Thai businesses and ease of doing business in Thailand would be adversely affected.176 Furthermore, it is true that adoption of modern principles may grant competitive advantage to foreign lenders having more experience in secured financing and that this could deter the Thai government and Thai lenders from supporting the adoption of the modern principles. However, with the government determination to reform laws on secured credit to get a higher Ease of Doing Business ranking, which was reflected by the specification of a clear time frame, this competitive advantage would not be likely to obstruct the law reform. It is possible that Thai lenders would not oppose the reform because they would have up to three years177 to be able to prepare and get ready for the future reform. However, in the worst case scenario, the functional approach might not be successfully implemented if the linking of existing registry systems and unification of the relevant laws under short-term and medium- term plan would not include the use of ownership for security purposes and outright transfers of receivables in financing transactions to the security regimes.

VIII. Lessons Learned After exploring the secured transaction law reform in Thailand, the following lessons can be extracted.

A. Reputational Benefits Provided by the Ease of Doing Business Ranking as a Good Incentive for Law Reform Among other motivations, achieving a high Ease of Doing Business ranking could be a very significant incentive to change a law. Despite a lack of approval for the benefits of a functional approach, the reputational benefit resulting from achieving a high rank may incentivise law makers to adopt law reforms.

Credit: see Naewna (แนวหน้า), ‘Summary of the Cabinet’s Resolution on 17 April 2019’ (สรุปมติ ครม.ประจำ�วันที1่ 7 เมษายน 2562) (Bangkok, 17 April 2019), www.naewna.com/politic/408397. 172 BizTalkNews, ‘DBD Developed the Searching System Implementing a Common Gateway’ (กรมพัฒนาธุรกิจการค้าพัฒนาระ บบค้นหาข้อมูลหลักประกันทางธุรกิจไว้ ณ จุดเดียว) (22 May 2020), www.biztalknews.com/news-update/%E0%B8%81%E0%B8%A3%E 0%B8%A1%E0%B8%9E%E0%B8%B1%E0%B8%92%E0%B8%99%E0%B8%B2%E0%B8%98%E0%B8%B8%E0%B8%A 3%E0%B8%81%E0%B8%B4%E0%B8%88%E0%B8%81%E0%B8%B2%E0%B8%A3%E0%B8%84%E0%B9%89%E0%B 8%B2-%E0%B8%9E%E0%B8%B1/. 173 DBD, www.facebook.com/dbdsecuredtransaction/photos/a.121106281573404/1135938696756819. 174 DBD, www.facebook.com/dbdsecuredtransaction/photos/a.121106281573404/1149856872031668. 175 They include the Fiscal Policy Office, the Department of Business Development, the Execution Department, the Office of the Council of State, the TBA, the Thai Hire-Purchase Association, and the Thai Leasing Association. 176 Naewna (n 171). 177 ibid.

286 Parawee Kasitinon Even with the existence of doubt about the benefits of adopting a functional approach, and the concern about doctrinal conflicts, Thai law makers are making an effort to establish a unified security regime according to the Strength of Legal Rights Index.

B. Internationally Accepted Standards do not Require a ‘One Size Fits All’ Approach A significant reason for opposing international standards is that a one-size-fits-all approach could not apply in all jurisdictions. However, the main purpose of international standards is to reach certain goals; thus, different means may be adopted to reach the same goals.178 The Legislative Guide that preceded the UNCITRAL Model Law aims to allow debtors to use the full value in a property to support credit and to provide for equal treatment of diverse sources of credit and of diverse forms of secured transactions to enhance the policies of availability of multiple security rights in the same assets and a functional approach.179 Nevertheless, in order to treat all acquisition financiers equally, the Guide proposes ‘unitary and non-unitary approaches to functional equivalence’.180 Thus, instead of copying the Model Law, a country may adopt a reform that is most fitting for its legal system. The two Alternatives proposed for Thailand181 illustrate the way a functional approach that addresses all concerns over Thai secured transactions law reform could be introduced.

C. Shifting the Debate from Adherence to Traditional Legal Doctrines to Promotion of Social Welfare Advocates of consistency with legal tradition should be encouraged to explain why they believe that maintaining the status quo is preferable to accepting the proposed changes if there are no practical benefits created by a strict adherence to legal doctrine that does not promote social welfare. Learning from the Thai law reforms, one reason given by the opponents of adopting a functional approach is grounded on doctrinal conflicts without considering whether the doctrine is based on a sound policy.182 This does not mean that coherence in legal system is not important. However, this raises the question of how a coherent change can be made rather than forming a justification for denying changes.

D. Exploring Doctrinal Conflicts and Opposition in Order to Pave the Way for a Law Reform Possible doctrinal conflicts should not make the transplantation of legal concepts supporting social welfare impossible. Rather, drafters should learn from doctrinal conflicts and opposition 178 See ch 2, especially at III and IV C. 179 UNCITRAL Legislative Guide, paras 50, 52 at 20, 62 at 23, and 67 at 24. 180 UNCITRAL Legislative Guide, paras 74–82 at 336–38. 181 See VI A. 182 This exercise would involve consideration of whether the following consequences of the doctrinal approach are sound: (a) that the creation of encumbrances in an asset without publicity or protecting third parties is permitted, (b) that ownership-based creditors are allowed to retain any surplus, (c) that the debtor in ownership-based transactions is

Implementation of International Standards on Secured Transactions into the Thai Legal System 287 to reform, discover exactly what they need to solve, and come up with the solutions most suitable for the country. This chapter follows this path by studying the arguments made in opposition to adoption of international standards183 and proposing alternatives compatible with traditional legal concepts and the needs of ownership-based creditors.184

E. Unfamiliarity is not an Excuse for Non-adoption of Transplanted Legal Concepts If maintaining the status quo provides no practical benefits, prevailing unfamiliarity with new legal concepts should not be an excuse for non-adoption of reforms. Unfamiliarity could be addressed by capacity building. Moreover, incremental, instead of a radical, reform could lessen the adverse impact of unfamiliarity by providing enough time for the stakeholders to gradually learn and become accustomed to working with the new ideas. For example, because, when it was first adopted by the BSA, the idea of a debtor granting a security right over all its assets to secure performance of an obligation was unknown to Thai lenders and Thai banks, they raised several concerns185 and were unwilling to accept this approach.186 However, after the intervention of the DBD and the Thai SME Development Bank,187 Thai lenders learned how to benefit from this new legal concept and granted credit based on all assets of debtor’s businesses.188 Moreover, because the functional approach was not adopted instantly in Thailand, it has been gradually understood by Thai lenders. Thus, at least certain groups of lenders, such as hire-purchase/leasing and factoring businesses, have recognised the usefulness of this approach189 and have tended to support the law reform.

F. Government Intervention can Provide an Incentive for Adopting Transplanted Legal Concepts in Practice The government plays a significant role both in educating the private sector as to the utility of the new legal concepts and in encouraging them to take advantage of them in practice. In the absence of government intervention, delay may be caused by the fact that private sector actors may tend to be risk-averse and may wait and see if the new concept is reliable before deciding to rely on it. For instance, Thai Bankers expressed various concerns about taking all assets of a debtor’s business as a going concern as collateral, especially for SMEs.190 Accordingly, until July 2017,

disabled from creating junior security rights, and (d) that factoring businesses are prohibited from registering outright transfers of claims. 183 See IV B and VI A. 184 See VI A. 185 See n 190. 186 Wanlaya Kaewrungruang, Chief Legal and Control Officer, Siam Commercial Bank, ‘Address at the Seminar on the Business Security Act: from Banker’s Perspectives’ (21 January 2016). 187 See n 192, 193. 188 Telephone interview with Prai Praladnetr, Legal Officer, Professional Level, Department of Business Development, Ministry of Commerce of Thailand (15 May 2019). 189 See IV A. 190 Most SMEs are sole proprietorships and their reputation relies heavily on the owner; therefore, if such owner is not successful, the SME could not benefit from the going concern value of its business. Moreover, in the case of taking all

288 Parawee Kasitinon there was no debtors’ business as a going concern registered in the BSA registry.191 However, in 2017, the DBD, in cooperation with the Thai SME Development Bank,192 launched a project aiming at providing credit to franchise businesses.193 Other lenders have learned how to benefit from taking all assets of a debtor’s business as collateral and started giving loans securing by all assets of the debtor‘s business. That is, a leasing company has started granting loans, 70,000 to 300,000 baht, to small businesses, such as small groceries, salons, and butchers, based on all assets of their businesses.194

G. An Incremental Reform as a Good Transition to a Better Law Reform It is not true that an incremental reform should not be adopted because it is not a perfect law reform. Although adoption of a sudden and radical reform may produce a better law at once, if the stakeholders do not understand or believe in it because of unfamiliarity, they may not choose to utilise or rely on the new legal concepts in practice. Secured transactions law reform in Thailand, in some ways seemingly an unsuccessful law reform, exemplified a gradual reform that enabled all stakeholders to learn about the inadequacies of each incremental law reform adopted in the past and paved the way for better future law reform. That is, the law reform started from a CCC’s lack of non-possessory security rights in movable and intangible properties leading to issuing several Acts supplementary to the provision of mortgage. Despite the supplementary Acts, various types of valuable property were not covered. Hence, the BSA was drafted with an intention to set up a new security regime replacing delivery

assets of the debtor‘s business as collateral, a security enforcer must be appointed, but there is a lack of confidence in this new profession, and a lack of good understanding about the security enforcers‘ roles and duties, and the overlapping of the roles and duties of security enforcers and those of a receiver in case of the debtor’s bankruptcy: see Kaewrungruang (n 186); Podjanad Sangpruk, Assistant Managing Director, Kasikorn Bank, ‘Address at the Seminar on the Business Security Act: From Banker’s Perspectives’ (21 January 2016); Kumchai Jongjakapan, Law Professor, Thammasat University, ‘Address at the Seminar on Security Enforcers under the Business Security Act’ (9 March 2016). 191 During 4 July 2016 to 4 July 2017, most of the properties registered (60%) are bank accounts. Movable assets used in business operation including inventory, raw material, machines, vehicles, and vessels constitute 19.65% of all registered assets. Comparably, 20.28% of the properties registered are claims. Finally, intellectual property accounts for the lowest percentage of the registered properties, 0.07%: see Thai Rath (ไทยรัฐ), ‘SMEs Register Business Securities up to 2.67 trillion baht in 1 year Revealed by the Ministry of Commerce’ (พาณิชย์ระบุ _1 ปี _SME ยื่นจดทะเบียนหลักประกันธุรกิจกว่า _2.67 ล้านล้าน) (Bangkok, 8 August 2017), www.thairath.co.th/content/1031880. 192 The Thai SME Development Bank is a specialised financial institution governed by the Ministry of Finance and intended to providing credit to support development of Thai SMEs, but not to accept deposits: see Center for Protection of Users of Financial Services, ‘Specialized Financial Institutions: SFIs’ (สถาบันการเงินเฉพาะกิจ), www.1213.or.th/th/aboutfcc/ finservices/Pages/SFIs.aspx. 193 This kind of business is selected because most of these franchise businesses are well organised, have good business plans, and thus have a good chance of success. Moreover, a franchise business is easier and less risky to start because franchisees would be guided and assisted by franchisors. See Voice Online, ‘Ministry of Commerce in cooperation with SME Bank Granting Loans Securing by All Assets to Franchisees’ (พาณิชย์เตรียมจับมือ SME Bank ให้สินเชื่อธุรกิจแฟรนไชส์โดยใช้กิจการเป็นหลักท รัพย์ค้ำ�ประกัน) (14 August 2017), www.voicetv.co.th/read/515248. 194 Praladnetr (n 188). In August 2018 all assets of the debtors’ businesses constituted 0.07% of the August registration: see Department of Business Development, ‘Registration of Businesses and Online Service of the Department of Business Development’ (การจดทะเบียนธุรกิจและการให้บริการทางอิเล็กทรอนิกส์ กรมพัฒนาธุรกิจการค้า), www.dbd.go.th/news_view.php?nid=469411441. Recently, in January 2020, all assets of the debtors’ businesses accounted for 0.01% or 23 million baht of all January registration: see Department of Business Development, ‘Registration of Business in January 2020’ (การจดทะเบียนธุรกิจประจำ�เดือนมกรา คม), www.dbd.go.th/news_view.php?nid=469417034.

Implementation of International Standards on Secured Transactions into the Thai Legal System 289 of possession with registration in the BSA securities registry, instead of an asset-based ownership registry. With the BSA, ownership-based lenders and factoring businesses195 gradually learned that they could take advantage of the BSA, like other the lenders taking BSA security rights. This is so because the rationales for inclusion of both groups of creditors are now recognised by the financiers. Eventually, such recognition could expedite full-scale adoption of the functional approach.

IX. Conclusion The BSA was enacted because of inadequacies of non-possessory security rights under the CCC regime. Although the BSA embraces several modern principles on secured transaction, as there are still different security regimes, Thai secured transaction laws do not comply with the internationally accepted standards which require a functional approach. Because of a desire to achieve a higher Ease of Doing Business ranking, with the World Bank’s assistance, Thailand has begun an effort to establish an integrated secured transaction scheme to comply with the Strength of Legal Rights Index. Unfortunately, the functional approach has not yet been successfully adopted in the Thai legal system. In this chapter, the legislators and government organs in charge of the law reform are believed to be the most significant factors affecting transplantation of the functional approach. Doctrinal conflicts are also considered to be the main obstacle preventing adopting an approach requiring equal treatment between security and ownership-based devices and subjecting outright transfers of receivables to a security regime. The solutions proposed are a modification of ownership-based transactions without changing the status of ownership-based creditors as owners and subjecting outright transfers to a security regime without interfering with the fundamental differences between outright transfers and security rights. Moreover, two alternatives are proposed to address unreadiness to substantially modify the CCC. However, enactment of a new law does not guarantee the success of law reform and practical results. Capacity building for Thailand is significant to ensure that all stakeholders are equipped with necessary capacities if the functional approach is adopted. All in all, several lessons extracted from a case study of Thai secured transactions law reform demonstrates that a case-study based approach is beneficial in that it provides lessons which may be applied to law reform in general.

195 In spite of the inability to register outright transfers under the BSA, factoring businesses in practice have circumvented that limitation by registering security rights in the claims as BSA secured creditors to fix their priority before entering into outright transfer: see V B (ii).

290

14 Secured Transactions Reform in Vietnam: Prominent Achievements, Experiences, and Lessons Learnt HUYEN PHAM

I. Introduction and Background Vietnam is a nation of the Southeast Asian Region, having a population of about 96.2 million. Vietnam started its ‘Doi Moi’ in 1986 to open-up their domestic and foreign policies. Up to 1986, Vietnam had only established relationships with the Soviet Union and other members of the socialist country community. Starting from 1986, Vietnam has been changing its strategy to shape international relations with not only socialist but also capitalism countries and to integrate into the region and the globe. One significant reform in Vietnam in the 1980s was the shift from a centrally planned to a market-oriented economy. The country’s per capita GDP growth since 1990 has been among the fastest in the world, and the country has made impressive progress in alleviating poverty and non-income dimensions of welfare. Furthermore, after a recent slowdown triggered by an economic crisis with non-performing loans, Vietnam’s economy has re-emerged stronger, with a real GDP growth rate of 7.02 percent in 2019.1 This places Vietnam’s growth ahead of its South East Asian neighbours. Vietnam is experiencing positive development in the certain areas, for example, exports are growing because of successful efforts to diversify Vietnam’s manufacturing production base. The General Statistics Office (GSO) released a report, stating that in 2019 Vietnam’s export turnover reached US$264.189 billion, up 8.4 per cent compared to the previous year – the highest-ever increase. In this, the domestic sector contributed US$82.96 billion, an increase of 18.9 per cent, while foreign-invested enterprises posted an import-export turnover of US$181.23 billion, up 4 per cent year-on-year. Imports reached US$236.87 billion, reflecting a growth rate of 6.8 per cent from 2018. Vietnam has remained an attractive destination for foreign investors in 2019 with total foreign direct investment capital registered in the country hitting a record high of US$362.5 billion, up 6.5 per cent against the previous year.2 This is a result of attractive labour and operating costs as

1 Vietnam’s 2 World

General Statistics Office (GSO). Bank Group, ‘East Asia and Pacific Economic Update’ (April 2018).

292 Huyen Pham well as the country’s participation in regional trade agreements, such as the ASEAN (Association of South East Asian Nations) Economic Community and the Free Trade Agreements with the European Union and Japan. In addition, following a slowdown in the banking sector, and in particular in small and medium sized enterprise (SME) finance, the local banking sector is emerging as stronger, with fewer, larger, better-managed and regulated players, and continued efforts to address nonperforming loans (NPLs) and risk management. While the financial sector situation is gradually stabilising, there are several systemic vulnerabilities that continue to pose access to finance issues. 97 per cent of firms (based on current government criteria) are SMEs, contributing to 40 per cent of the national GDP and employing about half the workforce. Access to finance remains a significant obstacle for these SMEs: the World Bank Group (WBG)/International Finance Corporation (IFC) estimate that 49 per cent of SMEs are unserved or underserved by formal financial institutions, with a credit gap of nearly US$25 billion. International best practice shows that financial infrastructure can help to address SMEs’ constraints on access to finance. A solid financial infrastructure will represent a critical dimension in advancing financial inclusion for the under-served and unserved micro, small and medium sized enterprises (MSMEs). Credit reporting systems and secured transactions frameworks are crucial elements of the financial infrastructure that facilitate broader and fairer access to financial services by reducing information asymmetry and the cost of transactions for both lenders and borrowers. Specifically, a modern credit reporting system supports the retail lending business by providing objective information on the credit worthiness of individual customers or small businesses. They allow lenders to make faster and more accurate credit decisions, thereby lowering default rates and increasing credit lending volumes. Similarly, well-designed secured transactions laws and collateral registries facilitate lending to SMEs by maximising the economic potential of movable assets as collateral and contribute to more robust financial systems by promoting credit diversification, allowing financial institutions to rely less on immovable and real estate collateral. Over the past decade, the Government of Vietnam has taken active steps to develop the country’s capital markets, restructure existing financial institutions, strengthen corporate governance and create solid financial infrastructure to boost the development of its financial sector. One of the significant reforms by the Government since the mid-1990s is to leverage the value of available assets of SMEs, which are mostly movable assets (including tangible and intangible assets), through the secured transactions system. While an enabling regulatory framework for secured transactions is significantly improving the lending environment in Vietnam, experiences from other reformers suggest that the legal provisions need to be backed with broader institutional reforms and assistance in implementation to maximise the impact. Implementation measures require legal and institutional reforms, sector capacity building, development of supporting services and a central bank’s incentives to support the reform. While a common law country normally separates secured transactions law to deal with personal property from mortgage law to govern real property transactions secured by real property, a civil law country, including Vietnam, follows a ‘Civil Code’ approach and combines both real property and personal property backed transactions and both asset-based and nonasset-based security devices in its legal/regulatory framework for secured transactions. In Vietnam, the concept of secured transactions was first created in the 1990s and legalised in the Civil Code 1995. Following the Civil Code 1995’s effectiveness, some other solid foundations were established to enable secured transactions, including an enabling regulatory

Secured Transactions Reform in Vietnam 293 framework for secured transactions and a security interest registration agency. There have been a number of other reforms occurring at different times in different pieces of legislation and in regulations have helped Vietnam to become closer to international best practice in secured transactions. Those sets of legal documents include the Civil Code 1995, Decree 165/1999/ND-CP, Decree 08/2000/ND-CP, the Civil Code 2005, Decree 163.2005/ND-CP, Decree 83/2010/ND-CP, the Civil Code 2015 and Decree 102/2017/ND-CP, as well as other related circulars, etc. Another important element is the modern security interest registration system, which creates a centralised, transparent and public database on Secured Transactions and provide a service to end-users which is open all the time. The reform of the registration registry started in 2001 with the setting up of the National Registration Agency for Secured Transactions (NRAST) as an agency under the Ministry of Justice of Vietnam (MOJ). NRAST is responsible for providing guidance, implementing and providing information on secured transactions registration notices nationwide, supervising the implementation of secured transactions law, and developing and managing the national database on secured transactions registrations. In its early stage of development, the secured transactions framework in Vietnam was not advanced. The registration system was still paper-based and the secured transactions regulations did not allow broader types of assets to be used as collateral. Due to these issues, the commercial banks of Vietnam did not feel comfortable with lending against movable assets. All commercial banks in Vietnam relied on lending against real estate. To fix these shortcomings, in partnership with the Swiss State Secretariat for Economic Affairs (SECO), the IFC, as the most experienced international organisation providing technical assistance on secured transactions reforms, engaged with MOJ, specifically NRAST, to conduct different phases of a secured transactions reform under the Vietnam Financial Infrastructure Program led and implemented by IFC. The IFC’s experience in other countries suggests that secured transactions reform is not only about legal and technology infrastructures but also about changing the credit culture, which often requires more time to alter lenders’ mindsets to accept movables as collateral. Secured transactions reforms to achieve a fully-fledged and efficient market in sophisticated movables lending products will involve various stages, ie creating an enabling regulatory framework for secured transactions, developing on-line registration systems for secured transactions, providing capacity building for the banking sector and other stakeholders on movables finance, developing policies/guidelines on movables finance, and building movables finance supporting services, for example, collateral management industry, credit enhancement. With this approach, IFC started the program in Vietnam with NRAST in 2003 and has completed three phases. While the focus of the first phase was creation of an enabling a legal and regulatory framework for secured transactions, the second phase focused on building a first world class web-based registration system for secured transactions and the third phase’s objective was the development of a market for movable finance. Going through these three phases, the IFC has conducted a reform of the NRAST operations, updated the paper-based registry to an electronic platform, built capacity within the financial sector in close coordination with the key stakeholders, and monitored the implementation of laws and fine-tuned remaining shortcomings as necessary. Major achievements of the program include the adoption of the new Civil Code 2015 and a new Decree 102/2017/ND-CP on Secured Device Registration in 2017 which brings the current legal and institutional framework in line with international best practice principles. In addition, the registry infrastructure for secured transactions is in place, creating the necessary foundation for movables finance transactions. A substantive movables finance market has been established and lenders have basic knowledge of movables lending, which opens opportunities for SMEs to leverage on their available assets.

294 Huyen Pham This chapter will focus on analysing Vietnam’s secured transactions reform in the last two decades to draw on the country’s experience, and identify lessons learnt and prominent achievements that support financial market development. The Vietnamese government has gone through a long journey to establish the eco-system. As mentioned above, secured transactions reform has been implemented in the three main areas: (i) creating and improving the legal framework for secured transactions, (ii) building the first world class web-based system for secured transactions in Vietnam, and (iii) capacity building for the banking sector to move away from real estate secured lending.

II. Creating and Improving an Enabling Regulatory Environment for Secured Transactions While the term ‘secured transactions’ is used internationally to refer to transactions involving security over personal property (or so-called movable assets), the concept of ‘secured transactions’ in Vietnam includes both security interests over movable collateral as well as real estate mortgages, and depending on the context, the term should be understood accordingly. According to international best practice, secured transactions laws will enable businesses to use their available assets as security to generate capital. For example, the farmer pledges his cows as collateral for a tractor loan, or the seller of goods or services pledges the cash flow from its customer accounts as collateral for business expansion. Any loans secured by movable assets as collateral are an alternative to traditional lending backed up by real estate, since they serve borrowers with risk characteristics typically falling outside of a bank’s comfort zone. The collateral for these loans basically consists of accounts receivable, inventory and equipment. Developing these alternative lending products will primarily benefit start-ups and SMEs who do not have real estate or land but have movable assets as their main capital stock. With this concept, an effective legal framework for secured transactions will enable borrowers to obtain working capital more easily. To reach this objective, the enabling regulatory framework should allow a broad scope of assets to be used as collateral, provide clear rules on priority for secured creditors and ensure an effective enforcement of security upon default. Looking at lending markets globally, secured lending accounts for about 80 per cent of the total lending portfolio. In the experience of the IFC, about 70 per cent to 80 per cent of secured loans involve movable assets, and among these, there are about 60 per cent to 70 per cent of secured loans involving inventory and accounts receivables. These numbers indicate that movable assets are a major source of business finance worldwide, especially in most developed economies. For example, in the United States, movables account for around 70 per cent of smallbusiness financing. The country’s asset-based lending industry has been growing rapidly since the mid-1970s, and the total of credit commitment was increased by 9.2 per cent in 2019 as compared to the previous year.3 Recognising that financial market development can facilitate economic growth and job creation through the development of SMEs, many countries have modernised their secured transactions laws. Specifically, these countries have enacted relevant secured transactions legal frameworks to broaden the type of movable assets which financial institutions can take as collateral. 3 Secured Finance Network, ‘Annual Asset-Based Lending Survey Highlights’ (2019), www.sfnet.com/docs/defaultsource/data-files-and-research-documents/sfnet-annual-non-participant-report-2019-final.pdf?sfvrsn=edb99d52_2.

Secured Transactions Reform in Vietnam 295 In Vietnam, the issuance of the Civil Code 2015 was a key milestone for the government. This new Civil Code represents progress in several important areas.4 The law clarified and expanded the permissible scope of secured transactions (ie the type of security interests that can be granted). It acknowledges future obligations as a permitted form of collateral and provides a clear definition of future assets. Creditors can now describe their collateral in general terms, ie by type of property rather than detailing the amount, size, value, etc. of the collateral when registering their security interests. The law further strengthened the priority rules and clarified the effectiveness of security registration against a third party. The general rule is that the first to file or the first to perfect has priority. It has also decriminalised the pledge of one property for multiple obligations so now a borrower can use the same collateral to secure several debts. With respect to enforcement, the new law allows for the secured party to repossess and dispose of collateral by following the existing contract, without the need to go to a court or to reach a new agreement. It also enables the parties to agree on the method of enforcement at the time of signing the security agreement. At the same time, the law provides redemption rights to the borrowers. The secured transactions provisions of the Civil Code 2015 were complemented by the following legal documents relating to secured transactions which were also issued during the project implementation: Decree 102 on security registration and its effectiveness against a third party, Circular 08 on registration, and Circular 16 on enforcement. Even with the advances made by the Civil Code 2015, there is still no unique and separate law on secured transactions in place in Vietnam, and there remain inconsistences and uncertainties. The further issuance of streamlined sources of law on secured transactions would potentially clarify previous inconsistencies and uncertainties and contribute to a strengthened and more robust financial infrastructure.

A. Creation of Security: Expanding the Scope of Permissible Collateral A secured transactions law is most useful when it defines the scope of permissible collateral broadly so as to include tangible and intangible property of any nature, including assets that do not yet exist or are not yet owned by the debtor (future assets), and a changing pool of assets. A single, unitary concept of security interest should be adopted for granting a real right in any movable property from the debtor to the creditor in order to secure an obligation of the debtor.5

(i) The Civil Code 1995 Vietnam is a very specific case showing the complexities of reform in different stages. If we look at back the early stage of secured transactions reform in Vietnam, the concept of secured transactions was reflected in the Civil Code 1995, which was the first comprehensive regulation dealing with security interests on movable assets. However, at this stage, even though the highest type of law (the Civil Code) promoted a modern concept of secured transactions, other regulations

4 The 5 See

section dealing with secured transactions is Pt III, Ch XV, s 3. ch 2 II and IV B (i).

296 Huyen Pham issued later included provisions which prevented the development of secured transactions. For example, a set of subsidiary legislation, including Decree 165/1999/ND-CP and Decree 178/1999/ND-CP, was enacted soon after the 1995 Civil Code. Although some provisions of these Decrees conformed to many key features of international best practice and allowed nonpossessory pledges of a wide range of movable assets, some others hampered this progress by providing for restrictive lending against movables. Despite piecemeal attempts to overturn these contradictory restrictions, equipment, inventory, and accounts receivable financing was therefore still very rare in Vietnam.

(ii) Decrees 165 and 178 Decree 165 on Secured Transactions was enacted in November 1999, and provided progressive rules on the scope and creation of security interests in movable property.6 The Decree included many essential features of best practice, for example, allowing non-possessory pledges over broader types of assets, including equipment, inventory, receivables, negotiable instruments, documents of title, and intellectual property.7 There were no restrictions on who could give or take a pledge, nor did it mandate excessive contractual terms. Further, notaries and other third parties did not have to be involved in creating security in collateral or solemnising the security agreement. The Decree still contained some unnecessary requirements, but the most basic best-practice requirements were covered there. The Decree helped to avoid the most common mistakes found in traditional approaches to movable property financing. However, only 40 days after the adoption of Decree 165, the Vietnamese Government adopted a new Decree 178 that was applicable to credit institutions operating in Vietnam. Consequently, secured lenders became subject to two sets of regulations: one set (Decree 178) governed credit institutions regulated by the State Bank of Vietnam; and another set (mainly Decree 165) applied to both credit institutions and other creditors such as inventory suppliers and other trade creditors. The existence of two sets of rules put lenders in a state of uncertainty and banks could not make prudent decisions based on this conflicting tapestry of legal rules. There were several restrictions and contradictions to the Decree 165 under the Decree 178. For instance, Decree 178 stipulated that an asset could serve as security to only one credit institution,8 while the Decree 165 allowed a borrower to pledge their personal property to implement different obligations9 and, unlike Decree 165,10 Decree 178 required possessory pledges rather than non-possessory pledges.11 Decree 178 also added restrictions to a secured transaction. The most significant change was the requirement for collateral valuation,12 which created additional transactional costs and thus decreased access to credit. Further, a purchase-money loan13 could be made only if the government directed the loan or if the asset was purchased for use in a ‘mediumor long-term investment project’ and the debtor met specific criteria.14 6 The Decree was adopted on 19 November 1999. 7 Decree 165, Art 7. 8 Decree 178, Art 11. This restriction was relaxed in 2002. See Decree 85/2002/ND-CP on supplementing and amending some articles of Decree 178/1999/ND-CP, Art 1, para 13. 9 Decree 165, Art 6. 10 Decree 165, Art 15. 11 Decree 178, Art 12(1). 12 Decree 178, Art 8. 13 In this discussion, a purchase-money loan refers to a loan that enables a debtor to acquire specific goods, whether the credit is extended by a seller, supplier, or third-party creditor. A lessor under a finance lease extends purchase-money credit. 14 Decree 178, Art 14.

Secured Transactions Reform in Vietnam 297 Lacking clear understanding on international best practices in secured transactions made the Government confused while adopting enabling regulations for the better development of the movables finance market. In 2003, the Asian Development Bank (ADB) and the IFC started their discussion with the MOJ on a technical assistance scheme to reform the secured transactions system. While ADB invested in IT hardware for NRAST, IFC provided knowledge transfer and experience sharing to NRAST. IFC introduced international best practice, including Article 9 of the US Uniform Commercial Code (UCC Article 9) and the United Nations Commission on International Trade Law (UNCITRAL) Draft Legislative Guide, to the MOJ, related ministries and other government agencies, ie the Office of the Government. IFC provided hands-on support to NRAST to draft a revision to the Civil Code 1995 and other related sub-laws.

(iii) Civil Code of 2005 and Decree 163 Subsequently, the next reform in secured transactions happened with the enactment of the new Civil Code of 2005. This Code leveraged the advanced provisions of the Decree 165 and provided for a broad concept of movable collateral, but under the new notion of a ‘mortgage’ for non-possessory security interests, rather than ‘pledge’. In this way, the Civil Code recognised the fundamental principles of secured transactions law and did not leave them to be dealt with by lower level (secondary) legislation. This is a positive step forward for the predictability of the secured lending regime in Vietnam. Further, a new Decree 163/2006/ND-CP was adopted in December 2006 to elaborate on the framework provisions of the new Civil Code. Most importantly, Decree 163 repealed the complicated and backward-moving Decrees 178/1999/ND-CP and Decree 85/2002/ND-CP. Presumably, circulars that further complicated the administration of Decrees 178 and 85 also fell by the wayside. As mentioned earlier, Vietnamese secured transactions laws covered both security interests over movables and land mortgages, and this continued to be the case under the Civil Code of 2005 and Decree 163. The Civil Code of 2005 and Decree 163 contain a number of positive features that respond to the financial community’s call for greater conformity with best practice. This legislation offers new possibilities for secured lending, though lenders were slow to warm up to the provisions as they assess their new opportunities. These new set of STs regulations was built on the principles of eligible collateral which were more advanced than those in the Civil Code 1995. Both the Civil Code 2005 and the Decree 163 allowed securing party to use their own assets as collateral, and those assets could be both present and future assets.15 The Civil Code 2005 and the Decree 163 also addressed the ease of security interest creation. Under these legal instruments, formalities for creating security interests are simplified. In addition, greater freedom of contract is respected. Specifically, the parties have the freedom to address through the security agreement (which might be separate from loan agreement) all matters relating to their relationship, including defining warranties and covenants, events of default, and

15 See Civil Code 2005, Art 320 (Objects used to secure the performance of civil obligations), which provides: (1) Objects used to secure the performance of civil obligations must be under the ownership rights of the securing party and be permitted for transaction. (2) Objects used to secure the performance of civil obligations are the existing objects or objects to be formed in the future. Objects to be formed in the future are movable property or immovable property under the ownership of the securing party after the time the obligations are established, or the security transactions are entered into.

298 Huyen Pham remedies. Further, the legal requirement of the maximum debt ratio has been eliminated and the value of collateral need not exceed the value of the secured obligation.16 With the efforts to create a uniform legislation on secured transactions in Vietnam, the MOJ decided to develop a separate law on secured transactions. In that way, the law could be revised as soon as there was any development in the financial markets and create a unitary system for secured transactions. The IFC recommended to the MOJ that there should be a single type of ‘secured transaction’ instead of regulating several types of secured transactions such as pledges, mortgages and guarantees. In addition, it also recommended that the draft law on secured transactions should cover all types of perfection methods and the relevant priority rules for each type of perfection method. The draft law on secured transactions was finalised and submitted to the National Assembly of Vietnam but due to its back-log, the National Assembly did not include development of the law on secured transactions in the Legislative Program. Due to this situation, the MOJ reviewed all regulations on secured transactions with a view to reforming them to ensure that the new legislation complied with international practice. In 2012, the Government adopted the Decree 11/2012/ND-CP to amend some articles of Decree 163 which changed the concept of future assets. Under the amended Decree 163,17 future assets which could be the subject of security interests no longer included land use rights but did include three categories of assets, namely, assets formed from loan capital,18 assets currently in the phase of formation or legally created at the time of entry into the security transaction,19 and assets already formed and subject to ownership registration, provided they are registered in accordance with law after the time of entry into the secured transaction.20

(iv) Civil Code of 2015 In 2014, after 10 years of implementation of the Civil Code 2005, the Vietnamese Government found that the Civil Code 2005 had become out-of-date compared with Vietnam’s economy development, and inconsistent with international best practice. Therefore, the Government decided to revise the Code. With reference to UCC Article 9 and the UNCITRAL Legislative Guide on Secured Transactions (2007) (UNCITRAL Legislative Guide), one more reform was conducted. The new Civil Code of Vietnam (the Civil Code 201521) was passed by the National Assembly on November 24, 2015 and came into effect from July 1, 2017 with new content closer to the general principles of civil law, including the provisions on security for performance of obligations.22 Overall, the new approach of the 2015 Civil Code has basically addressed the difficulties and shortcomings in the formation and performance of security devices. It has built on the progress made in the previous Civil Code and the Decree 163 and allows both tangible and intangible collateral. The law expanded the permissible scope of secured transactions (ie the type of security interest that can be granted). Among other things, creditors can now describe their collateral in general terms, ie by type of property rather than detailing the amount, size, value, etc. of the

16 Decree 163, Art 5. 17 Art 4.2, amended by Decree 11; Art 1.2. 18 Assets acquired from the utilisation of loans. 19 Assets of which the physical formation or creation occurs at the time of execution of the secured transaction, for example a building under construction at that time. 20 For example, a house which has been built but has not yet been registered with the provincial-level land use right registry office. 21 No 91/2015/QH13. 22 Arts 292–350.

Secured Transactions Reform in Vietnam 299 collateral when registering their security interests.23 This new Civil Code represents significant progress in secured transactions legal reform, as it has enhanced creditors’ rights and clarified the confusion in the market that had been caused by multiple secured transactions provisions in various sources of law. It provides a more reliable and transparent foundation for movables finance in Vietnam. Compared with UCC Article 9 or the UNCITRAL Model Law on Secured Transactions (2016) (UNCITRAL Model Law), there are still some shortcomings of the law in relation to the possible types of security interests. According to international best practice in secured transactions, there is a unitary approach for secured transactions, in which all transactions, regardless of forms or names, that create a security right/interest in an asset by contract to secure performance of an obligation, are secured transactions. There is no distinction between pledge, mortgage, retention of title (conditional sale), or other forms of security. However, the Civil Code of Vietnam provides for nine different types of secured device, including pledge, mortgage, deposit, security collateral, escrow deposit, title retention, guarantee, pledge of trust and retention of property.24 The Civil Code also has separate provisions governing each security device.25 This may cause some confusion for lenders about effects of the security devices, especially since there is no comprehensive list of priority rules. On the other hand, the Civil Code 2015 includes some provisions which are much more advanced. For example, it provides a clearer article on types of permissible collateral, which includes different elements.26 This article is close to international best practice in relation to collateral description and the types of collateral, which include both tangible and intangible assets. In summary, the legal reform in Vietnam, in terms of creation of secured transactions went through a complex process with several adopted laws and sub-laws. Three Civil Codes were adopted and there were some inconsistencies among sub-laws in the early stage. But with the efforts of the Government, Vietnamese law now allows lenders to take broader types of assets as collateral, thus helping MSMEs to leverage their available asset for better access to credit.

B. Perfection of Security According to international best practice, a security right shall be effective against third parties, by one of four methods of perfection: filing a notice of security interest in the collateral, or taking possession (which is not very common), or automatic perfection (if the security interest is purchase money security interest in consumer goods), or control (deposit account, letter of credit rights, securities).27 The perfection (or effectiveness against third parties) of a security right comes from the demand of lenders for a transparent database in secured transactions, thus helping them to prevent frauds. International experience shows that a modern secured transactions system which has an advanced system of perfection of security right will support lenders by (i) enabling them to reduce their credit risks; (ii) increasing transparency by allowing them to

23 Civil Code 2015, Art 295(2). 24 Civil Code 2015, Art 292. 25 Pt Three, Ch XV, s 3, sub-ss 2–8. 26 Civil Code 2015, Art 295: (1) Collateral must be under the ownership rights of the securing party, except for the cases of retention of property or retention of title. (2) Collateral may be described generally but must be identified. (3) Collateral may be existing property or after-acquired property. (4) The value of collateral may be greater, equal or smaller than the value of the secured obligation. 27 On the perfection provisions of the UNCITRAL Model Law, see ch 4 V.

300 Huyen Pham register a notice of security rights and do a search for a security right; and (iii) ensuring secured lenders have rights against third parties (ie other creditors, purchasers of collateral, an insolvency officer, such as a bankruptcy administrator or a trustee). The history of secured transactions reform in Vietnam shows that before 2015, filing a notice of a security interest in collateral was the only method of perfection legalised in the laws and sublaws on Secured Transactions Registration and other related circulars issued by MOJ. The Decree 102/2017/ND-CP (passed pursuant to the 2015 Civil Code) stipulated the types of mandatory registrations and voluntary filing of notices of security interests. According to the Decree, filing a notice of security interests in movable collateral28 is optional.29 However, in practice, secured parties always register their notice of security right in movable collateral with the NRAST to inform any third parties on their position over that collateral. For the first time, Civil Code 2015 legalised two methods of making a security device effective against third parties: (1) filing a notice of the security device and (2) possession (or holding) of collateral. There is, thus, a distinction between effectiveness between the two parties to the transaction and effectiveness of the security interest against third party. Once the security interest is effective against third parties, the secured party has full rights to pursue the collateral and to priority for payment out of the proceeds when the collateral is sold.30 The 2015 Code provides that ‘[a] security device becomes effective against third parties upon filing a notice of the security device or upon possession or holding of collateral by the secured party’.31 Thus, filing a notice of the security device and the act of possession (or holding) of collateral have the same legal effect in determining the timing of effectiveness of the security interest against third parties. If there is no filing of a notice or taking of possession, the security interest is valid between the parties, but not against third parties. In Vietnam, filing is the most suitable and efficient way to provide notice of a security interest in assets. The IFC provided hand-on support to NRAST in building a modern filing system which fully complies with the UNCITRAL Guide on the Implementation of a Security Rights Registry (2013) (UNCITRAL Registry Guide).32 Presently, NRAST is managing and operating the electronic, notice-based, centralised, simplified and modernised filing system, which provides a service operating at all times for filing and searching security interests in collateral. The system requires unique content for an initial notice, eg name and address of debtor/secured party, identification of securing party, general description of collateral, etc. The system also allows parties to search, amend, or terminate notices. In addition, the perfection of security right by control is another method which is normally used by secured lenders in Vietnam. It is not clearly defined in the Civil Code 2015. However, given lending techniques in securities/deposit account/letter of credit right financing, secured lenders will usually apply this perfection method combined with filing a notice of security right. For example, the most recent legal framework for secured transactions33 allows borrowers to use their deposit account or their securities as collateral. Usually, the secured party will be the bank maintaining the deposit account or holding the securities and, therefore, controlling the deposit

28 Except for security interests in ships and aircraft. 29 Decree 102, Art 4.2. 30 The question of priority where there are competing interests in the collateral is dealt with at III C. 31 2015 Civil Code, Art 297. See also Decree 102, Art 5(1). Registration of security device is ‘the notation in registration book or entering data into database by the registration office that the debtor uses property to secure performance of obligation owed to the secured party’ (Decree 102, Art 3(1)). 32 See www.uncitral.org/pdf/english/texts/security/Security-Rights-Registry-Guide-e.pdf. 33 Civil Code 2015; Decree 163/2006/ND-CP.

Secured Transactions Reform in Vietnam 301 account or the securities. At the same time, the secured party will usually also do a filing a notice of the security interest in the deposit account or the securities collateral. There are some gaps in regulations on secured transactions in Vietnam due to the delay in revising the Decree 163. NRAST is working on a revision to Decree 163 and there is no new Decree providing implementation guidance for the Civil Code 2015 at the moment. Until the new decree is enacted, the Decree 163 is still effective. But there is lack of a comprehensive list of priority rules in Vietnam, as discussed in the next section.

C. Priorities When there are conflicting interests, the question of competition with the secured parties arises. There are several possible scenarios, for example, (i) the same collateral might be used for different secured transactions, or (ii) the collateral might be sold or exchanged, or (iii) the collateral might be subject to a judgment lien or to bankruptcy proceedings. To deal with such issues, secured transactions law needs to provide a set of priority rules to identify who should get to keep the collateral or the proceeds from the sale or exchange of the collateral. The priority rules should ensure predictability for a secured party and be clear so as to encourage multiple creditors to advance credit against the same collateral, enabling a debtor to maximise the value of its assets. Before the reform in 2005, priority rules among creditors were very weak in Vietnam. There was a rule that priority between security interests was to be determined by the order of registration,34 but this only applied to non-possessory security interests, and the priority position of a secured creditor who took possession of the collateral was not dealt with. Nor were there any provisions dealing with priority conflicts in particular situations, such as where collateral was severed from, or became fixed to, real property or in relation to movable property that accedes to other movable property or where movable property is commingled.35 It can be seen that the range of priority disputes governed by the pre-2005 Vietnamese law was narrow. For this, and other reasons discussed above,36 lenders preferred to take real property as collateral, and rarely lent against movable property. Moreover, there was a lack of judicial decisions on the pre-2005 law, and even little anecdotal discussion among lawyers as to how priority conflicts should be resolved. Both these factors hindered the development of a consistent interpretation of the legislation and a common understanding of the law relating to priority of security interests. The priority rules enacted after 2005 are much better and closer to the international best practice. These generally consist of a basic rule of ‘first in time, first in priority’. Priorities between different creditors are further clarified in the Civil Code 2015, in which there is a hierarchy of rules. If all competing interests are perfected, the rule is ‘first in time to perfect’. If not all the competing interests are perfected, the perfected interests have priority over the unperfected ones. If none of the competing interests are perfected, the first to be created has priority.37 The parties can change the order of priority stipulated in the Civil Code by subordination agreement. There are some special cases for priority. For instance, Decree 163 provides with some special rules of priority in relation to security rights over receivables and over inventory.38 34 Decree 165, Art 14(3) and Art 37(2)(b), which relates to the proceeds generated by an enforcement sale of the collateral. 35 Compare Art 11 of the UNCITRAL Model Law. 36 See I above. 37 Civil Code 2015, Art 308. 38 Decree 163, Arts 20 and 22.

302 Huyen Pham A mortgage of a debt claim (ie an account receivable) may be made flexibly (so that the whole debt or part of a debt can be mortgaged, as can a future receivable), and without notice to the debtor.39 However, when the debt claim is transferred according to the provisions of Article 309 of the Civil Code 2005 (that is, an outright transfer) the order of priority between the transferee and the mortgagee is determined according to the time of registration of transfer and mortgage transactions at the competent security transaction registry.40 This Article is not contrary to the new Civil Code 2015, specifically Article 365 (which is the equivalent of Article 309 of the Civil Code 2005), as both Articles (Article 22 of Decree 163 and Article 365 of Civil Code 2015) will now be applied to the relevant situation. Another example of a special rule is that relating to the priority position of a buyer of encumbered inventory in the ordinary course of business, who obtains ownership of the asset free from the security interest. This is in distinction to a buyer of equipment subject to a security interest, who takes the asset subject to the security interest, unless the sale predates the registration of the security interest, or the asset is a motor vehicle, and the registration of the security interest does not refer accurately to the frame and engine number of the vehicle.41 A modern secured transactions regime includes special rules for those advancing purchase money, who obtain super priority over other secured creditors in certain circumstances.42 Decree 163 provides for super priority for a those providing credit under title retention sales (both where payment is deferred and when it is payable in instalments) and leases of more than one year, if the transaction is registered at the relevant secured transactions registry within 15 days of the contract being made.43 If registration is not made during this short period, the priority rule between the purchase-money secured lender and the ordinary secured creditor is ‘first to file’.44 Retention of title devices can be registered under Decree 102.45 However, the list of purchase money lenders with super priority in Decree 163 is not comprehensive, and could be expanded to include all secured parties whose credit enables the purchase or lease of equipment. inventory, livestock, and fixture financing. According to international best practice, creditors holding non-consensual liens in the collateral, such as the statutory lien of the tax authority, a judgment creditor’s lien or the right of an insolvency administrator, should not have preferential status over secured creditors but should be subject to the same priority rules.46 However, in Vietnam, the relevant provisions are unclear and unsatisfactory.47 For example, the Law on amending and supplementing a number of articles of the Law on Enforcement of Civil Judgments48 and the Law on Bankruptcy 201449 provide for priority of payment for secured parties without mentioning that the secured transactions must be perfected. These provisions create gaps in implementing laws and holes which can be exploited

39 Decree 163, Art 22(1). 40 Decree 163, Art 22(4). 41 Decree 163, Art 20(1) and (3). 42 These are called acquisition secured creditors in the UNCITRAL Model Law (Art 2(a)). 43 Decree 163, Art 13. 44 ibid. 45 Decree 102, Art 4(2)(c). 46 cf UNCITRAL Model Law, Arts 36 and 37, which do permit limited preferential status for some claims. 47 Resolution 42, Art 12 does give priority to secured creditors over tax liabilities, but does not provide that the security interest needs to be perfected for this priority to apply. 48 Law No 64/2014/QH13 amending the law on Enforcement of Civil Judgements, No 26/2008/QH12. 49 Law No 51/2014/QH13.

Secured Transactions Reform in Vietnam 303 for fraud activities. The Law on Enforcement of Civil Judgements, as amended, recognises that secured parties have priority over judgment lien creditors, but it provides that the secured party will always win rather than priority being determined on the basis of first in time.50 Similarly, the Law on Bankruptcy provides for a secured party to have priority and to be paid first from the collateral, if it has a secured debt created before the bankruptcy proceedings are opened.51 The law, however, is silent on a perfection requirement for the secured debt.

D. Enforcement The importance of the rules on enforcement of security interests is explained well by the IFC in a study of the law of Vietnam written in 2007:52 Speedy, effective, and inexpensive enforcement mechanisms are essential to realising security interests. Enforcement is most effective when parties can agree on rights and remedies upon default, including seizure and sale of the collateral outside the judicial process. Reasonable safeguards against creditor misbehavior should be adopted to ensure that self-help remedies are exercised peacefully and that commercially fair value is obtained through private sale of the collateral. When the seizure and disposition of the collateral does call for judicial intervention, expedited summary legal proceedings should limit judicial findings to the existence of agreement granting the security interest and of an event of default.

In Vietnam, the enforcement mechanisms are regulated clearly in the Civil Code 2015 and other sub-laws, including Decree 11/2012/ND-C53 and Resolution 42/2017/NQ-QH13. The foreclosure mechanism in Vietnam is not strong as the mechanism in UCC Article 9 but there has been significant progress. Specifically, Decree 11 amended some articles of Decree 163,54 with some progressive provisions. For example, it allows the secured creditor to proactively realise collateral if there is an agreement among two parties on secured assets enforcement.55 Also, the Civil Code 2015 provides for the circumstances in which collateral can be realised.56 These are where: 1. 2. 3.

The obligor does not perform at all or fails to properly perform the secured obligation when it becomes due. The obligor has to perform the secured obligation before it becomes due when default occurs as agreed upon by the parties or as provided by law. Other circumstances agreed upon by the parties or provided by law.

50 Law on Amending and Supplementing a number of articles in the Law on Enforcement of Civil Judgements 2014, Art 20, amending the law on Enforcement of Civil Judgments, Art 47(3). 51 Law on Bankruptcy 2014, Art 53. 52 FIAS and IFC-MPDF, ‘Vietnam, Increasing Access to Credit through Collateral (Secured Transactions) Reform’ (2007), www.ifc.org/wps/wcm/connect/007044b4-0bea-4495-bd5c-1fabd854be3d/VN-FIAS-Secure-Transaction-ENG. pdf?MOD=AJPERES&CVID=j5gSpLx. 53 Dated 22 February 2012. 54 See II A (iii). 55 Decree 163, Art 58 as amended by Decree 11, Art 1.15. 56 Civil Code 2015, Art 299.

304 Huyen Pham Several other articles of the Civil Code 2015 cover different aspects of enforcement, namely, that notice of realisation of collateral must be given to the debtor,57 that the debtor has the right to redeem collateral on payment of the secured obligation,58 the methods of foreclosure (including sale),59 and the distribution of proceeds from the sale of collateral.60 In the Code, the provision on the obligation of the debtor to hand-over collateral for realisation is very clear: it provides that the debtor must hand over the collateral in the circumstances listed above,61 and that, if he fails to do so, the secured creditor can bring the matter to court.62 From a contractual perspective, if the debtor fails to perform at all or fails to properly perform the secured obligation, the secured party has the right to realise the collateral at the earliest time and at the lowest cost, complying with the principles of objectiveness, honesty, and good faith, without court involvement. As a matter of theory, out of court enforcement is one of the ‘pillars’ of secured transactions law.63 Later, in 2017, Resolution 4264 on pilot measures to handle bad debts (NPLs) was enacted to support secured transaction enforcement. The resolution covers several matter relating to enforcement, such as the right to repossess collateral,65 the application of a summary procedure if there is a dispute about the right to repossess collateral,66 the treatment of collateral consisting of a real estate project,67 limits on the distraining of collateral provided by a judgment debtor,68 priority of payments out of the realisation of collateral,69 and the transfer of collateral.70 With very detailed guidance on the realisation of distressed assets, the environment for enforcement is better and banks can easily manage and effective resolve their portfolio risks. However, this resolution is only effective for a pilot period of 5 years.71 In addition, the enforcement of secured transactions in Vietnam is still weak due to the lack of expedited judicial proceedings. Out-of-court workouts do not work very well in Vietnam since, despite the legal provisions for out of court enforcement discussed above, the State Bank of Vietnam has not issued any specific regulations on this method. The clear regulation of expedited judicial proceedings in either the Civil Procedure Code or in a future revision to Decree 163 would help to remove this weakness. Compared with other countries in the region, the legal environment for secured transactions in Vietnam is pretty advanced. However, to implement these regulations, coordination and cooperation among related stakeholders are very essential. Even more important than this will be the detailed guidelines and policies from financial regulator (ie the State Bank of Vietnam).

57 Civil Code 2015, Art 300. 58 Civil Code, Art 302. 59 Civil Code, Arts 303–06. 60 Civil Code 2015, Art 307. 61 Civil Code 2015, Art 299. 62 Civil Code 2015, Art 301. 63 IFC, ‘Recommendations of the World Bank Group on the Draft Revision of the Civil Code (provisions on security devices for performance of obligations)’. See also ch 2 II and IV B (vii). 64 Resolution 42/2017/NQ-QH13. 65 Resolution 42, Art 7. 66 Resolution 42, Art 8. 67 Resolution 42, Art 10. 68 Resolution 42, Art 11. 69 Resolution 42, Art 12. 70 Resolution 42, Art 15. 71 Resolution 42, Art 19.

Secured Transactions Reform in Vietnam 305

III. Building a World Class Web-Based Registration System for Secured Transactions The importance of an efficient registration system to a modern secured transactions regime is clear.72 The Modern Principles of secured transactions law include a requirement of publicity for third party effectiveness, and clear and predictable priority rules.73 A registration system achieves both of these objective, by providing the means of publicity of security interests to third parties, and enabling priority to be established by the date of registration. There are various features of a registration system which facilitate these objectives, and which are found in regimes which comply with the Modern Principles. These features are discussed in the next paragraph. First, the system should be a centralised one, so that there is only one registry with the centralised database in a country. Second, it should cover all types of interests in all types of movable collateral.74 Third, it should be a notice filing system,75 which means that only limited information needs to be registered, and there is no requirement for the registration of any document. Registration under a notice filing system has the function of alerting third parties to the possible existence of a security interest, rather than giving full information. Fourth, the registry has no obligation to check or verify the information registered. Fifth, registration is a requirement for the effectiveness of the security interest against third parties, and not for the creation of the security interest. Sixth, searching of the registry should be easy and widely available. These features are best achieved in a registry which is electronic and online. If a registration system contains these features, it is straightforward for the priority rules to include a ‘first to file’ rule. Publicity of security interests is particularly important when security interests are nonpossessory. As mentioned above, the law in Vietnam has long provided for non-possessory interests, and this is in conformity with international best practice,76 since businesses need to retain possession of their movables in order to operate. Development of a registration system including the features mentioned above is therefore very significant for Vietnam. The following sections describe how this development occurred.

A. Centralised Database In 2001, the National Registration Agency for Secured Transactions (NRAST) was established as an agency under the Ministry of Justice of Vietnam (MOJ) and is responsible for (i) providing guidance, implementing and providing information on secured transactions registration notices nationwide, (ii) supervising the secured transactions law implementation, and (iii) developing and managing the national database on secured transactions registrations set up under the MOJ. NRAST set up three registration centres in Hanoi, Da Nang and Ho Chi Minh City to manage secured transactions registrations of security interests on all movable assets and leasing

72 See UNCITRAL Legislative Guide, Ch IV, paras 29–34; R Haselmann, K Pistor and V Vig, ‘How Law Affects Lending’ (2010) 23 Review of Financial Studies 549. See also this book, ch 2 IV B (ii), ch 4 VI, and II B of this chapter. 73 See ch 2 II. 74 See ch 2 IV B (ii). 75 See ch 2 IV B (iii). 76 See II A (i), (ii) and (iii).

306 Huyen Pham transactions, except for ships and aircraft.77 While NRAST is a single system for most security interests in movable assets, it has significant flaws and is not user-friendly, primarily because it remains paper based. This is the main constraint cited in the survey of financial institutions. This paper-based registration system for secured transactions was in place for about 10 years (from 2001 to early 2012). This system had satisfactorily served the needs of banks with fax, postal mail, walk-in at NRAST’s centre, and later by email registrations. However, the paperbased system was not self-searchable and end users could not register the security interest on movable collaterals themselves, nor could they get a registration certificate within a reasonable time period, which would be needed as a supporting document for timely loan appraisal and approval. In addition, with the paper-based system, the database on Secured transactions Registration was decentralised in NRAST’s 3 separate centres. Those weaknesses caused certain inconveniences for bankers and private sector entities, including time and cost.

(i) The 2005 IFC/VBNA Survey A survey of bankers was carried out in 2005 by the IFC and the Vietnam Banks Association (VBNA) to identify the problems with the NRAST Registration system, and to inform the reform of the system, which took place in 2012. The following section discusses the key concerns of the bankers as identified in that survey and steps which, following this survey, it was thought could be taken to ameliorate the problems.78 There was very considerable concern with the way that the system operated. 88 per cent of those surveyed said that they would prefer an online system rather than a paper-based one. The system was seen by bankers as complex and time-consuming, with the process of registration taking several days, and often a longer period than the statutory time limit for registration.79 The position improved a little after the date of the survey, as a result of new standards, so that many registrations were completed within one day. Also, some banks were able to submit registrations by fax, which speeded up the process, but which led to another issue, namely, that submission by fax was only permitted for regular registrants, who had an account with the registry. This led to discrimination against occasional registrants. The time taken for registration to be complete also meant that searches were inaccurate, since recently registered interests did not show up on the search. The time taken to search was also lengthy, with 31 per cent of banks saying that it took them between seven and ten days to obtain search results. An online system was thought to answer all these problems, by providing for speedy, if not instantaneous, registration and searching. The piecemeal nature of the system was also a problem: around 70 per cent of bankers were concerned that the system was not unified, which made it more difficult to access information on security interests of other creditors.

77 Under Vietnamese law, the prevailing legal authority for registration is found in different laws and sub-laws, many of which are discussed above. During the period of 2000–04, these were the Civil Code 1995 and Decree 165 (see II A (i) and (ii)). For the period of 2005–14, these were the Civil Code 2005, Decree 163 (see II A (iii)), Decree 08/2000/ ND-CP and Decree 83/2010/ND-CP. Since 2015, the Civil Code 2015, Decree 163, Decree 102 (see I and II A (iv)) and other related circulars issued by the Ministry of Justice covered the area of secured transactions. Art 298 of the Civil Code 2015 authorises registration in general terms and leaves the specifics to special laws and decrees (ie the Law of Enforcement of Civil Judgements (as amended), Resolution 42, Law on Bankruptcy, Decree 102, Decree 163 and any future revision to Decree 163). 78 See FIAS and IFC-MPDF (n 52) 30–34. 79 13.6% of the surveyed banks said that registering a security interest on a piece of equipment took four to six days, and 36.4% said that it took more than six days.

Secured Transactions Reform in Vietnam 307 Bankers also complained that the review of a submitted registration by the registry authorities took too long. Despite some pre-2005 reforms, registrars still had some discretion whether to accept or reject application, and, combined with requirements for detailed description of collateral which still existed in some regulations and forms, led to lengthy review and some rejections of applications. As mentioned above, a modern registration system should not involve any checking or review by the registry, and acceptance of registration should depend on the application of strict rules, which, in an online system, will normally be embedded into the software and will not involve human intervention. Other complaints by banks included the level of registration fees (which could be reduced if an online registry were introduced and labour costs saved), and the procedures for deleting a registration. A securing party could obtain deletion on its own application, without the consent of the secured party, which resulted in great risk to the secured party, as it removed the protection of registration without that party’s consent.

(ii) A New Web-Based Registration System To address the system obstacles discussed above, the IFC supported NRAST in developing a new web-based registration system for secured transactions. Since March 19, 2012, the 24/7 new on-line registration system for secured transactions has been in place and brought a lot of benefits to the banking community and private sector of Vietnam. It is a centralised, accessible, public and transparent database, helping credit institutions and other stakeholders search for information on security interests over movable collateral, and register their security interests. Compared with the previous system, the new system facilitated end users to do searches and registrations themselves anywhere and at any time with internet access.80 The on-line registration system provides for registration of all types of relevant interests and includes security interests in tangible movables (including fixtures) and intangible property, finance leases, long-term operating leases, the sale of secured sales contracts and liens over movables. In addition, the registration will require limited information, which is provided only to serve only the legitimate purposes of registration. Those purposes are to give notice that a security interest may exist in the identified collateral and to establish the secured party’s priority in the collateral. Extraneous information should not be required, although it sometimes is. For example, registration information on inter-secured party contracts, eg, subordination agreements, is not germane to third parties, but is provided for in the registry forms. The system uses unique criteria for both registration and search. It also follows a rule-based decision-making for the acceptance and rejection of registration applications, and for the conduct of searches. The rules and standards in this regard are concrete, specific, and limited. In addition, the new system in Vietnam also meets criteria of accuracy, speedy, accessibility, and cost effectiveness. It is very simple and easy to access and has no discriminatory treatment among parties. Everyone can access the system to conduct a public search and register their security interest over movables. Security of the system is strict, to prevent fraudulent activities.

80 Evidence from interviews conducted by the World Bank Communications Team in 2012 supports this view. The Vietnam International Bank said that: ‘The new on-line registration system is more efficient and can help us to comprehensively search security interests on movable assets, register security interests and get the registration certificates quickly. We can therefore make the loan approval and disbursement process much faster to better serve our clients.’ Thuan Phat Imp-Expr Investment Company said that ‘Operational online registry facilitates our access to credit from banks and supports business expansion. This reform indirectly promotes business growth – particularly for the private sector – making it easier for us to access credit.’

308 Huyen Pham After 5 years of implementing the on-line registration system for secured transactions, once again, the IFC supported NRAST to upgrade the system. The design of the upgraded system included additional features to meet the requirements of Vietnamese Government’s e-government criteria (level 4), such as online access, online payment and online support. The upgraded system was launched in July 2017 and received an award from the Vietnam Justice Minister as one of the top ten outstanding highlights of the judicial sector in 2017. The online access, payment, and support has made it easier to register security interests and has promoted movables lending, resulting in broad-based credit growth, particularly for MSMEs. In the year following the launch of the upgrade (July 2017–December 2019), the system recorded over 990,00081 new registrations. In total, the project has reached more than 1,950,000 new registrations,82 facilitating US$91.6 billion in financing83 for over 1 million SMEs84 and approximately 68,000 micro businesses.85

B. Description of Collateral International best practices show that the description of collateral should be general.86 However, in Vietnam, there was inconsistency among sub-laws. Decree 165 regulated general descriptions for future-acquired inventory. However, in 2002, the Vietnamese government issued yet another new set of rules – the Circular 6 – which imposed even further restrictions on the use of movable property as collateral. Contrary to Decree 165, the new rules required future-acquired inventory to be specifically described.87 Further, in addition to having to add the new specifications to the security agreement, the amended agreement also needed to be registered at NRAST to reflect the new and more specific descriptions. After reform, Decree 83,88 replacing Decree 08,89 opened an opportunity for a new method of registration, the so-called on-line registration and allowed secured or securing parties to provide general description of collateral. Later, Decree 102,90 replacing Decree 83, was drafted based on progress of the Decree 83. The Vietnamese on-line registration system for secured transaction has followed the UNCITRAL Registry Guide, ie notice-based registration, unique search and registration criteria, general description, etc.

IV. Building Capacity for the Banking Sector and Related Stakeholders A modern secured transactions system will not work if financial institutions are reluctant to promote movables finance and there are no supporting services for movables finance existing.

81 Statistics 82 ibid.

from NRAST’s system.

83 Calculated 84 ibid. 85 ibid. 86 See

by using methodology of IFC.

ch 2 IV B (iii). 6, Art II.2.3. 88 Decree 83/2010/ND-CP. 89 Decree 08/2000/ND-CP. 90 Decree 102 /2017/ND-CP. 87 Circular

Secured Transactions Reform in Vietnam 309 As mentioned previously,91 the secured transactions reform in Vietnam will not only include legal or registry infrastructure reforms but will also contain changes in lending culture and development of supporting services for finance secured on movables. To realise the potential for movables finance development and to take advantage of new laws and the new system, the IFC is working closely with the State Bank of Vietnam, and the Vietnam Banks’ Association to provide capacity building for the banking regulators and the banking sector. Many specialised workshops, seminars and training courses are conducted under the leadership of financial sector constituencies. Several forums where information and expertise are exchanged are also organised on a periodical basis. In addition, the IFC is working very closely with other related ministerial agencies to develop a collateral management industry which plays a very important role in movables finance. Before the reform, lending in Vietnam mostly relied on real estate as collateral. In 2006, IFC conducted a survey in banking sector to understand about lending culture. The survey showed that about 93 per cent of outstanding loans involved real estate as collateral. At that time, commercial banks were quite reluctant to provide loans to MSMEs against their available assets. All MSMEs used their business owners’ land use rights or buildings to mortgage to the banks. Access to formal financial services was difficult. The number of new registrations recorded in the NRAST system normally reflects the number of loans involving movable asset since this system captures all security interests over movable collateral. The statistics from NRAST showed the low number of new registrations, which was about 54,000. Picking up from these statistics, IFC started working with NRAST to disseminate information about Vietnam’s legal framework for secured transactions.92 The WBG Secured Transactions Toolkit was submitted to the MOJ for their reference in case of further reform. In addition, knowledge of the UNCITRAL Legislative Guide and Model Law was also shared with both State Bank of Vietnam and Ministry of Justice. Besides dissemination and advocacy activities, IFC also provided in-depth support to the State Bank of Vietnam and the Vietnam Banks’ Association in developing innovative lending in Vietnam. Many sector training sessions were organised and focused on accounts receivables, inventory financing, financial statement financing, factoring and supply chain financing. This training provided a great base of knowledge on the movable finance product system. Furthermore, IFC also worked with individual commercial banks to provide training on how to structure a loan secured by movables, how to conduct client due diligence, how to monitor loans and how to mitigate credit risks. Also, Professor Udell’s Asset Based Financing Book93 was published in Vietnamese and distributed to commercial banks and universities. Beyond the training for banks, IFC also provided trainings for SMEs to raise awareness for SMEs about their available asset value. These trainings have increased SMEs’ knowledge on movables finance, thus facilitating them to work proactively with banks. The statistics from the Registry shows that the number of new registrations (or new loans involving movable assets) has increased significantly from 2001 to 2019. Specifically, during the period from 2012 to 2019, the average increase ratio was about 21.5 per cent.

91 See I above. 92 As discussed at II A, and found in the Civil Code 2005, Decree 163 and Decree 08, later Decree 83, and later still the Civil Code 2015 and Decree 102. 93 G Udell, Asset Based Finance: Proven Disciplines for Prudent Lending (New York, Commercial Finance Association, 2004).

310 Huyen Pham Figure 1 Development of new registrations or new loans involving movable assets

Source: NRAST.

Other types of training on secured transactions were also delivered to judges of Vietnam. The training helped the court clerks to have a better understanding of secured transactions, thus facilitating the judges’ work on secured transaction case adjudication. In short, capacity building in Vietnam has not only been conducted for the banking community but also for the business community, the court system and university lecturers to ensure sustainability.

V. Conclusion Alignment between the IFC Financial Infrastructure Program94 and Vietnam’s strategy in inclusive growth and private sector participation to strengthen Vietnam’s competitiveness in the region is very important. It has contributed to the success of the reform. The Program created a more robust financial infrastructure in Vietnam, in particular, through the enactment of the Civil Code 2015 and upgrades to the public collateral registry. These developments facilitated broad-based credit growth, including movables financing of about US$91 billion to MSMEs. The training provided for banking sector participants and specific lenders strengthened capacities in the domestic banking market and improved the movables financing product offering for MSMEs, which are the growth engine of the private sector. After two decades of reform, Vietnam’s secured transactions framework is closer to international best practice. The Civil Code 2015 and other related sub-laws (Decree 163 and Decree 102) have created a great foundation for movables finance market development. The streamlined Civil Code 2015 and accompanying regulations and circulars on secured transactions also created greater transparency for secured financing market participants.

94 See

also I above.

Secured Transactions Reform in Vietnam 311 Training and workshops, as well as resulting in a more capable lending industry, helped to promote good governance, and to expand opportunities for low and moderate-income people. The program achieved several specific goals of the Vietnamese Government. The legal framework component of this project was aligned to the Government and the MOJ legislative reform agenda. The accompanying decrees and circulars provide further guidance on key practical aspects of secured financing, giving lenders comfort to design new secured financing products. The upgrade to the registration system, supporting a more transparent and accessible database of secured transactions, also achieved the government’s aim to reach level 4 for e-government public services as mentioned before. This includes, among other things, online access, payment, and online support. In addition, this program was relevant to the Government’s Socio-Economic Development Strategy for the period of 2011–20. The Strategy emphasises, amongst other things, structural reforms and the stabilisation of the macroeconomic situation. The priorities are: promoting human resources development; improving market institutions; and infrastructure development. The program also was closely aligned with the Vietnam Insolvency Reform, improved the rights of secured creditors of insolvent companies and strengthened the infrastructure for taking and enforcing security, reducing credit risk for banks. The program also built the capacities of local lenders in movables financing and supported banks to offer a lending product that is de-coupled from the real estate cycle, thereby contributing to macroeconomic stability as well as reduction in non-performing loans. Even with the achievements of the program, there are still some areas for further improvement. Firstly, the Government of Vietnam should streamline its legal framework for secured transactions, the Government should not adopt any more decrees or circulars. Instead of covering secured transactions matters in different Decrees and Circular, the Government may develop a single and separate Law on Secured Transaction which should be applicable and precise to avoid confused and inconsistent implication. Secondly, in terms of perfection and priority rules, a secured creditor’s right to proceeds upon the sale or other disposition of collateral should be ensured. This right is important to a wellfunctioning secured transactions legal system. Adoption of a comprehensive and commercially rational order for prioritising secured claims against non-consensual claims should be in place.95 The Government should also review all priority rules to ensure the compliance with international best practice. Further review the super-priority provision in order to promote commerce should be also conducted. Super-priority for equipment finance should include any form of transaction. It should also include secured parties whose credit enables the purchase or lease of equipment. inventory, livestock, and fixture financing are also worthy of super-priority rules.96 There should also be more coordination between secured transactions laws and bankruptcy laws to ensure consistent creditor’s rights to be enforceable. Thirdly, the Government should periodically review progress under the new Civil Code 2015 and Decree 163. Systematically monitoring the implementation of the new laws in practice should be considered. The review should provide meaningful opportunities for creditors and entrepreneurs to voice problems with the legal framework, if any. The Government should also monitor the implementation of the Laws, fine tune shortcomings, and streamline remaining legal issues.

95 See

II C.

96 ibid.

312 Huyen Pham Fourthly, in terms of enforcement, the Government should create an effective enforcement regime to help lenders to mitigate credit risks and save time and cost and introduce expedited judicial proceedings when out-of-court enforcement mechanisms do not resolve the issue.97 The legal framework of Vietnam should include explicit authorisation to pursue multiple remedies simultaneously, rather than consecutively, and without arbitrary obstacles. In addition, procedures for auction, enforcement of judgments, and private remedies should be periodically reviewed and revised to reduce creditor risk, enhance creditor confidence in the enforcement of obligations, and thus increase credit opportunities for all borrowers. Finally, capacity building for the banking sector, business community, court system and university should remain to ensure sustainable development. Our experience shows that secured transactions reform is not only about legal reform or IT infrastructure. It is at the end all about the development of a market for finance secured on movables. Therefore, the reform should be implemented in different phases with different focuses, ie legal reform, registration infrastructure development, capacity building on movable finance for all stakeholders, support to develop policies/guidance on movables, and finally development of operational supporting services (ie collateral management industry, e-financing platform).98 Capacity building for the banking sector is very important to support them in equip knowledge and know-how technique on movables lending, thus facilitating lending culture change to move away from real estate secured lending to movable financing.

97 See 98 See

II D. also ch 5 III B.

part iii Common Law Jurisdictions

314

15 Secured Transactions Law Reform in Common Law Jurisdictions (Brunei Darussalam as an Example) LOUISE GULLIFER

I. Introduction This chapter examines the legal consequences and challenges in reforming secured transactions law in common law jurisdictions. Given that the reform initiative in Brunei Darussalam (Brunei) is not otherwise covered in this book, it takes this initiative as an example to illustrate some of the points made, as well as giving a very brief overview of the content of the Brunei reform.1 However, it is not the purpose of this chapter to give a detailed account of the Brunei Secured Transactions Order. In this chapter, a common law jurisdiction is taken to include any jurisdiction that had English law in the past as the main or significant source of law (although there may have be other influences as well). Most common law jurisdictions have a statute or a provision in a statute incorporating English law into national law as at the date of that statute,2 and will often copy subsequent statutory developments in English law and pay attention to cases decided after that date. Thus, while it is impossible to generalise about the details of pre-reform secured transactions law in common law jurisdictions, there are usually some basic features and principles which are common to all, and it is these which are discussed in this chapter. Moreover, there have been some successful reforms of secured transactions law in common law jurisdictions, which can serve as models for reforming jurisdictions, although care has to be taken when adopting any national law model, as it may contain idiosyncrasies which are not necessarily desirable in the reforming jurisdiction.3

1 The account of the reform of secured transactions law in Brunei owes a great deal to the helpful comments of Bruce Whittaker, who was involved in the post-reform implementation and capacity building. He also made many other helpful comments on a draft of the paper, from the perspective of Australian secured transactions law, which was reformed in 2009 and which he reviewed in 2015 (see B Whittaker, ‘Review of the Personal Property Securities Act, Final Report’ (Commonwealth of Australia, 2015)). 2 See, eg in Brunei, the Application of Laws Act 1951; in Singapore, the Second Charter of Justice (1826), the Civil Law Act 1909, s 5 and the Application of English Law Act 1993; in Bangladesh, the Bangladesh (Adaptation of Existing Laws) Order 1972 (see ch 16 IV); and, from outside Asia, the Courts Act 1965 (Sierra Leone), s 74 and the Interpretation Act 1958 (Nigeria), s 45. 3 See, eg the NZPPSA, which does not provide that unregistered security interests are void in the insolvency of the grantor (NZPPSA, ss 52, 66(a), 85(1) and 103). See also V E below.

316 Louise Gullifer This chapter starts with a very brief account of the history of the law of secured transactions in Brunei, including the recent reforms. The third section gives a very brief overview of the modern principles of secured transactions law, as exemplified by the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Secured Transactions (2016) (UNCITRAL Model Law), and the modern Personal Property Security Acts (PPSAs), such as the New Zealand PPSA (NZPPSA) which was the model for the Brunei reforms. These principles are discussed in much more detail elsewhere in this book.4 The fourth section compares unreformed secured transactions law under the common law with these modern principles. In doing this, it examines the features of the common law which accord with modern principles, the features which need to be changed to accord with modern principles and the areas of the common law which need ‘translation’. The fifth section examines some other legal challenges which are faced in reforming secured transactions law in common law jurisdictions: the effect of the abolition of the distinction between legal and equitable interests in secured transactions law but not elsewhere in the law, the introduction of an overarching principle of good faith and commercial reasonableness and the interaction of reformed law with insolvency law. The fifth section also discusses briefly the use of models in reform of secured transactions law in common law jurisdictions, and the sixth section concludes.

II. History of Secured Transactions Law in Brunei A. Introduction Brunei is a high income country in South East Asia, with a population of around 420,000 and GDP per capita of USD 32,840,5 one of the highest in the world. Its economy is heavily reliant on oil and gas production,6 though its government is looking to diversify the economy into other areas, such as information technology and halal manufacturing.7 In the last three years, Brunei has introduced many regulatory reforms, and made the biggest advances of all states in moving towards the World Bank Doing Business Regulatory Frontier in the two consecutive years (2015–16 and 2016–17).8 The secured transactions law reform considered in this chapter was part of those regulatory reforms, and resulted in Brunei moving from 79th in the World Bank Getting Credit rankings in 20169 to equal 1st in 2020.10

B. The Pre-reform Secured Transactions Law The Application of Laws Act 1951 provided that ‘the common law of England and the doctrines of equity, together with statutes of general application, as administered or in force in 4 See ch 1 III C (i), ch 2 and ch 17 V. 5 See World Bank Group, Doing Business 2018 (2018), www.doingbusiness.org/content/dam/doingBusiness/media/ Annual-Reports/English/DB2018-Full-Report.pdf. 6 This accounted for 65% of GDP and 95% of exports: see CIA, ‘The World Factbook, Economy: Brunei’ (7 February 2020), www.cia.gov/library/publications/the-world-factbook/geos/bx.html. 7 ibid. 8 See World Bank Group (n 5) 6. 9 See World Bank Group, Doing Business 2016 (2016) 191, www.doingbusiness.org/content/dam/doingBusiness/ media/Annual-Reports/English/DB16-Full-Report.pdf. 10 See www.doingbusiness.org/data/exploreeconomies/brunei.

Secured Transactions Law Reform in Common Law Jurisdictions 317 England at [25th April 1951]’ should be in force in Brunei Darussalam, although only so far as ‘the circumstances of Brunei Darussalam and of its inhabitants permit and subject to such qualifications as local circumstances and customs render necessary’. The effect of this statute on secured transactions law had several aspects. The English law on secured transactions developed over many centuries largely in case law, which, of course, is a very important primary source of law in common law jurisdictions. The English case law was incorporated by the 1951 Act into the law of Brunei Darussalam. More recent case law developments would, as with other common law jurisdictions, be open to consideration by the courts. Thus, the following key features of English law were part of the pre-reform secured transactions law in Brunei. There were only four types of security interests: possessory interests were the pledge11 and the contractual lien12 and non-possessory interests were the mortgage13 and the charge.14 There were two types of charges, fixed and floating, the difference between which was developed by English case law in which the drafting of particular charge documents was considered and categorised.15 There were other devices which had the same purpose as security interests, such as sales on retention of title and finance leases. The registration regime for non-possessory security interests in Brunei created by companies (charges and mortgages) was very similar to that which was in force in English law until 2013,16 and was to be found in the Brunei Companies Act 1984 (Companies Act).17 Key features of this regime were that only some charges18 were registrable,19 and they were to be registered with the Registrar of Companies within 5 weeks of creation,20 as well as in the company’s own register.21 The duty to register was on the company, and failure to register was a criminal offence,22 as well as rendering the unregistered charge void against other secured creditors and against the liquidator on the company’s insolvency.23 In relation to security interests created by non-corporate entities (individual consumers and unincorporated businesses), those over tangible movable assets were registrable under the Bills of Sale Act 1984,24 which was similar to the English law Bills of Sale Acts 1878 and 1882. This regime also prescribed the form of the security agreement,25 and prohibited

11 A pledge (under English law) is where possession is given to the pledgee for the purpose of creating a security interest: Coggs v Bernard (1703) 2 Ld Raym 909, 913. 12 A contractual lien is where possession is given for some other purpose, and the parties agree that the possessor may retain possession until an obligation relating to that purpose is fulfilled by the owner of the goods: see H Beale et al, The Law of Security and Title-Based Financing, 3rd edn (Oxford, Oxford University Press, 2018) para 5.85. 13 A mortgage is where title (legal or equitable) to the asset is transferred to the mortgagee for the purpose of securing an obligation, and the mortgagee is obliged to retransfer title when the obligation is fulfilled: see Santley v Wilde [1899] 2 Ch 474; Maugham v Sharpe (1864) 17 CB NS 443. 14 The charge is an encumbrance rather than involving a transfer of title: see Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd [1985] Ch 207, 227. 15 See, eg Re Panama, New Zealand and Australian Royal Mail Company (1870) 5 Ch App 318; Re General South American Company (1875) 2 Ch D 337; Re Florence Land and Public Works Company (1878) 10 Ch D 530; Re Hamilton’s Windsor Ironworks ex p Pitman & Edwards (1879) 12 Ch D 707; Wheatley v Silkstone and Haugh Moor Coal Co (1885) 29 Ch D 715. 16 Contained in the UK Companies Acts 1948, 1985 and 2006. 17 Ch 39, as revised in 2015. 18 The term ‘charge’ included a mortgage. 19 The list of registrable charges was in Companies Act, s 80(2). 20 Companies Act, s 80(1). 21 Companies Act, s 89. 22 Companies Act, s 81(3). 23 Companies Act, s 80(1). 24 Ch 70. 25 Bills of Sale Act 1984, s 7(b) and the First Schedule.

318 Louise Gullifer the taking of security over after-acquired property, except in very limited circumstances.26 However, unlike the English law Bills of Sale Acts, the definition of ‘bill of sale’ had been extended in Brunei to include ‘agreements for the hire of personal chattels entered into for the purpose of securing the repayment to the lessor of such chattels of money advanced by him to the hirer’. Thus, at least in the context of finance extended to non-corporate entities and individuals, Brunei already had registration of some devices in which title was retained by the supplier which had the function of securing credit.

C. Secured Transactions Law Reform in Brunei In 2016, Brunei enacted the Secured Transactions Order27 (STO), which was a wholesale reform of its secured transactions law. The STO is modelled on the NZPPSA, and includes provisions tracking that legislation reasonably closely, although the ordering of provisions is different. The STO includes sections on the creation, perfection, registration, priority and enforcement of security interests, as well as general sections and a section on repeals and transition. The relevant parts of the Companies Act and the Bills of Sale Act referred to above are repealed.28 This section also repeals section 6(1)(c) of the Hire Purchase Order 2006 but no other parts of this legislation. As a result, those financing vehicles on hire purchase in Brunei are continuing with their previous practice of taking possession of the ownership papers for the vehicle (but returning them to the hirer once a year so that the registration of the vehicle can be renewed), as well as registering their interest under the STO.29 Another provision not repealed by the STO is section 48 of the Bankruptcy Order.30 This section is in very similar form to section 344 of the UK Insolvency Act 1986,31 and provides that general assignments of book debts or a class thereof by an unincorporated business that are not registered in a register kept by the Registrar of the Supreme Court are void in the insolvency of the assignor. As a result of the lack of repeal, assignees have now to register in both this register and the STO register to avoid their interest being void on the insolvency of the assignor in relation to unpaid book debts (receivables). In common with all PPSAs, the STO applies to all transactions which have the function of security, without regard to the form of the transaction or the location of title in the collateral.32 It also applies to some interests which do not have the function of security, namely, outright assignments of receivables and operating leases.33 While the drafting in section 2(1) and section 3 is somewhat ambiguous as to whether these are seen as ‘secur[ing] payment of an obligation’,34 the

26 Bills of Sale Act 1984, s 6(2). Under English law, a bill of sale which purported to include future assets was held absolutely void for failure to comply with the formal requirements set out in the Schedule to the Bills of Sale Act 1882: Thomas v Kelly (1888) 13 App Cas 506. 27 Made under Art 83(3) of the Brunei Constitution. It has been amended by the Secured Transactions (Amendment) Order 2016 and is supplemented by the Secured Transactions Regulations 2016, which provide detailed rules about registration. 28 STO, s 93. 29 Email from Bruce Whittaker dated 24 February 2020 on file with the author. 30 Ch 67 of 1956, revised in 1984. 31 This section derives from s 43 of the Bankruptcy Act 1914. 32 See ch 2 IV B (i); STO, s 2(1)(b) and definition of ‘security interest’ in s 3(1); cf NZPPSA, s 17. Unusually, the STO also covers some non-consensual security interests (‘liens created by judgment or by operation of law’ (s 2(1)(a)). cf the coverage of non-consensual liens in the Philippine PPSA (see ch 10 III C and D). 33 STO, s 2(1). Operating leases are defined in s 3 as ‘a lease, other than a financial lease, for a term of more than one year’; cf NZPPSA, s17(1)(b) where a lease for more than one year is included in the definition of ‘security interest’. 34 This is the wording in s 3.

Secured Transactions Law Reform in Common Law Jurisdictions 319 Order follows the NZPPSA35 in excluding such transactions from the application of the enforcement provisions, so that it is clear that they are only treated as ‘security interests’ for the purposes of perfection and priority.36

III. Modern Principles of Secured Transactions Law The modern principles have already been discussed in some detail earlier in this book.37 This section merely summarises the main principles in order to introduce the analysis in section 4. Modern law should be as simple and accessible as possible, avoiding complexity and fragmentation unless this is strictly necessary. Therefore, according to modern principles, secured transactions law should be contained in a single code, covering all types of debtors and all types of transactions which perform the function of security.38 In order to maximise access to credit, it should be possible to take security over all types of assets, including future assets, and over all the assets of a debtor.39 It should be possible to create a security interest with minimal formality.40 The system should be as transparent as possible, so there should be a single registration system which is cheap and easy to use, which permits advance registration and which applies to all transactions within the system (subject, perhaps, to some alternative means of perfection in specific cases). Priority rules should be as simple and straightforward as possible. This entails there being a ‘first to file’ rule (for interests perfected by registration), superpriority for acquisition financing in order to prevent a monopoly by one lender and taking free rules which facilitate the o rdinary operation of commerce. There should be effective enforcement mechanisms which enable a secured creditor to enforce quickly, easily and cheaply (and including extra-judicial enforcement)41 but which balance protection for the debtor and other creditors.

IV. Comparison between the Modern Principles and the Common Law A. Introduction Given that the modern principles are derived, originally, from Article 9 of the US Uniform Commercial Code (UCC Article 9), itself a reform of a common law system, it is not surprising that there are many features which are already present in the common law, whether expressed in the same conceptual framework or otherwise. In order to bring a common law system in line with modern principles, the actual substantive changes are relatively limited, and one of the purposes of this section of this chapter is to pinpoint these changes. However, given the different conceptual structure of a modern reformed secured transactions law, there are also areas of the common

35 NZPPSA, s 105(2). This provision is also found in other PPSAs, eg Saskatchewan PPSA (SPPSA), s 55 and Australian PPSA (APPSA), s 109. 36 STO, s 62. 37 See ch 2 II and IV B. 38 See IV C (iii) below. 39 See IV B (i) (a) below. 40 ibid. 41 Ibid.

320 Louise Gullifer law which, though the end result may not be all that different, will require ‘translation’ into new concepts. This may result in small but not insignificant substantive changes. The discussion in this section, though reasonably detailed, is not exhaustive. There are detailed similarities and differences which are not discussed: the main purpose of this section is to pinpoint the principal areas where there would not be substantive change, and those where there would be. This situation can make reform easier or more difficult. In one sense, it is easier to reform a law if relatively little needs to be changed. However, it also raises two questions which need careful analysis to answer. First, if the law is fairly similar and works well, why change it? Second, what is the point of changing the whole conceptual structure if you just come back to the same functional place in the end? The answer to both these questions necessitates the rigorous identification of the actual changes that will be made, and determining the explanations of why these changes are beneficial. For example, one of the changes to the common law would be the introduction of a registration system which is much more comprehensive than presently exists. The benefits of including more interests on the register have to be determined by considering the benefits of registration itself.42 One of the reasons for changing the conceptual structure of the common law relating to secured transactions is to remove complexity and fragmentation. The benefits of this (as opposed to the use of bespoke, but well developed, concepts for particular security interests and transactions) again need to be identified.43 For example, a simpler law could be more easily understood by people from other jurisdictions wishing to do cross-border deals. Of course, the benefits of simplicity are lost if the resulting reformed law is also very complex, and this is a matter of some difficulty for reformers, since the model codes themselves include a certain degree of complexity, probably because of the nature of the area of law under consideration.

B. Features of the Common Law which Accord with Modern Principles (i) Flexibility (a) Assets over Which Security can be Taken, Including Future Assets A critical part of the common law is the operation of equitable principles,44 which has led to the law of property including both legal and equitable interests.45 The flexibility thus achieved means that many of the restrictions that affect secured transactions law in some countries just do not exist. Under the common law it has been possible to take security over any type of asset, whether tangible or intangible, as long as it counted as ‘property’. It has also been possible to give security over future assets, which do not exist or are not owned by the grantor at the time the security interest is created,46 and for the subject matter of the security interest to be described in generic terms. The development of the floating charge enables companies to grant security over

42 See, eg s 2 of the discussion paper written by the author for the UK Secured Transactions Law Reform Project at stlrp. files.wordpress.com/2017/01/gullifer-registration.pdf. 43 See, eg the introduction to the draft Secured Transactions Code produced by the Financial law Committee of the City of London Law Society (CLLS Code), www.citysolicitors.org.uk/storage/2020/03/Secured-Transaction-Code-an d-Commentary-discussion-draft-March-2020.pdf. 44 For an account of the history of the two strands of law and equity, the administration of which was merged in the Judicature Act of 1873, see J Hackney, Understanding Equity and Trusts (London, Fontana Press, 1987) 32. 45 Tinsley v Milligan [1994] 1 AC 340 (HL) 371 (Lord Browne-Wilkinson). 46 This ability is limited for individual debtors and non-corporate businesses: see below.

Secured Transactions Law Reform in Common Law Jurisdictions 321 circulating assets, that is, assets which are disposed of in the ordinary course of business. The upshot of this liberal approach means that it is possible for a corporate grantor to grant security over all its assets, and, in tandem with a creditor-friendly insolvency regime, for a secured creditor to enforce its security by realising the value of the business as a going concern, thus capturing extra value for itself and other creditors.47 The features outlined here are all in accord with modern principles of secured transactions law. In English law they date from, at least, the nineteenth century, with the result that they have been incorporated into the law of other common law jurisdictions. For example, in the case of Holroyd v Marshall in 1862,48 the House of Lords confirmed that, in equity, it was possible to take security over future property. In that case, the owner of a mill granted a security interest over his machinery, with liberty to substitute new machinery, which would then itself become subject to the security interest. Despite the fact that, at law, further conduct would have been required to create a security interest over the substitute machinery, the House of Lords held that, in equity, the security interest attached to the new machinery from the moment that it was acquired by the mill owner, and that the priority of the secured creditor’s interest over the new machinery dated from the moment of the grant of the original security interest (rather than the moment when the new machinery was acquired) which meant that it had priority over the claims of an creditor who completed execution after that moment of grant. Further, in the case of Tailby v Official Receiver in 1888,49 the House of Lords confirmed that the most generic of descriptions was sufficient in order to identify the assets which were the subject of a security interest, and that a description which included future assets was permissible provided that it was possible to ascertain whether an assert fell within the description once it had been acquired by the grantor. The floating charge developed in the later nineteenth century in the course of a series of cases concerning charges over the entire undertaking of companies, in which the courts found an express or implied power to dispose of the charged property absolutely or by way of security in the ordinary course of business of the company.50 The only limitation on these liberal rules comes from the Bills of Sale Acts (which, as can be seen from the case of Brunei, are typically replicated in the legislation of common law jurisdictions). As mentioned above, the effect of s 5 of the 1882 Act is that an individual or noncorporate business cannot give effective security over future tangible assets, except crops to be grown, and substitute machinery.51 However, this limit only applies to tangible assets and a noncorporate business, for example, can give security over, or make an absolute assignment of, all its receivables.52 Such a business could not, though, give a floating charge over all its assets, something which is possible in reformed systems since incorporated and unincorporated businesses are generally treated the same.53 47 See, further, P Wood, Comparative Law of Security Interests and Title Finance, 3rd edn (London, Sweet & Maxwell, 2019) para 8.08. 48 Holroyd v Marshall (1862) 10 HL Cas 191. 49 Tailby v Official Receiver (1888) 13 App Cas 523. 50 Re Panama, New Zealand and Australian Royal Mail Company (1870) 5 Ch App 318, 322, CA; Re General South American Company (1875) 2 Ch D 337; Re Florence Land and Public Works Company (1878) 10 Ch D 530, 546, CA; Re Hamilton’s Windsor Ironworks ex p Pitman & Edwards (1879) 12 Ch D 707; Wheatley v Silkstone and Haugh Moor Coal Co (1885) 29 Ch D 715; Cox Moore v Peruvian Corporation Ltd [1908] 1 Ch 604. 51 This exception is found in the Bills of Sale (Amendment) Act 1882, s 6. See also Brunei Bills of Sale Act 1984, ss 6 and 7. 52 In English law such an assignment is registrable in the Bills of Sale Register under s 344(2) of the UK Insolvency Act 1986. 53 In the Brunei STO, a ‘debtor’ against whom a security interest can be registered can be an individual, an unregistered company or a registered company (s 45). See also ch 18 (Pakistan) IV E fn 97 (a non-corporate entity can create and register a floating charge).

322 Louise Gullifer (b) Lack of Formalities Another aspect of the flexibility of the common law (and, in particular, the application of equitable principles) is the lack of formalities required to create a security interest. It is possible (if not desirable) to create a charge without a written agreement,54 and an effective assignment of choses in action is possible without notice to the obligor,55 thus making non-notification receivables financing easily possible.

(ii) Extra-judicial Enforcement There are two other important features of the common law which accord with modern principles of secured transactions law. The first is that it is possible to enforce non-possessory security interests extra-judicially.56 Although only a legal mortgagee57 has the right under the general law to take possession of the mortgaged assets on default,58 a provision in an equitable mortgage or a charge giving such a right is valid and enforceable.59 The same analysis applies to a right of sale once possession is taken.60 Moreover, a contractual provision giving the right to appoint a receiver is enforceable, and this is typically included although a limited right also arises under the general law.61 Moreover, other devices which have the function of security, such as retention of title sales and leases, will also include enforceable contractual provisions enabling extra-judicial enforcement.62 Enforcement of both these types of interest and ‘true’ security interests is potentially subject to a stay if the debtor is in certain types of insolvency proceedings,63 but this is itself a feature of best practice in insolvency law. The ability of a secured creditor to enforce out of court is a critical aspect of the modern principles.64 The common law does, however, include protection for the debtor in that the enforcing creditor is under certain duties when enforcing ‘true’ security interests, which have been established largely through a series of cases.65 Thus, it is obliged to act in good faith at all times and, once it has decided to sell (or realise the value of) the collateral, it owes an equitable duty to interested parties to take reasonable care to obtain the true market

54 This has always been the law. It was recently confirmed in the registration regime introduced in 2013, which included provisions dealing with the situation where there is no instrument creating or evidencing the charge: see, in particular, UK Companies Act 2006, ss 859D(3) and 859E(1). 55 Donaldson v Donaldson (1854) Kay 711, 719; 69 ER 303, 307; Holt v Heatherfield Trust Ltd [1942] 2 KB 1 (KBD), 4. 56 For detailed discussion, see Beale et al (n 12) ch 18. 57 That is, a creditor to whom legal title is transferred by way of mortgage. 58 Johnson v Diprose [1893] 1 QB 512. In fact, the right exists even in the absence of default (Four-Maids Ltd v Dudley Marshall (Properties) Ltd [1957] Ch 317, 320) but the mortgage agreement will usually modify this right so that it only arises on default (Birmingham Citizens Permanent Building Society v Caunt [1962] Ch 883). 59 See Beale et al (n 12) para 18.35. This is subject to some statutory restrictions in relation to non-corporate grantors in the UK Bills of Sale Acts and the UK Consumer Credit Act. 60 Re Morritt (1886) LR 18 QBD 222, 233 (general common law); UK Law of Property Act 1925, s 101 (when the mortgage or charge is made by deed); an express power of sale is enforceable providing that the mortgagor’s right to redeem is respected (Fletcher and Campbell v City Marine Finance Ltd [1968] 2 Lloyds Rep 520) and subject to the statutory restrictions mentioned in the previous footnote. 61 UK Law of Property Act 1925, s 101(1)(iii), when the mortgage or charge is made by deed. 62 See Beale et al (n 12) ch 19. 63 For example, if a company enters into administration, a moratorium on enforcement of security interests and titlefinancing devices is imposed: see UK Insolvency Act 1986, sch B1, para 43. The position is similar if the directors of a small company propose a voluntary arrangement: see UK Insolvency Act 1986, sch A1, para 12. 64 See ch 2 II. 65 For detailed discussion, see Beale et al (n 12) ch 18. See also, in particular, Cuckmere Brick Co v Mutual Finance Ltd [1971] Ch 949; Medforth v Blake [1999] EWCA Civ 1482, [2000] Ch 86; Downsview Nominees Ltd v First City Corporation Ltd [1993] AC 295.

Secured Transactions Law Reform in Common Law Jurisdictions 323 value of (or a ‘proper price’ for) the encumbered asset.66 Similar protections will be included in a reformed scheme.67

(iii) Freedom of Contract The second feature is that the common law generally favours freedom of contract. This means, in the context of secured transactions law, that most of the rules are subject to party autonomy, thus permitting priority agreements, agreements about enforcement and other tailor-made arrangements. General freedom of contract is also a feature of the modern principles.68 This feature, however, can cut both ways. Freedom of contract is often used to justify the inclusion of antiassignment clauses in agreement giving rise to receivables, and can, on occasion, be cited as a reason for not including an override of such clauses in reformed secured transactions law.69

C. Features of the Common Law which need to be Changed to Accord with the Modern Principles (i) Introduction The substantive changes that need to be made to a common law system to accord with modern principles of secured transactions law are largely structural. In other words, they relate to where rules are to be found, and to what persons and transactions those rules are to be applied, rather than to the content of the rules themselves. Of course, in some particular cases this may lead to a different substantive result than under the current common law, in which case, the changes cannot be said to be merely structural. Moreover, when reforming an area of law, detailed changes are often as important in practice as broad changes, since they affect particular interest groups or raise particular policy issues. It is not possible to deal with all such matters of detail in this chapter, which is therefore not exhaustive, although the main areas are discussed and many examples are given.

(ii) Codification in a Single Statute The first major change required if a common law jurisdiction reforms its secured transactions law is that the law is codified in single statute covering all aspects of secured transactions law.70 The Brunei Secured Transactions Order is an example of such codification.71 Typically, as described above,72 pre-reform common law will be a mixture of case law and statute law, 66 However, the mandatory application of these protections to devices based on retention of title under a functional system would be a change from the common law: see IV C (iii) below. 67 See V C below. 68 See ch 2 II. See also, eg Art 3 of the UNCITRAL Model Law which permits variation of the provisions of that law, with the exception of Arts 4, 6, 9, 53, 54, 72, para 3, and 85–107 (these latter provisions relate to conflict of laws and transitional provisions). 69 See ch 18 (Pakistan) IV F. For discussion of this aspect of reform, see IV C (vi) below. 70 Typically, this will be creation of a security interest, perfection and rules about registration), priorities and enforcement, as well as rules about the rights and obligations of the parties before enforcement, conflict of laws and transitional provisions. Most reformed national laws and the UNCITRAL Model Law follow this scheme. 71 However, even the STO is not a complete codification, since not all previous relevant statutes have been repealed: see II B above. 72 See IV A.

324 Louise Gullifer with the statute law largely concerned with the registration system. There will be at least two statutes, one dealing with security interests created by companies, and one with security interests created by individuals and non-corporate businesses. Modern secured transactions systems include the law relating to security interests created by all these entities (including consumers) in one statute, so that the basic regime is the same for all types of grantors,73 although there can be some differences in relation to consumers: the detail of this tends to vary from state to state.74 The result of including all grantors in one regime will be that the rigid formal requirements of the Bills of Sale Acts in relation to security interests created by non-corporate debtors will no longer apply. Moreover, such debtors will be able to create security interests over future property without restriction,75 and security interests over intangibles created by such debtors will be registrable. The codification of secured transactions law also has the purpose of making the law simpler and more accessible, particularly to those who are not familiar with, or highly trained in, the common law case law method. This is a laudable and, to some extent, achievable aim, although it has to be remembered that, in a common law jurisdiction at least, any statute is likely to be the subject of cases interpreting its provisions, and so an overlay of case law is not entirely avoidable.76

(iii) Functional Approach The next major change is that the codified scheme will apply to all proprietary interests which have the function of securing an obligation, irrespective of the label put on them by the parties and irrespective of the location of title. This is often called the functional approach.77 The effect of such an approach in a common law jurisdiction is twofold. First, the different types of consensual security interest (pledge, lien, mortgage (whether legal or equitable78) and charge, whether fixed or floating) are all treated alike, although possession is usually an alternative means of perfection to registration,79 so that the result is similar to the creation of a pledge 73 See, eg UNCITRAL Model Law, Art 2(o) (definition of ‘grantor’) and Model Registry Provisions, Art 9 (which makes it clear that a grantor can be a natural or legal person). 74 One common example is to prohibit the creation of a security interest in after-acquired property by a consumer (see NZPPSA, s 44) or to require specific written consent for such an interest (s 14 of the Brunei STO; Zambian Movable Property (Security Interest) Act, s 37). Some states require the specific description of collateral that is consumer goods (Zambian Movable Property (Security Interest) Act, s 35(3); SPPSA, s 10(3)). Another example is that there is often compulsory discharge of a registration against consumer goods once the debt has been paid (see Brunei STO, s 56; NZPPSA, s 161). Another example is that, in some jurisdictions, buyers of low value consumer goods take free from all security interests (NZPPSA, ss 54–55; see also Art 34(9) of the Model Law, which applies to security rights in consumer goods which have been perfected ‘automatically’, ie without registration under Art 24). There are also often different priority requirements for acquisition security interests in consumer goods (see UNCITRAL Model Law, Art 38; Philippines PPSA, s 23; NZPPSA, s 37). The rules on enforcement of a security interest against a consumer debtor may differ in some respects from the general rules on enforcement. Most states will also have consumer protection legislation which is typically separate from a Secured Transactions statute, which will often contain particular rules on enforcing security interests against consumer goods (see, eg NZPPA, pt 9 of which does not apply where the collateral is consumer goods; see also APPSA, s 119 which is to the same effect). 75 Although consideration could be given to restricting a consumer’s ability to give security over all his assets, or to give security over future assets without new lending being given: see NZPPSA, s 44; CLLS Code (n 43) s 22.2. 76 See, eg the body of case law which has built up in New Zealand and Australia since the reforms in those countries. There is also extensive secured transactions caselaw in Canada and the US. 77 UNCITRAL Legislative Guide ch 1, paras 110–12. 78 For the difference between a legal and an equitable mortgage, see Beale et al (n 12) paras 6.05–6.16. A charge over personal property is always equitable: see Beale et al (n 12) para 6.17. 79 See UNCITRAL Model Law, Art 18(2); Brunei STO, s 12(i)(b)(ii); ch 10 (Philippines) III C. Pakistan does not permit perfection by possession except for security interests created by companies: see ch 18 (Pakistan) IV C.

Secured Transactions Law Reform in Common Law Jurisdictions 325 under the common law. The distinction between legal and equitable security interests will also disappear.80 The consequences of treating all these interests in the same way are partly conceptual (for example, the difference between a mortgage, a transfer of title, and a charge, an encumbrance, disappear81) and partly practical. One example of the practical differences is that the same methods of enforcement and resulting rules apply to all types of interest.82 Another is that the priority rules will no longer depend on whether an interest is legal or equitable. A third is that any statutory provision which is triggered by the nature of an interest (such as a charge being a floating charge) will require redrafting. This particular point is discussed below. Secondly, devices involving retention of title, such as hire-purchase agreements, finance leases and sales on retention of title terms are included in the codified scheme. Some ramifications of this are a matter of mere ‘translation’ and will not involve substantive change.83 However, there would be some substantive change. The first is that the creditor’s interest resulting from this transaction would be registrable,84 with the sanction for non-registration of invalidity against other creditors and on insolvency.85 The second is that the same enforcement rules would apply to such interests as to ‘true’ security interests. Thus, the protections for the debtor mentioned above would apply, while under the common law there is no duty to act in good faith, for example, when enforcing a lease or a retention of title (ROT) interest.86 Moreover, there would be a duty to account for any surplus value in the encumbered asset, either to the debtor or to a junior secured creditor.87 This is not the case under the common law, although a contractual obligation to account is often included in leases and other retention of title devices.88 As well as including interests which have the same function as security interests and which are treated as such, a reformed system typically includes other interests for the purposes of registration and priority rules, but to which the enforcement rules (or at least some of them) do not apply. Outright assignments of receivables will be included for these purposes, but on enforcement there is no obligation to account for surplus value. This inclusion may not make much practical difference to receivables financiers in some jurisdictions, particularly in relation to nonnotification financing, since security interests are often taken (and registered) in addition to the outright assignments.89 Some, but not all, reformed systems also include long term operating leases and consignments for the limited purposes of registration and priority rules.90

80 See V B below. 81 The practical import of this distinction has for many years been close to zero: see Beale et al (n 12) paras 6.52–6.65. 82 It should, however, be noted that in many common law jurisdictions the differences in practice between enforcing a mortgage and other security interests are often negligible, since parties will provide for extensive enforcement rights in the security agreement. However, it is not possible for a charge or a pledge agreement to provide for foreclosure: see Tennant v Trenchard (1869) Law Rep 4 Ch 537, 543; Re Owen [1894] 3 Ch 220; Beale et al (n 12) para 5.09. 83 See IV D below. 84 It should be noted that, in relation to ROT sales of inventory, under the common law any interest in the products or proceeds of the inventory sold is characterised as a (registrable) charge: see Borden (UK) Ltd v Scottish Timber Products Ltd [1981] Ch 25; Compaq Computer Ltd v Abercorn Group Ltd [1991] BCC 484. 85 In New Zealand and Brunei (which adopted the New Zealand model) an unregistered security interest is not void on the insolvency of the debtor: see V E below. 86 Although some elements of protection for the debtor are observable in the doctrine of relief against forfeiture: see Beale et al (n 12) ch 19. 87 Also, if the enforcement yields less than the amount of the secured obligation, the balance remains payable. 88 See Beale et al (n 12) para 19.12. The application of the rules against forfeiture can sometimes lead to a similar result, but the law is very uncertain: see Beale et al (n 12) paras 19.16, 19.28, and 19.36. Under English law, consumers are given considerable protection under the Consumer Credit Act 1974. 89 See E Wilde, Legal Aspects of Invoice Finance, 2nd edn (UK Finance Ltd, 2019) ch 7. See also that a similar position exists in Thailand: see ch 13 IV B (ii). 90 See, eg Brunei STO, s 2(1)(b)(iv); APPSA, s 13.

326 Louise Gullifer

(iv) Registration Another major change is in the manner and details of registration. The traditional common law approach, which is the case in most unreformed common law jurisdictions, is that there is a statutory list of registrable charges which must be registered within a certain period (for example, 21 days) of creation of the charge by registering particulars of the charge. These particulars will be checked by the Registrar against the original charge document, if there is one, which will then be returned to the registering party.91 This regime was changed to some extent in the UK in 2013 so that all charges not exempt are registrable, the charge instrument itself is registered in addition to particulars and electronic registration was made easier.92 In a reformed system, however, there would be three main differences from the common law system. First, registration could take place at any time: in advance of creation of an interest or at any time after an interest had been created. The time limit would disappear.93 Secondly, only a ‘notice’ would be registrable, including minimal information such as the name of the grantor, the name of the creditor and the encumbered assets.94 Thirdly, only one notice is required to be registered for any number of security interests created by the grantor in favour of the secured creditor.95

(v) Priority A further change is that the basic priority rules under the common law, which are based on the principle of nemo dat quod non habet (or, in the context of security interests, priority for the first in time to be created), plus some exceptions,96 would be changed to the basic rule of ‘first to file or perfect’. Thus, for interests perfected by registration, priority would be based on the date of the registration,97 justified by the fact that once an interest is registered, other parties taking an interest know about it and are in a position to adjust their position in light of that knowledge. This change, however, is more cosmetic than substantive. Even under the common law system, priority tends in fact to depend on date of registration, in that a creditor taking security will usually search the register and will therefore take subject to any previously registered interest since they will have notice of it.98 Moreover, though in theory there is a period of invisibility 91 This was the regime in the UK before 2013. 92 The UK system now resembles, at least in part, the document filing system of the civil law: see ch 6 IV D, but without any checking of the document which is registered by a notary or by the Registrar. 93 See ch 6 IV D, where the options for advance registration open to a civil law jurisdiction are discussed. 94 See, eg Brunei STO, s 45(1); UNCITRAL Model Law Registry Provisions, Art 8. As seen from subparagraphs (d) and (e) of that article, some systems may also require a period of effectiveness of the notice, and/or a statement of the maximum amount for which the security right can be enforced. 95 See, eg Brunei STO, s 47(3); UNCITRAL Model Law Registry Provisions, Art 3. 96 One of the main exceptions is that a bona fide purchaser (acquirer for value) of a legal interest in an asset without notice of a previous equitable interest takes free of that equitable interest: see Pilcher v Rawlins (1872) LR 7 ChApp 259, 268–69; Heath v Crealock (1874) LR 10 ChApp 22, 29–30; Joseph v Lyons (1884) 15 QBD 280, 287; Hallas v Robinson (1885) 15 QBD 288, 292–93; Taylor v London & County Banking Co [1901] 2 Ch 231, 256. 97 For interests perfected other than by registration, such as by the taking of possession, the priority point is the date of taking possession or the creation of the security interest, whichever is later. 98 This would be the case even if the second interest were legal and the first were equitable, since the party taking the legal security interest would not be a bona fide purchaser for value without notice (see n 96). Furthermore, in the unusual situation where the second charge was fixed and the first floating, the second chargee would be very likely to have notice of a negative pledge clause in the first charge, which would have been included in the registered particulars, even if this were not compulsory (as it is, now, under UK Law: see UK Companies Act 2006, s 859D(2)(c)).

Secured Transactions Law Reform in Common Law Jurisdictions 327 between when an interest is created and when it is registered during which another interest could be created which would take subject to the first interest, at least where electronic registration is possible the first interest tends to be registered quickly. In addition, the first creditor may well not advance funds until after the time period has expired and it has checked that there is no other interest registered: if there is, it will just refuse to advance the funds (on the grounds that the warranty that there is no other competing interest has been breached) and will terminate the loan contract.

(vi) Anti-assignment Clause Override Free assignability of receivables is one of the tenets of the Modern Principles.99 It has been seen as an article of faith right from the beginning of the history of reformed law,100 but in fact the arguments in favour of an override are often practical: if a financier cannot be sure that an assignment will be effective so that it will have a property right effective against third parties (such as the insolvency officer of the assignor) and enforceable rights against the account debtor, it will be less likely to advance finance on the basis of the assignment.101 Another concern, which may be more important in some jurisdictions than others, is that financiers would have to examine all contracts giving rise to the receivables to see if they contained anti-assignment clauses.102 In order to ameliorate these concerns, a provision overriding clauses prohibiting or restricting assignment has been included in many reforming statutes in the common law world,103 but by no means all. Such a provision is not included in the New Zealand legislation, nor the Brunei statute which mirrors it. Overriding anti-assignment clauses can be seen as clashing with the common law principle of freedom of contract,104 and there is a delicate balance to be drawn between this principle and that of free alienability.105 Pakistan made a deliberate decision not to include this provision, on the grounds of freedom of contract.106 A limited override was introduced in the UK, targeting just receivables owed to SMEs,107 since the problems were mainly encountered in the area of SME finance.

99 See ch 2 IV B (vi). 100 Grant Gilmore, who was one of the original drafters of UCC Art 9, described the view in favour of the unrestricted and unrestrictable alienability of contract rights as ‘so fundamental an order [that] belief is instinctive and irrational, not logical and reasoned’: G Gilmore, Security Interests in Personal Property (Boston, Little, Brown & Co, 1965) 212, para 7.6. 101 See L Gullifer, H Beale and S Paterson, ‘A Case for Interfering with Freedom of Contract? An Empirically-Informed Study of Bans on Assignment’ (2016) 3 Journal of Business Law 203. 102 This is not a concern in the UK, for example: see ibid 219. 103 UCC, Art 9-406(d); the Canadian PPSAs, eg SPPSA, s 41(9); APPSA, s 81; Security Interests (Jersey) Law 2012, s 39; Zambia Movable Property (Security Interests) Act 2016, s 42; Nigeria Secured Transactions in Movable Property Act 2017, s 4(2)(b); Zimbabwe Movable Property Security Interests Act 2017, Second Schedule, para 4; Ghana Borrowers and Lenders Bill (the result of a review of the Borrowers and Lenders Act 2008), s 7. In Asia, the Bangladesh draft Act includes an override (s 65(9)). See also the international models: UNCITRAL Model Law, Art 13; UNCITRAL Convention on the Assignment of Receivables in International Trade, Art 11; European Bank for Reconstruction and Development Model Law, Art 5.4; Organization of American States Model Inter-American Law, Art 19. 104 See IV B (iii). 105 See L Gullifer, ‘Should Clauses Prohibiting Assignment Be Overridden by Statute?’ in L Gullifer and O Akseli (eds), Secured Transactions Law Reform: Principles, Policies and Practice (Oxford, Hart Publishing, 2016) 321. 106 See ch 18 (Pakistan) IV F. Preserving freedom of contract was also the reason for the non-inclusion of such a provision in the NZPPSA: see R Cuming, M Gedye and R Wood, Personal Property Securities in New Zealand (Thomson Brookers, Wellington, 2002) 183. See also below V E. 107 The Business Contract Terms (Assignment of Receivables) Regulations 2018.

328 Louise Gullifer

D. Areas of the Common Law which need ‘Translation’ In many areas, the substantive result of the introduction of reforms is not very different from the result under the application of the common law, but the conceptual structure and reasoning is quite different.

(i) The Floating Charge Perhaps the most obvious example of this phenomenon is the floating charge. Under the common law, this is a security interest that a chargor can grant over its present and future assets while retaining the ability to dispose of those assets in the ordinary course of business.108 While not limited to particular types of assets, it enables a grantor to give security over circulating assets, and therefore over all the assets of the business. The ability to dispose of charged assets enables the grantor to carry on its business and does not impede ordinary commerce. These effects of the floating charge are replicated in a reformed system in three ways. First, a security interest can be taken over present and future assets, and assets need only be identified generically.109 Second, the secured creditor can authorise the disposal of encumbered assets (in advance or specifically) in which case the disponee takes free of the security interest.110 Third, buyers of goods in the ordinary course of business,111 and transferees of money and money equivalents (such as funds in a bank account or negotiable instruments), take free of security interests, provided that they do not know that the disposition is in breach of the security agreement.112 Under the common law, a buyer of goods, or a transferee of money, in the ordinary course of business will usually take free of a charge for two reasons. One is that the charge is floating, so the grantor has the ability to dispose of the asset without the consent of the chargee, and the other is that the acquirer is a bona fide purchaser of the legal interest in the asset without notice of the prior equitable charge, and thus takes free under the normal priority rules.113 The second reason will not, however, work if the security interest is not a charge but is a legal mortgage unless the asset is money, in which case the rule in Miller v Race114 will enable the transferee to take free. These complicated rules are replaced in a reformed system with the simpler statutory provisions set out above.115 108 See IV B (i)(a) above. 109 See, eg Brunei STO, s 11(1)(a); UNCITRAL Model Law, Art 9(2). 110 See, eg Brunei STO, ss 38, 39 and 44; UNCITRAL Model Law, Art 34(2) and (3). See also The Royal Bank of Canada v Sparrow Electric Corp [1997] 1 SCR 411 (Canada). 111 This can be extended to lessees of goods and licensees of intellectual property. 112 See, eg Brunei STO, ss 38, 39 and 44; UNCITRAL Model Law, Arts 34(4)(5)(6), 47(6) and 48. See also APPSA, s 32; Warehouse Sales Pty Ltd & Lewis and Templeton v LG Electronics Australia Pty Ltd [2014] VSC 644 [39], which confirms that this section replicates the position previously held by the floating charge. While ‘knowledge’ typically means actual knowledge (see UNCITRAL Model Law, Art 2(r)), this is not always the case: see the table of the differences in the level knowledge in various sections of the APPSA in Whittaker (n 1) 281. 113 See n 96 above. 114 Miller v Race (1758) 1 Burr 452, 457–58. 115 In some jurisdictions, the courts have made it clear that the reformed scheme makes the concept of the floating charge redundant: see Hamersley Iron Pty Ltd v Forge Group Power Pty Ltd [2018] WASCA 1634 [60] (Australia); Commissioner of Inland Revenue v Stiassny [2013] NZLR 140 [55]; The Royal Bank of Canada v Sparrow Electric Corp [1997] 1 SCR 411 (Canada) (where a PPSA security interest over inventory was said to have the character of a fixed charge subject to a licence to sell the encumbered assets [53]). Other reformed jurisdictions have overtly kept the concept of the floating charge, albeit including it within the definition of ‘security interest’: see ch 18 (Pakistan) IV A, D and E (consideration is currently being given to doing away with the distinction between fixed and floating charges, as discussed in ch 18 (Pakistan) V). The same is true of some African jurisdictions: see M Dubovec and L Gullifer, Secured Transactions Law Reform in Africa (Oxford, Hart Publishing, 2019) ch 3 (Ghana), C3 and 4; ch 4 (Kenya), B4; ch 7 (Nigeria), B4 and D1; and ch 9 (Sierra Leone), C6. Zambia, on the other hand, did abolish the floating charge (see ibid ch 8 (Zambia)). The insolvency consequences of retaining the floating charge as a separate concept are examined in V D below.

Secured Transactions Law Reform in Common Law Jurisdictions 329

(ii) Priority Rules Relating to Retention of Title Devices Another area in need of ‘translation’ is that of the priority rules in relation to retention of title devices (such as ROT sales, leases, hire purchase agreements116). Where, under the common law, ownership in goods is retained by a financier, that party has full legal ownership. The goods therefore are not part of the assets of the party being financed (the debtor) at all. Any interests granted by the debtor, even over future property, cannot apply to those goods until ownership passes to the debtor, which will only happen when the obligation due to the financier is paid. Therefore, the financier retaining title will have priority over all other security interests created by the grantor in its assets. Since the retention of title interest is treated as a security interest in a reformed scheme, irrespective of the location of title agreed by the parties, the financier will not, as a matter of course, have priority over earlier registered interests. However, a reformed scheme includes a special priority rule for such a financier, known as the superpriority of a ‘purchase money security interest’ (PMSI), whereby, when certain conditions are fulfilled,117 the PMSI financier has priority over all other security interests in the asset, such as security interests over after-acquired property.118 This is for good policy reasons: without such a special rule, there would be no incentive for financiers other than the first lender to advance money to the grantor, since the first lender would have priority over all other interests, and, moreover, it is justifiable to give the second financier priority since the asset it has financed has swelled the assets of the grantor, so the first lender is no worse off by ceding priority.119 This special rule is an exception to the ‘first to file or perfect’ priority rule, and gives the purchase money financier priority only in relation to the financed goods, plus (usually) their products and proceeds.120 In relation to the goods themselves, there is no change from the common law, because of the analysis set out above, although in a common law system a financier is often permitted to retain title until all monies due from the debtor are paid,121 and in many reformed systems the superpriority only extends to the obligation to pay the purchase money itself.122 In relation to proceeds and products of the acquired goods, any interest under the common law would be a registrable charge without any superpriority,123 and would be unlikely to be registered since this would require registration of every sales contract under the common law registration scheme.

116 See IV C (iii) above. 117 These typically include not only registration of the PMSI within a certain period of the acquiring grantor taking possession of the asset (see Brunei STO, s 26) but, in some cases, notification of previously registered secured creditors (see, eg UNCITRAL Model Law, Art 38). 118 See Brunei STO, s 26. Under the UNCITRAL Model Law it is known as an ‘acquisition security right’ (see Art 2(b)), and the priority rules are set out in Arts 38–42. See also ch 16 (Bangladesh) V F, ch 18 (Pakistan) IV E, as well as the discussion in ch 20 IV A (i) (b). 119 For a more detailed analysis of the policy reasons underlying the superpriority of purchase money security interests, see C Walsh, ‘The Floating Charges is Dead: Long Live the Floating Charge’ in A Mugasha (ed), Perspectives in Commercial Law (London, Prospect Publishing, 2000) 129, 134; R Boadle, ‘A Purchase Money Security Interest in UK Law?’ [2015] Lloyd’s Maritime and Commercial Law Quarterly 76. 120 See, eg Brunei STO, s 26; UNCITRAL Model Law, Arts 38, 41 and 42. 121 Armour v Thyssen Edelstahlwerke AG [1991] 1 AC 339. 122 See, eg the SPPSA, s 2(1)(jj) and other Canadian PPSAs; APPSA, s 14; NZPPSA, s 16(1); Brunei STO, s 3; UNCITRAL Model Law, Art 2(b). An extension in relation to other obligations is sometimes included in relation to inventory ( fungible goods): see UCC, Art 9-103(B)(2). See also the recommendations in Whittaker (n 1) para 7.7.8.5.3. A similar effect may be able to be achieved by provision in the sale agreement for allocation of payments: see B Brown and J Sampson, ‘Retention of Title under New Zealand’s Personal Property Securities Act 1999’ [2002] Journal of International Banking Law 102, 105. 123 Any interest in products or proceeds created by the agreement between the parties would be created by grant, and, so as not to provide a windfall to the seller, would be limited to amount of the unpaid price of the goods. These attributes have led to the interest being characterised as a (registrable) charge: Borden (UK) Ltd v Scottish Timber Products [1981]

330 Louise Gullifer Under a reformed scheme, such an interest is more likely to be registered (because one registration of a notice can apply to all interests created by the grantor in favour of the secured creditor124) and, in any event, most schemes provide for a security interest to extend automatically to proceeds or products. Moreover, the ROT financier’s interest would have superpriority as a purchase money security interest. This is a substantive change to the common law position, and changes the balance of priority, in particular, in relation to receivables financiers, who would, under the common law position, have an unchallenged priority to the receivables which make up the proceeds of the inventory.125 For this reason, many reformed systems have an exception to the superpriority rule in relation to receivables that are proceeds of inventory subject to a purchase money security interest. Instead of the PMSI financier obtaining priority over a prior receivables financier, the relevant priority rule is ‘first to file’.126 This change has the effect that where a receivables financier enters into a financing transaction with the grantor, it will search the registry, and will attempt to enter into priority agreements with any PMSI financier who has already registered,127 but will have priority over all subsequent PMSI financiers.

V. Other Challenges A. Introduction This section considers some examples of other challenges that arise when a common law system of secured transactions is reformed. Again, this is not exhaustive, but indicative of particular types of challenges, and includes examples of how these have been overcome in Brunei and other reformed jurisdictions.

B. Legal and Equitable Interests128 It is important that reformed secured transactions law forms a coherent whole with the rest of the law of a state. In common law jurisdictions, one challenge is to make the new law, which, because of the functional approach, abolishes the distinction between legal and equitable

Ch 25, 44, 46; Clough Mill Ltd v Martin [1985] 1 WLR 111, 124, 126; In re Peachdart Ltd [1984] Ch 131, 143; New Zealand Ltd v Agnew [1998] 2 NZLR 129 (all cases on products); E Pfeiffer Weinkellerei-Weineinkauf GmbH & Co v Arbuthnot Factors Ltd [1988] 1 WLR 150; Compaq Computer Ltd v Abercorn Group Ltd [1993] BCLC 602; Polymer Systems (1999) Ltd v Montgomerie [2002] 3 NZLR 383; cf Associated Alloys Pty Ltd v ACN 001 452 106 Pty Limited (2000) 202 CLR 588 (a case on the unusual wording of a particular clause). 124 See IV C (iv) above. 125 This is because the ROT seller’s interest in the proceeds is extremely likely to be an unregistered charge. There is an argument, which has not been tested in the courts, that although UK Companies Act 2006, s 859H(3) provides that an unregistered charge is void against a liquidator, administrator and creditors, it does not mention an outright purchaser of the charged asset, such as a receivables financier, and so the charge is not void against such a person. This argument was not made in Pfeiffer Weinkellerei-Weineinkauf GmbH & Co v Arbuthnot Factors Ltd [1988] 1 WLR 150, where it might have succeeded (see Beale et al (n 12) para 14.17). 126 See, eg Brunei STO, s 27; NZPPSA, s 75A; SPPSA, s 34(8); APPSA, s 64, which modifies this rule by permitting the receivables financier to obtain priority by giving notice to a PMSI holder who has already registered. 127 It should be borne in mind that the PMSI financier only has to register once to cover all ROT agreements in the future with the grantor. 128 I am extremely grateful to Antony Duggan for his help and advice in relation to the Canadian law discussed in this section.

Secured Transactions Law Reform in Common Law Jurisdictions 331 security interests,129 fit with the rest of the law where this distinction still remains. The main area of intersection is the application of priority rules between security interests (as defined by the reformed legislation as any interest performing the function of security) and absolute interests which are not security interests. Under the common law, these priority issues are governed by the normal priority rules, which, although based on the nemo dat/first in time principle130 include the exception that a bona fide purchaser of the legal interest without notice takes priority over an earlier equitable interest.131 In a reformed system, the priority position between security interests and many absolute interests is covered by the priority rules in the secured transactions legislation, including the ‘taking free’ rules mentioned above.132 If a security interest is created in an asset and a third party subsequently acquires a legal absolute interest, (that is, legal ownership) in that asset, that third party will take subject to the security interest unless taking free under the relevant rule.133 Moreover, if a third party acquires an absolute legal interest in an asset and subsequently the transferor purports to create a security interest in favour of another party in that asset, the security interest will not arise because of the requirement that, to create a security interest, the grantor must have ‘rights in the collateral’.134 Depending on how the secured transactions legislation is drafted, however, not every priority question can be determined by applying these rules. Most reformed systems acknowledge that there are areas of property law outside the scope of the secured transactions legislation.135 This must be the case, for example, in relation to a priority dispute between two absolute interests which are not of the type which are covered within the reformed secured transactions scheme (for example, two consecutive sales of goods). Some priority disputes arising in relation to, on the one hand, an absolute equitable interest or an interest arising non-consensually, and, on the other hand, a security interest, are also usually outside the scope of the secured transactions legislative priority rules and have to be determined according to common law principles.

129 See IV C (iii) above. Under the common law, pledges and liens are legal interests, as are legal mortgages. All other security interests are equitable. 130 See IV C (v) above. 131 ibid. 132 See IV D (i). 133 Under the Brunei STO, the ‘taking free’ rules in relation to goods apply to a buyer (who takes an absolute legal interest in the goods) and a lessee (ss 43 and 44). In relation to other assets, the taking free rules apply to a ‘transferee’ of money (s 38), a creditor receiving payment of a debt through a payment system (s 39) and the ‘purchaser’ of a negotiable instrument, document of title, chattel paper and security certificate (s 40). While these terms clearly cover legal absolute interests, they also potentially cover equitable absolute interests by way of trust. Moreover, ‘transfer’ is defined in s 34 to include the creation of a security interest (although this is qualified by the words ‘in this section’). This drafting exactly follows the wording in the NZPPSA (s 87). 134 See Brunei STO, s 11(1)(c); UNCITRAL Model Law, Art 6(1). cf APPSA, s 19(2) where the requirement relates to attachment rather than to creation (see ch 1 IV A). This analysis does not apply where the absolute interest arises from an outright transfer of receivables, since this is treated as a security interest under the reformed legislation for the purposes of (inter alia) priority. If an absolute transfer is not registered, the transferor has power to create a security interest in (or to transfer) the receivables: if registered first, this second interest will have priority over the first absolute transfer. See Fairbanx Corp v RBC (2010) 319 DLR (4th) 618 (Ontario CA), where the name of a transferor in an absolute transfer was spelt wrongly in its registration, and the court held that a subsequent correctly registered security interest had priority. See also JS Ziegel, DL Denomme and A Duggan, Ontario Personal Property Security Act: Commentary and Analysis, 3rd edn (Toronto, LexisNexis Canada, forthcoming) para 11.4.4; UNCITRAL Guide to Enactment of the Model Law, para 85 (uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/mlst_guide_to_enactment_e.pdf). 135 See, eg APPSA, s 254(1): ‘This Act is not intended to exclude or limit the operation of any of the following laws (a concurrent law), to the extent that the law is capable of operating concurrently with this Act … (c) the general law.’ APPSA, s 10 defines ‘general law’ as ‘the principles and rules of the common law and equity’. See also Ontario PPSA, s 72: ‘Except in so far as they are inconsistent with the express provisions of this Act, the principles of law and equity … shall supplement this Act and shall continue to apply.’

332 Louise Gullifer The Canadian courts have gone furthest in developing a jurisprudence to deal with this type of dispute.136 There have been two contexts, one particularly Canadian and the other more general. First, the Canadians PPSAs are provincial law, while there is a federal scheme for the taking of security in some circumstances by banks, called the Bank Act.137 Until the Bank Act was amended in 2012,138 it did not contain any priority rules governing a priority battle between a Bank Act interest and a prior security interest created under the PPSA.139 The second context is where an equitable interest has been created over an asset (for example, by the grantor declaring a trust over the asset or where a trust has arisen by other, non-consensual, means) and the grantor subsequently grants a security interest over that asset. The first context gave rise to two interesting cases, which, while the policy questions raised have been dealt with by the amendment of the Bank Act, have confirmed the Canadian approach to any priority dispute involving a PPSA security interest and a non-PPSA interest. This approach is that the common law rules of priority apply (nemo dat/first in time with exceptions approach140). In order to apply these common law rules, it is necessary to classify the PPSA interest as either legal or equitable. In the Supreme Court decision of Innovation Credit Union v Bank of Montreal,141 it was held that it was a statutory interest ‘recognized at law’142 as a legal interest,143 but (as any security interest) only ‘to the extent of the debtor’s obligation’.144 That case concerned the grant of an unregistered PPSA security interest over an asset, which was followed by the grant of a Bank Act interest. The nature of the PPSA interest as a legal interest meant that on the application of the common law nemo dat rule,145 the Bank Act interest was subject to the PPSA interest, even though the latter was unregistered.146 The second case, Royal Bank of Canada v Radius Credit Union147 concerned a similar situation, except that in that case both interests were created over ‘future property’ and the assets in question were acquired after the security agreements had been entered into. The Supreme Court again applied a nemo dat/first in time analysis, with the result that the (unregistered) PPSA interest had priority. However, the reasoning, to common law eyes, was quite odd, in that the court recognised that a security interest could be created over future property (which is only possible under the common law where the interest is equitable148) but designated that interest as a ‘statutory interest’,149 relying on the Innovation Credit case, where such an interest was said to be a legal interest. This reasoning is, however, an example of the effect of ‘translation’ of common law concepts into the conceptual structure of reformed law. The beneficial effect of equity in enabling security to be taken over future assets has been captured, not only for the purposes

136 See Innovation Credit Union v Bank of Montreal [2010] SCC 47; Royal Bank of Canada v Radius Credit Union [2010] 3 SCR 38; Bank of Montreal v I Trade Finance Inc [2011] SCC 26. 137 SC 1991, c 46, ss 427 et seq. 138 Financial System Review Act 2012, amending the Bank Act 1991, ss 426(7) and 428(1). 139 The difficulties this context has given rise to are an example of the general point that, when a system is reformed, it is preferable to repeal all conflicting legal systems for the creation, registration and priority of security interests: see VI. 140 See IV C (v) above. 141 [2010] SCC 47. 142 ibid [42]. 143 ibid [51]; Bank of Montreal v I Trade Finance Inc [2011] SCC 26 [61]. 144 Innovation Credit Union v Bank of Montreal [2010] SCC 47 [43]. 145 See IV C (v) above. 146 The amendment to s 428(1) of the Bank Act provides that a Bank Act interest has priority over an earlier unperfected interest unless the bank knew of that interest when it took its own. 147 [2010] 3 SCR 38. 148 See IV B (i) (a) above. 149 Innovation Credit Union v Bank of Montreal [2010] SCC 47; Royal Bank of Canada v Radius Credit Union [2010] 3 SCR 38 [34].

Secured Transactions Law Reform in Common Law Jurisdictions 333 of the reformed system, but also to simplify the interaction between a PPSA interest and other, non PPSA, interests. It would be a very complicated system which treated a PPSA interest as a legal interest where the interest covered only present assets (at the time of creation) and an equitable interest where the interest covered future assets as well. Moreover, given that the latter type of interest is likely to be very common, to classify such an interest as equitable would weaken its status vis a vis interests outside the PPSA scheme in a way that would be inconsistent with its status within the PPSA scheme.150 The case that has arisen in the second context,151 Bank of Montreal v I Trade Finance Inc152 illustrates the application of the traditional common law priority rules to the classification of the PPSA interest as a legal interest. In that case, a trust arose over the asset by operation of law, and a PPSA security interest was subsequently granted in that asset. Despite the grant of the security interest being in breach of trust, the grantor still had ‘rights in the collateral’ and could therefore grant a valid security interest.153 The court held that, as the security interest was a legal interest, the secured creditor had priority as bona fide purchaser without notice of the earlier interest.154 If the first interest had been a legal interest (such as the interest of a buyer), the nemo dat/first in time approach would apply and the first interest would have prevailed.155

C. Good Faith and Commercial Reasonableness There is typically a requirement in reformed secured transactions legislation that the parties act in accordance with good faith and commercial reasonableness.156 Such a wide formulation could be seen as antithetical to the tenets of the common law, in which there is no general concept of good faith or commercial reasonableness, although these concepts do apply in certain situations and underlie many common law (and particularly equitable) doctrines. Take, for example, the common law position in relation to the enforcement of security interests, which has developed largely through case law.157 Thus, while an enforcing secured creditor must act in good faith,158 the concept of good faith is narrow, so that breach of the duty of good faith requires dishonesty or an improper motive and does not include gross negligence,159 and, subject to this limited constraint, a secured creditor is entitled to decide whether and when to sell collateral.160 However, once the 150 As discussed above, a person taking an absolute legal interest in an asset which is already subject to a PPSA interest takes subject to that PPSA interest unless the taking free provisions apply. In this situation, the position mirrors the position of a person taking an absolute legal interest in an asset which is already subject to an equitable security interest in an unreformed common law system. 151 Where an equitable interest has been created over an asset and the grantor subsequently grants a security interest over that asset. 152 [2011] SCC 26. 153 ibid [55]; RCC Cuming, C Walsh and RJ Wood, Personal Property Security Law, 2nd edn (Toronto, Irwin Law, 2012) 514. 154 Bank of Montreal v I Trade Finance Inc [2011] SCC 26 [58]–[67]. 155 Innovation Credit Union v Bank of Montreal [2010] SCC 47 [51]. In this situation, however, it is unlikely that the grantor would have had ‘rights in the collateral’ to create the second security interest unless the asset was tangible, and the grantor had sufficient possessory interest for this to count as ‘rights in the collateral’ (see, eg Sale of Goods Act (Ontario) 1994, s 25(1): where a seller is left in possession of goods after property has passed to the buyer, a security interest under which the secured creditor obtains possession of the goods is as valid as if the buyer had expressly authorised it). 156 See, eg UNCITRAL Model Law, Art 4; APPSA, s 111; SPPSA, s 65(3). 157 See also the discussion in IV B (ii) above. 158 Downsview Nominees Ltd v First City Corporation Ltd [1993] AC 295, 311. 159 Medforth v Blake [1999] EWCA Civ 1482, [2000] Ch 86, 93 (Sir Richard Scott VC), CA (103). 160 Cuckmere Brick Co v Mutual Finance Ltd [1971] Ch 949, 965; Tse Kwong Lam v Wong Chit Sen [1983] 1 WLR 1349, 1355.

334 Louise Gullifer secured creditor does decide to sell the collateral, it owes an equitable duty to interested parties to take reasonable care to obtain the true market value of (or a ‘proper price’ for) the mortgaged property on the date on which it decides to sell;161 a ‘proper price’ being ‘the best price reasonably obtainable is that which the court will have determined could (actually) have been obtained at the time of sale, and in the circumstances then prevailing, if proper steps had been taken’.162 Brunei has taken an interesting approach to this issue. Despite tracking the NZPPSA closely in most respects, there is no equivalent to the New Zealand provision that ‘All rights, duties, or obligations that arise under a security agreement or this Act must be exercised or discharged in good faith and in accordance with reasonable standards of commercial practice’.163 Instead, there are specific provisions in relation to enforcement, which appear to mirror the common law position.164

D. Interaction with Insolvency One of the thorniest issues arising when a common law jurisdiction reforms its secured transactions law is the interaction with insolvency law,165 and, in particular, how to deal with provisions which impose consequences on insolvency if a charge is a floating charge as created. In English law, and in most common law jurisdictions, assets subject to a floating charge are treated rather differently from those subject to other security interests. This was originally because the development of the floating charge permitted security to be taken over all the assets of a business, leaving nothing for other creditors. Certain unsecured creditors were given preferential status, so that they were paid out of floating charge assets in priority to the floating charge holder.166 Moreover, the expenses of the insolvency process are usually payable out of floating charge assets if the unencumbered assets of the business are not enough to cover them. On reform, and the consequential adoption of a functional approach, the distinction between fixed and floating charges is usually abolished or made redundant.167 Usually, the new legislation needs to tackle this issue, and to provide a new test distinguishing between those security interests over whom the preferential creditors and the expenses have priority on the insolvency of the debtor, and those over whom they do not. For example, the Australian PPSA provided that any reference to a floating charge in a statute is now a reference to ‘a security interest that has attached to a circulating asset’.168 The term ‘circulating assets’ is defined by a list of possible types

161 Cuckmere Brick Co v Mutual Finance Ltd [1971] Ch 949, 965, 972, 977. 162 Alpstream AG v PK Airfinance Sarl [2015] EWCA Civ 1318 [249]. 163 NZPPSA, s 25(1). 164 For example, s 68 of the Brunei STO provides that ‘[a] secured party who exercises a power of sale of the collateral under section 66 shall have a duty to obtain the best price reasonably obtainable at the time of sale’. This formulation is very similar to the dictum from the Alpstream case cited in the text to n 162. 165 See ch 2 IV A (iii)(c). 166 Exactly which creditors are preferential creditors varies from jurisdiction to jurisdiction, and has varied from time to time (for example, Crown preference was abolished in the UK in the Enterprise Act 2002, but has been reintroduced to a limited extent in December 2020). 167 Thus, in the Brunei STO, a security interest is defined in s 3(1) as ‘a property right in personal property that is created by agreement and secures payment or other performance of an obligation, regardless of whether the parties have denominated it as a security interest’. But see IV D (i) above and, in particular, n 115, which lists jurisdictions in which the floating charge survives reform. 168 APPSA, s 339(5). There are references to floating charges in Australian statutes other than those dealing with the priority of preferential creditors and expenses, and this is the case in many common law jurisdictions. Subsequent legislation has amended all relevant statutes to include the new definitions of ‘floating charge’, however, so that s 339 is now redundant: see Whittaker (n 1) para 9.3.2.1.

Secured Transactions Law Reform in Common Law Jurisdictions 335 of assets169 but also includes the subject matter of a security interest where ‘the secured party has given the grantor express or implied authority for any transfer of the personal property to be made, in the ordinary course of the grantor’s business, free of the security interest’.170 The drafting is quite complex and there are numerous exceptions to these relatively simple rules. This approach has been the subject of much criticism.171 The NZPPSA did not originally deal with this issue, but later introduced a provision limiting the priority of preferential creditors to security interests over receivables and inventory, but excluding purchase money security interests and transfers of receivables where new value is given.172 Although this formulation seems reasonably simple, it has also given rise to some difficulties, especially in relation to the definition of ‘receivable’.173 This particular issue raises both technical and policy considerations, and the optimal approach is not obvious.174 Unfortunately, however, the nettle has not yet even been grasped in Brunei. Instead, despite the functional approach contained in the STO, the Insolvency Order 2016 still uses the old terminology, and provides that, on winding up of a company, preferential debts ‘shall have priority over the claims of the debenture holders under any floating charge created by the company (which charge, as created, was a floating charge), and shall be paid accordingly out of any property comprised in or subject to that charge’.175 This failure to amend the insolvency law and to bring it into line with the reformed secured transactions law is very unfortunate, and risks perpetrating the unreformed concepts and terminology.176 The dangers of doing this, and the fact that a preferable approach is to abandon the former distinctions in all aspects of secured transactions law, have been pointed out by Canadian, Australian and New Zealand commentators and judges,177 and this sets (and should set) the pattern for reform of secured transactions law in other common law jurisdictions.

E. Use of Models The use of models by a state when reforming its secured transactions law is discussed in the conclusion to this book.178 For a common law jurisdiction, there is the option of using a model from another common law jurisdiction, as an alternative to using a transnational model such as the UNCITRAL Model Law, particularly given the similarities between the existing law in most common law jurisdictions (largely because of the legacy of English law).179 A model must always 169 APPSA, s 340(5). 170 APPSA, s 340(1)(b). 171 See D Turner, ‘Fixed Charges over Receivables and the Personal Property Securities Act’ (2011) 19 Insolvency Law Journal 71. See also the five year review of the Australian Personal Property Securities Act 2009 in which it was recommended that the provisions on ‘circulating assets’ and ‘control’ be replaced with simpler wording similar to the New Zealand provisions: Whittaker (n 1) para 9.2.1. No changes, however, have yet been made. 172 See amended cl 2 of Sch 7 to the UK Companies Act 1993. 173 See Commissioner of Inland Revenue v Northshore Taverns Ltd (in liq) (2008) 23 NZTC 22,074; Strategic Finance Limited v Bridgman [2013] NZCA 357. 174 For a discussion of the wider implications, see S Paterson, ‘The Insolvency Consequences of the Abolition of the Fixed/Floating Charge Distinction’, Secured Transactions Law Reform Project Discussion Paper, https://stlrp.files.wordpress.com/2017/01/paterson-fixed-and-floating-charges.pdf. 175 Insolvency Order 2016, s 147(7). S 30(1) is in similar terms in relation to the taking of possession of a company’s assets by a receiver. 176 For discussion of similar problems in the reformed systems in Africa, see Dubovec and Gullifer (n 115) ch 4 (Kenya), C9. 177 See the judgments cited in n 115 above. 178 See ch 20 III B. 179 For example, in Bangladesh the choice was made to use the Canadian PPSAs (particularly those of Ontario and Saskatchewan) as the primary model, with some modifications taken from the UNCITRAL Model Law (see ch 16

336 Louise Gullifer be only a starting point, as it is important for the resulting legislation to dovetail well with the rest of a state’s law, and for the legislation to reflect the legal and economic realities in a state. The benefits of using a model are that a reformed secured transactions law is complex, and includes many interrelated provisions, and the use of a model goes some way to minimising the chances of gaps or inconsistencies. One risk in using a national model is that each national statute has subtleties underpinning the model, leading to idiosyncrasies in that statute the reasons for which may not be appreciated by those using the model. Several examples of this phenomenon appear from the use of the NZPPSA by Brunei. First, the New Zealand statute does not provide that unregistered security interests are void on insolvency. It merely provides that they are not effective against third parties who have an interest in the relevant assets. In all the other PPSAs and reformed systems, an unregistered security interest is void against an insolvency officer, which has the effect that the holder of that interest is treated as an unsecured creditor on the grantor’s insolvency. The variation from this approach was a deliberate policy choice for New Zealand.180 It is not clear whether a similar policy choice was intended in Brunei, but the relevant sections in the New Zealand NZPPSA, which give priority to third parties but do not provide for invalidity on insolvency, are replicated in the Brunei STO.181 It would be unfortunate if this conclusion was reached in the Brunei legislation without deliberate intent. Second, under the New Zealand legislation, a security agreement is effective according to its terms,182 and there is no provision overriding anti-assignment clauses. This was a deliberate choice made on the basis of contract.183 Again, it is not clear whether this was a deliberate policy choice in Brunei. Third, the New Zealand statute includes, as an asset class over which security can be taken, chattel paper.184 This is a North American concept which was included as an asset class in UCC Article 9.185 It was probably not a concept that was particularly useful in New Zealand, but there is little evidence that it was incorporated consciously in the Brunei text, or that it is a concept used in that jurisdiction. For example, it does not appear in either the Companies Act 1984 or the Bills of Sale Act 1984.

VI. Conclusion This chapter has considered the features of a modern secured transactions law which are already present in the common law, but also the main features that will necessitate substantive change. Although these are not all that great, and are mainly structural, these changes will bring about some changes in substantive result. In a similar fashion, reform requires reconceptualisation of devices such as the floating charge and those based on retention of title. While many substantive results remain the same, again there are some which will change. It is important to identify these, and to assess their importance, in order to focus the debate on the actual changes and on the market participants who will be affected by them. There can then be a sensible evaluation of the (Bangladesh) IV). Pakistan, on the other hand, used the UNCITRAL Legislative Guide (the Model Law was not yet adopted) as the primary model: see ch 18 (Pakistan) IV. 180 The history and the debate on both sides is discussed in detail in M Gedye, ‘The New Zealand Perspective’ in Gullifer and Akseli (n 105) s F(i). 181 NZPPSA, ss 52, 66(a), 85(1) and 103 (Brunei STO equivalents: ss 43, 22, 30 and 42). 182 NZPPSA, s 35. 183 See Cuming et al (n 106) 183. See also IV C (vi) above. 184 See in particular ss 17 and 98. 185 UCC, Art 9-102(a)(11).

Secured Transactions Law Reform in Common Law Jurisdictions 337 costs of reform as compared to the benefits. Moreover, this analysis can assist with the necessary education and explanation once a reform has been introduced, since a distinction can be made between merely unfamiliar concepts and terminology and actual substantive changes in result. This chapter has also identified, by way of example, some challenges which arise when the secured transactions law of a common law jurisdiction is reformed. It is possible to learn from the experience of reformed jurisdictions how these challenges can be overcome, but the difficulties of some should not be underestimated, and the policy issues resulting should not be ignored. In particular, the interaction between secured transactions law and insolvency, explored in detail elsewhere in this book, raises particularly complex issues. Finally, this chapter has also considered, by way of example, the reform of secured transactions law in Brunei. Most of the challenges have been dealt with by the use of legislation from another common law jurisdiction, namely New Zealand, as a model. However, several concerns have been identified. First, references to the floating charge remain in insolvency law, which raises the danger that the functional approach will not be followed in its entirety. Secondly, it is not clear that various unusual features of the New Zealand law were intended to be included as a matter of policy.

338

16 Bangladesh Secured Transactions Framework: Moving Towards a Reform MAREK DUBOVEC AND JUNAYED CHOWDHURY1

I. Introduction For over a century, Bangladesh’s secured transactions framework has been influenced by English law, creating a fragmented regime with separate statutes applicable to different types of debtors and assets. As an example, other than charges created by companies and registrable under the Companies Act, all other security devices and their functional equivalents become effective against third parties without any form of registration. The steps taken by the regulators, such as the Bangladesh Bank (the central bank), have not corrected the underlying causes for the reluctance of financial institutions to extend credit. One of the main impediments is the absence of a transparent and electronically available registration system that not only facilitates due diligence on the assets proposed as collateral, but also objectively allocates priorities among competing claims. Accordingly, numerous studies have shown that local businesses of all sizes, particularly micro, small and medium-sized enterprises (MSMEs), lack access to credit. Nonetheless, a strong growth in exports and remittances has fuelled economic development, which could have been accelerated with sufficient access to credit. The Bangladesh Bank, with the support of the World Bank Group, initiated a process designed to overhaul the secured transactions framework with a modern statute (the draft Act) underpinned by an electronic registry. After careful consideration, the Personal Property Security Act (PPSAs) of Ontario and Saskatchewan were chosen as the models, supplemented, where appropriate or necessary, by the provisions of the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Secured Transactions (2016) (UNCITRAL Model Law). The latter became the source for certain approaches, such as the perfection of security interests in bank accounts by control or the procedures required to repossess the collateral. Deviations from the PPSA models were not material for the most part, but were mainly inserted in order to simplify the text (for example, chattel paper financing does not exist and is not expected to emerge to justify the inclusion of corresponding rules2) or to satisfy some local expectations (for example, to establish a specific authority to manage the registry). Overall, the draft Act is based on the functional approach to security interests, including within its scope, some quasi-security transactions 1 The authors thank Francesca Lo Re, Senior Financial Sector Specialist of the World Bank Group, and Chikezie Anachu of the Kozolchyk National Law Center for their useful suggestions. 2 See the discussion of a similar issue in ch 15 V E.

340 Marek Dubovec and Junayed Chowdhury such as long-term leases and commercial consignments. It provides for the establishment of a modern electronic registry to become the primary method of perfection, while preserving the role of possession, and also providing for control. The third building block of the draft Act is the inclusion of efficient enforcement remedies, with a strong focus on extra-judicial processes. The draft Act addresses all the other aspects of security interests law that are commonly included in PPSAs, including attachment, priorities, conflict of laws, and transition rules. Implementing regulations will address a number of areas, particularly in relation to the Registry, including the definition of various unique identifiers for different types of obligors according to which financing statements will be indexed. The secured transactions reform will introduce a number of novel approaches and concepts to Bangladesh’s legal framework. The drafters were aware of the profound consequences of reform and provided for consequential and desirable amendments to related legislation, including the Bankruptcy Act and the law that facilitates the enforcement of debts secured with rights in movable property. The ‘Movable Collateral Registry Reform’ had been requested by the financial and business sector for more than two decades, and it has been recently officially endorsed by the financial and business community, alongside various ministries, as necessary to boost MSME finance and MSME sector development. It is hoped that this reform package is enacted and implemented in the near future in order to create a credit-friendly environment incentivising lenders to channel credit to the real economy.

II. Economic Overview Bangladesh is a South Asian, lower-middle-income ($1,006 to $3,955) economy3 of 163 million people.4 After achieving independence in 1971, political and infrastructural instability created an immediate need for foreign aid. Thus, since independence, Bangladesh has been regarded as a test case for development by economists, policymakers, and those administering programmes for donor countries and international financial institutions.5 Broadly, Bangladesh’s economic policy seeks to alleviate poverty by focusing on four main areas of advancement: food production, education, industry, and technology. Frequent flooding and ill-equipped infrastructure often frustrate plans for development. Bangladesh’s government has taken a free-market approach to economic advancement since the mid-1990s, promoting privatisation of state-owned industries, banking reform, and foreign investment. Despite the government’s push to privatise government-owned enterprises in manufacturing, agriculture, transportation, and communication, strong public opposition has slowed this initiative.6 With the steady progress towards achieving Vision 2021 (an articulation of where Bangladesh wants to be in 2021, the year marking its 50th independence anniversary), the government of Bangladesh is implementing an innovative scheme entitled ‘Digital Bangladesh’.7 This initiative focuses on the digitalisation of the governance of Bangladesh 3 World Bank, ‘World Bank Country and Lending Groups’ (2018), datahelpdesk.worldbank.org/knowledgebase/ articles/906519-world-bank-country-and-lending-groups. 4 World Factbook, ‘South Asia: Bangladesh’ (April 2018), https://data.worldbank.org/indicator/SP.POP.TOTL? locations=BD. 5 GPO for the Library of Congress, ‘Bangladesh: A Country Study – Foreign Assistance’ (1989), countrystudies.us/ bangladesh/63.htm. 6 The Commonwealth, ‘Bangladesh: Economy’, thecommonwealth.org/our-member-countries/bangladesh/economy. 7 Finance Division, ‘Advancement towards Digital Bangladesh: Status Update 2017’ (Ministry of Finance, June 2017), mof.portal.gov.bd/sites/default/files/files/mof.portal.gov.bd/page/044ef203_53ca_489d_bc3b_60989c8b163a/Digital%20 Bangladesh%2022-05-2017%20Final.pdf.

Bangladesh Secured Transactions Framework 341 and access to information by initiating tech-based developments in different areas, including four priority sectors: e-governance, e-education, e-service, and e-commerce.8 In this regard, 2.94 per cent of Bangladesh’s GDP has been allocated in the budget for the year 2017–2018 for this initiative.9 All secured transactions infrastructure, such as the future registry and any platforms for the disposition of collateral, are expected to be digitised as well. Bangladesh’s GDP has grown at approximately 6 per cent per year since 1996, exceeding 7 per cent growth in 2016, 2017 and 201810 and for the first time, reached 8.1 per cent in 2019.11 In 2017, agriculture comprised 13.22 per cent of the country’s GDP, industry 31.15 per cent, and services made up the remainder 55.53 per cent.12 Despite representing the smallest portion of the GDP, in 2019 nearly half of the labour force (40 per cent) was engaged in agriculture.13 Garment exports accounted for more than 84 per cent of total exports in 2019.14 This sector’s sustained growth combined with remittances from overseas ($16.4 billion in 2019) are key contributors to Bangladesh’s continued economic growth and rising foreign exchange reserves.15 Besides garments, other major industries include textiles, pharmaceuticals, chemicals, leather, and cement.16 Rice is by far Bangladesh’s most important agricultural product.17 Other food products include jute, tea, wheat, sugarcane, potatoes, tobacco, pulses, oilseeds, spices, fruit, beef, milk, and poultry.18 In 2017, textiles and garments constituted 90 per cent of Bangladesh’s exports,19 followed by footwear and headwear 2.57 per cent, animal products (1.27 per cent), animal hides (1.01 per cent), and foodstuffs (0.56 per cent).20 Export data from 2017 shows that Bangladesh’s major export partners are mostly European economies (63 per cent), though the largest single destination is the United States (15 per cent).21 In recent years, despite a volatile global economy, rapid economic growth has propelled Bangladesh from a low-income country to a lower-middle-income country with per capita income of $1,220 in 2015.22 Several factors are behind Bangladesh’s economic resilience. First, strong macroeconomic fundamentals at the onset of the financial crisis; second, strong growth of exports and remittances, and third, relatively under-developed and insulated financial markets.23 Bangladesh’s global share of exports has more than doubled since 1995, led primarily by the surge in garment manufacturing. Bangladesh’s strong domestic demand, gradually improving

8 ibid. 9 ibid. 10 2015: $597.8 billion; 2016: $640.7 billion; 2017: $686.5 billion, 2018: $763.4 billion, 2019: $837.6 billion. 11 International Monetary Fund, ‘World Economic Outlook Database 2019’ (2019). 12 Bangladesh Bureau of Statistics, ‘Gross Domestic Products (GDP) of Bangladesh 2018–19’ (2019) 2. 13 World Bank, ‘Employment in Agriculture’ (September 2019), data.worldbank.org/indicator/SL.AGR.EMPL.ZS. 14 Bangladesh Garment Manufacturers and Exporter’s Association (BGMEA), ‘Trade Information’ (2020), www.bgmea. com.bd/home/pages/TradeInformation. 15 M Hassan, ‘Remittance Hits Record 16.4b in FY2019’ (Dhaka Tribune, 3 July 2019), www.dhakatribune.com/ business/economy/2019/07/03/remittance-hits-record-16-4b-in-fy19. 16 Ahaduzzaman et al, ‘Overview of Major Industries in Bangladesh’ (2017) 30 Bangladesh Journal of Chemical Engineering 51. 17 M Bearak, ‘Bangladesh Is Now Home to almost 1 million Rohingya Refugees’ (Washington Post, October 2017), www.washingtonpost.com/news/worldviews/wp/2017/10/25/bangladesh-is-now-home-to-almost-1-million-rohingyarefugees/?utm_term=.80a738aded9e. 18 World Factbook (n 3); Export.gov, ‘Bangladesh – Agriculture Equipment and Inputs’ (October 2017), www.export. gov/apex/article2?id=Bangladesh-Agricultural-Sector. 19 Observatory of Economic Complexity, ‘Bangladesh’ (2020), atlas.media.mit.edu/en/profile/country/bgd/. 20 ibid. 21 ibid. 22 World Bank, ‘Bangladesh – Country Partnership Framework for the Period FY16–20’ (March 2016) i, documents.worldbank.org/curated/en/362231468185032193/Bangladesh-Country-partnership-framework-for-theperiod-FY16-20. 23 ibid.

342 Marek Dubovec and Junayed Chowdhury investment climate, and moderate single digit inflation accelerated GDP growth beyond 2017 projections and are expected to further improve growth in the near future.24 On the supply side, economic growth will be driven by a sustained expansion in industry and services, enabled by greater investments in infrastructure and energy.25 On the demand side, export growth (spurred by significant economic recovery of key export target markets since the 2008–09 economic crisis) and private investment are expected to strengthen aggregate demand while also contributing to capacity creation.26 However, with rising imports boosted by both private investment and export growth recovery, the current account deficit is projected to rise to over 1.7 per cent in 2019.27 Non-bank financial institutions in Bangladesh are regulated under the Financial Institution Act 1993 and supervised by the Bangladesh Bank. There are currently 34 such financial institutions: two are government owned, one is a subsidiary of a state-owned commercial bank, 15 were created by private domestic initiatives, and 15 were created by joint venture initiatives.28 The Bangladesh Bank categorises banks into scheduled or non-scheduled.29 There are currently 59 scheduled banks and six non-scheduled banks in Bangladesh.30 Scheduled banks are licensed to operate under the Bank-Company Ain 1991 (the Bank Company Act 1991) and are under the full control and supervision of the Bangladesh Bank. Non-scheduled banks are established for special and definite objectives and operate under the specific laws that govern those objectives.31 Scheduled banks are further divided as follows: Table 1 Type of Bank

No. of Banks

Description

State Owned Commercial Banks (SOCBs)

6

Fully or majority owned by the government of Bangladesh.

Specialised Banks

2

Established for specific objectives like agricultural or industrial development. Also fully or majority owned by the government of Bangladesh.

Private Commercial Banks (PCBs)

40

Majority owned by private entities. Further divided into two groups:

Conventional PCBs

32

Perform conventional banking functions, that is, interest-based operations.

Islamic Shariah-based PCBs

8

Perform banking functions according to Islamic Shariah principles, that is, profit-loss sharing mode.

Foreign Commercial Banks (FCBs)

9

Branches of banks which are incorporated abroad

24 ‘6.3 Percent Maximum Possible GDP Growth of Bangladesh in 2015–16: World Bank’ (BDNews24.com, 13 June 2016), bdnews24.com/economy/2015/06/13/6.3-percent-maximum-possible-gdp-growth-of-bangladesh-in2015-16-world-bank; World Bank, ‘Global Economic Prospects – South Asia’ (January 2018), pubdocs.worldbank.org/ en/372561512062619975/Global-Economic-Prospects-Jan-2018-South-Asia-analysis.pdf. 25 World Bank (n 24). 26 ibid. 27 World Bank, ‘Multilateral Investment Guarantee Agency Country Partnership Framework for Bangladesh for the Period FY16–FY20’ (March 2016), documents.worldbank.org/curated/en/362231468185032193/pdf/103723-REVISEDPUBLIC-IDA-R2016-0041.pdf. 28 Bangladesh Bank, ‘Banks & FIs, Financial System’, www.bb.org.bd/fnansys/bankfi.php. 29 ibid. 30 The non-scheduled banks are Ansar VDP Unnayan Bank, Karmashangosthan Bank, Grameen Bank, Jubilee Bank, Probashi Kollyan Bank and Palli Sanchay Bank. 31 ibid.

Bangladesh Secured Transactions Framework 343 Private sector credit averaged 4,902.09 billion Bangladeshi taka (BDT) ($59.04 billion) from 1999 to 2017, reaching an all-time high of 8,198.70 billion BDT ($98.47 billion) in December of 2017. Consumer credit decreased to 9,508.44 billion BDT ($114.20 billion) in January 2018 from 9,519.90 billion BDT ($114.33 billion) in December 2017.32 As of 2014, SMEs comprised 99.0 per cent of all enterprises and contributed 25.0 per cent of Bangladesh’s GDP.33 Banks and other financial institutions mostly focus on large-scale loans and avoid small-size loans to SMEs in order to improve the cost-effectiveness of the business operations of those banks and other financial institutions.34 Besides cost efficacy, major challenges faced by creditors in providing loans to SMEs include: i) poor customer knowledge; ii) inadequate business skills and literacy; iii) low profitability; iv) lack of credit data; v) lack of collateral or capital; and vi) a poor business enabling environment.35 Most loans to SME entrepreneurs were overdrafts, cash credit, or working capital loans for one year or less (84.5 per cent).36 The Bangladesh Bank has attempted to combat this lack of access to finance for SMEs by making financial inclusion a policy priority for banks and financial institutions, and establishing banks in rural areas.37 For example, in 2017 the Bangladesh Bank recommended capping the interest rate on loans to women-owned SMEs at 9 per cent.38 One of the most important sectors of Bangladesh’s economy is agriculture.39 In 2015, the Bangladesh Bank published the Agricultural and Rural Credit Policy 2017–201840 (with effect from July 2017) for the purpose of facilitating agricultural loans. Under the Agricultural Policy, if farming is carried out on land that is no more than five acres, loans must be secured by hypothecation of the crop.41 However, if farming is carried out on land of more than five acres, then the decision on taking security shall be made by the bank or lender based on its business relationship with the borrower.42 Besides agriculture, the Bangladesh Bank has also promulgated a policy entitled ‘Small and Medium Enterprise (SME) Credit Policies & Programmes’.43 This SME Policy provides that banks and financial institutions can provide unsecured credit facilities (up to 2,500,000 BDT) against personal guarantees, especially to small and women entrepreneurs, but credit can also be provided against hypothecation of products and machinery if the loan applicant’s credit profile

32 ‘Bangladesh Consumer Credit’ (Trading Economics, March 2018), tradingeconomics.com/bangladesh/ consumer-credit. 33 ADB Institute, ‘Solutions for Small and Medium-Sized Enterprises’ Difficulties in Accessing Finance: Asian Experiences’ (August 2017) 2, www.adb.org/sites/default/files/publication/348741/adbi-wp768.pdf. 34 M Mujeri, ‘Improving Access of the Poor to Financial Services’ (General Economics Division of the Planning Commission, January 2015) 18, www.plancomm.gov.bd/wp-content/uploads/2015/02/1_Improving-Access-of-the-Poorto-Financial-Services.pdf. 35 SMR Anwar, ‘Credit Rating for Small and Medium Enterprises: Problems and Prospects in Bangladesh (2017) 6 Journal of Asian Business Strategy 234, 237. 36 ibid. 37 Mujeri (n 34). 38 Bangladesh Bank, ‘SMESPD Circular No 1’ (3 April 2017), www.bb.org.bd/mediaroom/circulars/smespd/ apr032017smespd01.pdf. 39 See Bangladesh Bureau of Statistics, ‘45 Years Agriculture Statistics of Major Crops’ (February 2018), bbs.portal. gov.bd/sites/default/files/files/bbs.portal.gov.bd/page/16d38ef2_2163_4252_a28b_e65f60dab8a9/45%20Years%20 Statistics%20of%20Various%20Crops%20310118.pdf. 40 See Agricultural Credit & Financial Inclusion Department, ‘Agricultural & Rural Credit Policy Programme for the FY 2017–2018’ (Bangladesh Bank, 2018), www.krishibank.org.bd/notice-circular/agricultural-and-rural-credit-policyand-program-for-the-fy-2017-2018/. 41 ibid para 5.08. See discussion of hypothecation at III below. 42 Agricultural Credit & Financial Inclusion Department (n 40). 43 SME & Special Programmes Department, ‘Small and Medium Enterprise (SME) Credit Policies & Programmes’ (Bangladesh Bank, 2018), www.bb.org.bd/sme/smepolicye.pdf.

344 Marek Dubovec and Junayed Chowdhury is not strong.44 However, in order to determine which collateral will be adequate to secure credit facilities of more than 2,500,000 BDT, banks are directed to follow their internal procedures.45

III. Current Secured Transactions Framework In Bangladesh, the term ‘movable property’ has been given a number of meanings depending on the context in which it is used.46 Its widest meaning is ‘property of every description except immovable property’.47 While separate statutes deal with different aspects of secured transactions in movable property, they are inconsistent with one another in terms of their application and effect, and leave a number of gaps. The current legal regime for secured transactions in movable property is governed by the following legislation: a) b) c) d) e) f) g) h) i) j) k) l) m)

The Contract Act 1872 The Transfer of Property Act 1882 The Sale of Goods Act 1930 The Inland Shipping Ordinance 1976 and the Inland Mechanically Propelled Vessels Rules 1951 The Bangladesh Merchant Shipping Ordinance 1983 Civil Aviation Rules 1984 (promulgated under the Civil Aviation Act 2017) The Companies Act 1994 The Bankruptcy Act 1997 Margin Rules 1999 read with Securities and Exchange Ordinance 1969 Artha Rin Adalat Act 2003 (Money Loan Court Act 2003) Microcredit Regulatory Authority Act 2006 and Microcredit Regulatory Authority Rules 2010 The Insurance Act 2010 The Road Transport Act 2018 (came into effect on 22 October 2019 by repealing the Motor Vehicle Ordinance 1983) and related rules

The oldest statute that addresses some aspects of secured transactions is the Contract Act 1872, a colonial Indian sub-continent statute that was incorporated into the laws of Bangladesh after independence.48 Subsequently, the secured transactions law evolved based on the principles of English law.49 The Contract Act 1872 expressly recognises two types of security rights: the lien, and the pledge.50 A bailee’s specific lien under the Contract Act 1872 arises where the bailee, in accordance with the purpose of the bailment, has rendered any service involving the exercise of labour or skill in respect of the goods bailed. Such a bailee, in the absence of a contract to the contrary, has a right to retain goods until he receives due remuneration for the 44 ibid p 10. 45 ibid. 46 Code of Civil Procedure (CPC) 1908, s 2(13) (‘movable property’ includes growing crops); Penal Code 1860, s 22 (the words ‘movable property’ are intended to include corporeal property of every description, except land and things attached to the earth or permanently fastened to anything which is attached to the earth). 47 General Clauses Act 1897, s 3(34). 48 The Contract Act 1872 was enacted after the First, Second, Third and Fourth Law Commissions (established in 1834, 1853, 1861 and 1879 during the British colonial era) made recommendations for codification of the Indian Penal Code 1860, the Code of Criminal Procedure 1898, the CPC 1908, the Evidence Act 1872, the Indian Contract Act 1872 and the Transfer of Property Act (TP Act) 1882 (see the Bangladesh Law Commission website at www.lawcommissionbangladesh.org/about.htm). In effect, the Contract Act 1872 is a code of English law. F Pollock, ‘Preface’ in N Bhadbhade, Pollock & Mulla on Indian Contract and Specific Relief Act, 12th edn (New Delhi, Butterworths, 2001) vol 1. 49 See discussion of English common law in ch 15. 50 Contract Act 1872, ss 170–79.

Bangladesh Secured Transactions Framework 345 services rendered.51 In accordance with common law principles, the bailee must have possession of the goods in order to exercise his right under the Contract Act 1872.52 Another category of lien is a general one held by bankers, factors, wharfingers, advocates of the Supreme Court, and policy-brokers who may, in the absence of a contract to the contrary, retain any goods bailed to them as security for a general balance of account.53 A pledge under the Contract Act 1872 is the bailment of goods as security for payment of debt or performance of a promise. A pledge is only complete upon delivery of the property, which may be constructive or actual.54 On default, the pledgee may enforce its right by selling the collateral extra-judicially, but must give the pledgor reasonable notice of the sale.55 The Transfer of Property Act 1882 introduced three forms of security interests involving movable property: the actionable claim, the transfer of marine insurance policies, and the assignment of rights under fire insurance policies. The Act left many important aspects, such as the priority of successive assignments, unaddressed. The Sale of Goods Act 1930 is largely based on the English Sale of Goods Act 1893.56 Under section 25 of the Sale of Goods Act 1930, the seller may reserve the right of disposal of the goods until certain conditions are fulfilled. Furthermore, section 47 provides for the seller’s lien under which an unpaid seller in possession of goods is entitled to retain possession until payment. Apart from these statutory security devices, hypothecation became a commonly used form of security, especially in banking transactions. It has been defined as the creation of a charge where possession of goods will remain with the hypothecator.57 The rights and obligations arising under hypothecation may vary with facts and principles established through common law. The Companies Act 1994, which is largely based on the Indian Companies Act 1956 and the English Companies Act 1985, provides for the establishment of the only registry for security interests in movable property in Bangladesh: the Office of the Registrar of Joint Stock Companies and Firms in which companies are required to register their mortgages and charges. Under the Companies Act 1994, companies may mortgage or create a charge over their movable and immovable property, including book-debts.58 In order to tackle recurring loan defaults and the magnitude of lawsuits arising from them, the Bangladesh Parliament enacted the Artha Rin Adalat Act 2003 (Money Loan Court Act 2003). It is a pro-bank/financial institution statute under which only banks and financial institutions can file suits for loan recovery.59 Under the Money Loan Court Act 2003, the debtor or the defendant is not allowed to file any counter-claim or raise any defence of set-off.60 Although the law appears one-sided, it has been held to be constitutionally valid by the Appellate Division of the Supreme Court of Bangladesh,61 and has resulted in speedy disposal of cases at trial stage.62 Accordingly, 51 ibid s 170. 52 Mohammad Meah v Pubali Bank and others 41 DLR(AD) (1989) 14, discussing Hartley v Hitchcock (1816) 171 ER 512, para 16. 53 Contract Act 1872, s 171. Such lien extends to all securities including bills, cheques, money entrusted and securities deposited with the banker for advancement of credit, unless there is a contract to the contrary; Sonali Bank v Bengal Liner Ltd 42 DLR (1990) 487. 54 Lallan Prasad v Rahmat Ali AIR 1967 SC 1322. 55 Contract Act 1872, s 176. 56 Sale of Goods Act 1930, ss 4, 6, 9 and 10 closely track English Sale of Goods Act 1893, ss 1, 5, 8 and 9. 57 State Bank of India v SB Shah Ali AIR 1995 AP 134. See ch 17 III B. 58 Companies Act 1994, s 159. 59 Sultana Jute Mills v Agrani Bank 46 DLR (AD) 174 (1994); Kazi Jawaherul Islam v Standard Co-operative Society 18 BLD 310 (1970). 60 Money Loan Court Act 2003, s 18(2). 61 Sultana (n 59); Kazi (n 59). 62 See also the Money Loan Court Act 2003, which provides specific alternative dispute resolution mechanisms under ss 21 and 22.

346 Marek Dubovec and Junayed Chowdhury secured parties have a quick remedy when suing on the debt, which facilitates the enforcement process with respect to secured transactions, reducing the risk of debtors obstructing enforcement actions against the collateral. The draft Act introduces changes to the law to facilitate the enforcement of security interests, as explained below.63

IV. Why PPSA was used as a Model In the existing realm of secured transactions law a number of models are available, including the European Bank for Reconstruction and Development’s Model Law (implemented by many Central and Eastern European countries), the Organisation for the Harmonisation of Business Law in Africa (Organisation pour l’Harmonisation en Afrique du droit des affaires, OHADA) Uniform Act (applicable in the OHADA member states), Book IX on Proprietary Security of the Draft Common Frame of Reference (for European countries), the Organization of American States Model Inter-American Law (adopted by a number of Latin American countries), and, recently, the UNCITRAL Model Law (implemented in some African countries).64 The drafters of the proposed Secured Transaction (Movable Property) Act of Bangladesh took notice of Professor MacDonald’s reminder that ‘the success of legislative reform is highly dependent on: (i) how well the statute or Code in question reflects the conceptual structure of existing law; and (ii) how closely the style of legislative drafting resembles the dominant style deployed in the jurisdiction in question’.65 Therefore, before discussing the model for the new secured transactions law, it is important to analyse the legal structure of Bangladesh. Bearing the legacy of the English colonial legal regime, Bangladesh accommodated almost all of the previous colonial legislation after gaining independence in 1971.66 It is important to note that while interpreting statutes and deciding cases, Bangladeshi courts readily rely upon Indian and English judgments, as well as those of other commonwealth jurisdictions and the United States, when there is no authoritative Bangladeshi precedent. The Appellate Division of the Supreme Court of Bangladesh has acknowledged the rulings of English and U.S. courts as persuasive authorities for the courts of Bangladesh.67 During the colonial era, the courts of the Indian sub-continent had observed that decisions of Australia, Canada, and other Commonwealth courts, and judgments of the courts of the United States were persuasive authorities for the courts in India, and were to be respected as opinions of eminent persons accustomed to expounding principles of jurisprudence similar to those of the Indian sub-continent.68 Being a part of the colonial Indian sub-continent before independence, these observations are equally applicable to Bangladesh’s jurisprudence.69 Keeping the above in mind, it was imperative that the guidance and source-material for legislative drafting in Bangladesh on a complex subject-matter (like secured transactions) would derive inspiration from the models used by the common law countries. This approach facilitates the 63 See V H below. 64 RA MacDonald, ‘A Model Law on Secured Transactions. A Representation of Structure? An Object of Idealised Imitation? A Type, Template or Design?’ (2015) 15 Uniform Law Review 419, 443. 65 ibid. 66 Through the enactment of the Bangladesh (Adaptation of Existing Laws) Order 1972. 67 Public Service Commission v Mohammad Sohel Rana VIII ADC (2011) 332; see also Forasol v Oil and Natural Gas Commission AIR 1984 SC 241. 68 Re CP Motor Spirit Act AIR 1939 FC 1; Tan Bug Taim v Collector of Bombay AIR 1946 Bom 216. 69 World Bank Group, ‘A Review of the Legal and Policy Framework for Movable Property Secured Transaction in Bangladesh’ (December 2016) 10.

Bangladesh Secured Transactions Framework 347 work of the drafters to assess and contextualise the rich judicial wisdom and practical experiences of the common law countries, in order to address the problems and limitations of the socio-legal fabric of Bangladesh. In that context, and upon assessing the available models, the stakeholders chose to model the draft secured transactions law on the Canadian PPSAs; in particular, those of Ontario and Saskatchewan provinces.70 However, in some aspects, the secured transactions law of Bangladesh departed from the source models and accommodated provisions from the UNCITRAL Model Law. After the initial draft was prepared, it was reviewed by members of the Monitoring Committee established for the project, which comprised experts from the Ministry of Finance, the Bangladesh Bank, and advisors of the World Bank Group. To make the draft Act more effective for achieving its purpose, consultations were held with different stakeholders, such as the Ministry of Commerce, Bangladesh Investment Development Authority, Bangladesh Leasing & Finance Companies Association, Association of Bankers Bangladesh Limited, and the Legislative and Parliamentary Affairs Division of the Ministry of Law, Justice and Parliamentary Affairs. A legislative package including ‘Commentary on the draft Secured Transaction (Movable Property) Act’ and ‘Consequential Amendments for the Secured Transaction (Movable Properties) Act’ were prepared with the objective of facilitating understanding and discussion on the main features and legal effects of the proposed legislation. The Commentary provides a detailed explanation of each section of the draft Act, including the purpose of the provisions and practical examples illustrating the application of the provisions, while the ‘Consequential Amendments for the Secured Transaction (Movable Properties) Act’ (a total of nine, including the Money Loan Court Act 2003) identify the individual sections of the laws to be modified upon entry into force of the draft Act. An executive summary regarding the objective and salient features of the draft Act was also shared. Following a suggestion from the Ministry of Finance, the draft Act was benchmarked against familiar South Asian regimes, in particular India, Pakistan, and Sri Lanka to assess its viability in the local as well as regional context. A Bangla translation of the Draft Secured Transaction (Movable Property) Act was also sent to the Government of Bangladesh for further consultation. After further assessment, the Ministry of Finance notified the Bangladesh Bank that the draft Act needed to be shortened to 35 sections. Subsequently, advisors of the World Bank Group restructured the draft Act by transferring certain sections to a piece of delegated legislation entitled the draft ‘Secured Transaction (Movable Property) Rules’ (draft Rules), which will be passed under the draft Act. The shortened draft Act and draft Rules are now being evaluated by the Bangladesh Bank and the Ministry of Finance with the aid of advisors from the World Bank Group.

V. Structure of the Draft Act The draft Act and Rules are divided into ten chapters, addressing all the elements of secured transactions that are commonly found in the PPSAs as well as other modern secured transactions laws, such as Article 9 of the US Uniform Commercial Code (UCC Article 9) and the UNCITRAL Model Law. Being influenced largely by the Canadian PPSAs, the draft Act and Rules follow the structure of those models rather than the UNCITRAL Model Law.

70 Personal Property Security Act, RSO 1990, c P-10 (Ontario PPSA); Personal Property Security Act, 1993, SS 1993, c P-6.2 (Saskatchewan PPSA).

348 Marek Dubovec and Junayed Chowdhury

A. Preliminary Provisions Chapter I contains a comprehensive list of definitions and prescribes the mechanism for the entry into force of the Act. While the Act is to enter into force on the date stated in a notification published in the Official Gazette, it is understood that it will not happen before the Registry is established and operational. The definitions and terminology used throughout contains one significant departure from the PPSAs in that the draft Act uses the label ‘obligor’ for what is commonly understood as debtor, that is the person who has rights in the collateral. The reason for this deviation is to accommodate the locally acceptable concept of debtor, which ordinarily means the person to whom the loan is made, and attach a separate meaning to the word ‘obligor’ to describe the person who provides the asset as collateral for a loan made to the debtor.71 Following the PPSA models, the draft Act permits serial-number indexing for certain types of assets. The definition of serial numbered goods includes not only motor vehicles and other means of transport but contemplates that implementing rules may designate additional types of assets. This could potentially, and unduly, expand the notion of serial numbered goods beyond those typically designated as such in the PPSA systems. In many jurisdictions, stakeholders and drafters often argue that this notion ought to be expansive, even including computers or other household goods.72 However, in the context of Bangladesh, the proposed definition of the serial numbered goods leaves the discretion with the Government to expand it by way of delegated legislation.73 It is envisaged that any subsequent expansion of the definition (which is currently limited only to motor vehicles and other means of transport) would only cover the high value assets (for example, heavy equipment) to which serial numbers are assigned by the manufacturer, and which have a vibrant secondary market. Low value consumer items (for example, laptops) are not expected to be included in the definition. It is hoped that the issuer of the rules in Bangladesh will exercise its power in a reasonable manner so as not to affect the efficiency of commercial transactions by expanding the definition of serial numbered goods to include low value consumer goods that may need to be identified in registrations in order for a security interest to remain effective against buyers and lessees. Some definitions in Chapter 1 of the Act, such as ‘competing claimant’ and in Chapter 1 of the Rules, such as ‘control agreement’ were incorporated from the UNCITRAL Model Law. As further explained below, the draft Act and Rules will provide for perfection by control.

B. Application of the Act and Conflict of Laws Chapter II sets out the scope of application, regulates the relationship with other domestic laws, and provides a set of conflict-of-law rules that determine when the Act and Rules will apply if the transaction involves some foreign element. Section 4(1) provides that the Act is to apply to any transaction that functionally secures an extension of credit with a right in movable property. It then includes a non-exhaustive list of the types of devices such as chattel mortgage, pledge, hypothecation, and charge that the Act is to treat as a security interest under the functional approach. As a result, all functional equivalents are subsumed under the unitary concept of a security

71 Under some national laws and models, such distinction is preserved by the use of the term ‘grantor’ for the collateral provider. See s 10 of the Australian PPSA; Art 2(o) of the Model Law. 72 An example of this is Ethiopia; see s 2(46) of the Proclamation of 2019. 73 Draft Act, s 2(aaa).

Bangladesh Secured Transactions Framework 349 interest, and the corresponding governing legislation is superseded.74 The Act will expressly preserve the application of the principles of common law and equity,75 but only to the extent they are not inconsistent with the provisions of the Act. Also, the Act will follow the approach of the PPSAs in terms of applying to ‘quasi-security interests’, including leases for a term of more than one year and commercial consignments.76 The interest of lessors under leases for a term exceeding one year and that of a transferee of an account fall under the definition of a ‘security interest’. The Act applies to consumer goods defined as ‘goods that are used or acquired primarily for consumption or for any household purpose’ in section 2(1)(k). As a result, the Act empowers individuals to use their assets that they hold for consumer purposes as collateral. Moreover, the Rules impose a positive obligation on the secured party to register a cancellation statement discharging the registration of security right exclusively in consumer goods when obligations under the security agreement are performed.77 The conflict of law provisions track those of the PPSAs, relying on the location of tangible collateral as the connecting factor for security interests therein and the location of the obligor as the connecting factor to determine the law applicable to the perfection and priority of security interests in intangible assets. The chapter also provides special rules applicable to specific types of intangible assets, such as bank accounts, non-intermediated securities, and intellectual property rights, which were drawn from the UNCITRAL Model Law.

C. Secured Transactions Registration Authority Chapter III provides for the establishment of the Secured Transactions Authority to act as the administrative body to supervise and manage the operations of the Registry. The Board of the Authority, among other powers, can appoint the Registrar. While this chapter deals with administrative matters, Chapter VII provides the substantive rules for the operations of the Registry. One of the functions of the Board is to hear and decide on the claims of affected parties for loss or damage caused by an error or omission in the operation of the Registry. The establishment of the Secured Transactions Authority is consistent with Bangladesh’s practice of creating an independent and stand-alone oversight authority (separate from the Bangladesh Bank) to regulate and monitor financial transactions.78

D. Attachment of a Security Interest Chapter IV requires the satisfaction of three typical conditions for a security interest to attach, mirroring the PPSA approach. Unlike the PPSAs, it requires writing even for possessory security interests in order to minimise the risk of disputes. This chapter also sets out some rights and duties of the parties, including a duty to exercise due care with respect to the collateral and a right to request information. These aspects are dealt with in a separate chapter in the UNCITRAL Model Law,79 albeit with a substantively similar treatment. 74 In the draft Act, s 3 provides a non-obsante clause which supersedes all the laws except otherwise provided in the Act. A series of consequential amendments for the concerned statutes have been proposed separately. 75 Draft Act, s 5(5). 76 See the definitions in ss 2(1)(ee) and (i) of the Draft Act. 77 Draft Rules, r 43(4). 78 Similarly, for regulating micro-credit and microfinance operations, Bangladesh created the Microcredit Regulatory Authority. 79 UNCITRAL Model Law, ch VI.

350 Marek Dubovec and Junayed Chowdhury

E. Perfection of a Security Interest Chapter V provides the rules on the perfection of security interests, setting out the two main methods: registration and possession. Departing from the PPSA models, special perfection methods have been provided for bank accounts and non-intermediated securities, which fall under the investment property asset class in the Ontario PPSA.80 For the former, a security interest can be perfected automatically when the depository institution is the secured party or when a third party executes a control agreement with the depository institution and the obligor. For the latter, a security interest can be perfected by notation on the books of the issuer of the security or execution of a control agreement. The provisions of this chapter are not strictly limited to perfection, but also contain some special priority rules. One example of these is that under rule 19(3) of the draft Rules, after issuance of a document of title covering goods, a perfected security interest in such document of title has priority over a competing security interest perfected by any other means including registration.

F. Priorities The fundamental priority rule of first to register or to perfect by other means81 is the cornerstone of Chapter VI, as reflected in section 21 of the draft Act. With some modifications, the priority rules also apply to claims of judgment creditors that have registered a notice. The Act will provide protection for a security interest against the claims of a judgment creditor if the judgment creditor fails to register a notice of judgment and does not inform the secured party. If, the judgment creditor registers a notice of judgment and informs the secured party, then the judgment creditor will have priority.82 Rules 24 and 25 of the draft Rules provide special priority rules for purchase money security interests (PMSI) in inventory and other goods. Different requirements, depending on the type of encumbered asset, will have to be satisfied for the PMSI secured party to gain priority over an earlier perfected security interest in the same asset. For inventory, the PMSI creditor must register a notice and inform any other competing creditor with a security interest in the inventory perfected by registration.83 For other goods and intellectual property rights, the PMSI must be perfected by registration within ten days after the obligor acquires possession or by attachment of the security interest with respect to the intellectual property.84 The draft Rules also contain comprehensive priority rules concerning security interests in fixtures, as well as crops.85 The application of these rules is limited to conflicts with rights in land for which title has been issued pursuant to the Registration Act of 1908. The reason for this carve-out is because land registration and administration is a self-contained regime in Bangladesh, which is regulated by the Ministry of Land through the relevant land registries, and it was suggested that it would be prudent to leave the mechanics of land related issues out of the purview of the draft Act and Rules. Additional priority rules related to rights affecting immovable property are provided.86 These relate, inter alia, to security interests in a payment under a lease

80 See

Ontario PPSA, s 22(1) under which a security interest in investment property may be perfected by control. ch 2 IV B (ii). Act, s 22. 83 Draft Rules, r 24. 84 Draft Rules, r 25. 85 Draft Rules, rr 28–29. 86 Draft Rules, rr 32–33. 81 See

82 Draft

Bangladesh Secured Transactions Framework 351 of immovable property and security interests in rights to payment under a mortgage. Security interests perfected under this Act shall have priority over any other rights/interests perfected under other laws. The priority rules relating to security interests in bank accounts have been adapted from the UNCITRAL Model Law, giving preference to perfection by control over perfection by registration. Similarly, the priority provisions for security interests in non-intermediated securities have been taken from the UNCITRAL Model Law. Finally, the chapter contains rules on the defences available to account debtors with respect to assignment of receivables and security rights in other intangibles87 which are adopted based on the provisions found in a separate chapter on rights and duties in the UNCITRAL Model Law.88

G. Registry System Chapter VII provides substantive rules on registration, searching, and other related registry functions. The Registry is to operate as a notice-filing system in which financing statements that set out the information commonly required by the PPSA systems are registered. A financing statement can be registered before the security interest has attached, as long as the obligor has provided sufficient authorisation.89 The effectiveness of a financing statement may only be affected by an error which would render the financing statement unsearchable by an identifier of the obligor or a serial number, if any, or an error in other information that would seriously mislead a reasonable searcher. Even where there is an error in a serial number, the financing statement remains effective except as against buyers and lessees. The Registry will be searchable against an identifier of the obligor, which is expected to be a unique number rather than a name, and a serial number.90 Detailed provisions defining the unique number of different types of obligors will be included in the regulations. The draft Rules provide for the registration of amendment and cancellation statements along the lines of the PPSAs.91 However, the rule differs from the PPSAs in one aspect: it requires that within seven days of appointing a receiver, a notice relating to the appointment be registered.92

H. Default Rights and Remedies Chapter VIII deals with enforcement remedies of secured parties upon default of the debtor. It provides for a set of extra-judicial remedies, but also empowers the parties to use any remedies set out in a security agreement or some other law. One of the remedies provided in this chapter is the appointment of a receiver upon application to a court, which is consistent with the current situation in Bangladesh where extra-judicial appointments are not permitted.93 Special enforcement rules for a number of transactions (for example, for security interests in documents of title, obligations secured by an interest in both movable and immovable property, and so on) have

87 Draft

Rules, r 38. Model Law, ch VI. Act, s 24(7). 90 Draft Rules, r 42. 91 Draft Rules, r 43. 92 Draft Rules, r 45. 93 Draft Rules, r 55. 88 UNCITRAL 89 Draft

352 Marek Dubovec and Junayed Chowdhury also been included. With respect to the enforcement of security interests in ‘payment rights’, the chapter provides for specific rules concerning receivables, money, instruments, debt securities, and bank accounts. The secured party must send a notification of default and intention to repossess the collateral as well as another notification in order to dispose of the collateral. Both notifications must be given to the obligor and affected third parties at least 10 days before taking the intended action. The notification requirements do not apply in certain circumstances, such as when the collateral is perishable or could speedily decline in value. The chapter prescribes the usual rules for the allocation of proceeds, protections of buyers of collateral at public and private auctions, remission of any surplus to the obligor, etc. Obligors are granted a number of rights and protections, including the right to reinstate the security agreement and redeem the collateral (this right is also given to persons entitled to receive a notification of disposition). The right to reinstate the security agreement, which is a typical feature of the PPSAs but which is absent in UCC Article 9 and the UNCITRAL Model Law, may not be waived before default.

I. Miscellaneous This chapter deals with various matters, including the right to claim damages for any foreseeable loss caused by the failure to discharge a duty in a reasonable manner, the form in which notices may be served, the designation of Registry staff as public officials, and similar procedural/administrative matters. It contains provisions that authorise the Government to issue rules and the Authority to issue regulations upon consultation with the Government. The rules and regulations will primarily implement the registry provisions of the Act.

J. Transition Chapter X provides transitional rules ensuring the protection of prior security interests, including rights in movable property that would have qualified as security interests under the Act or Rules. Secured parties will be given a period of one year to perfect their security interests by one of the methods under the Act, unless such perfection would have ceased earlier under the prior law. Perfection within the transitional period and before the perfection under the prior law would have ceased will continue the perfection and priority of the prior security interest under the Act.

VI. Deviations from the PPSA A number of deviations from the PPSA model have already been discussed. The drafters carefully evaluated the entire UNCITRAL Model Law with the view of supplementing the PPSA (for example, with perfection by control), eliminating certain approaches (for example, the chattel paper rules as explained below), or simply substituting the UNCITRAL Model Law approach for the PPSA (for example, in relation to repossession of the collateral). The Act and Rules will also include Bangladesh specific approaches, such as the requirement of writing even for possessory security interests94 and the limitation of the priority rules for fixtures and crops to specific types of land.95

94 Draft 95 Draft

Act, s 14. Rules, rr 28–29.

Bangladesh Secured Transactions Framework 353 The draft Act does not provide any rules for chattel paper financing because such a practice does not exist in Bangladesh, and it was believed that providing for compartmentalisation of accounts would introduce unnecessary complexity into receivables financing. Other jurisdictions where the notion of chattel paper was exported have struggled with finding its practical application and have suggested the deletion of the corresponding rules from their legislation.96 Unlike the PPSAs, the Act will apply to security interests in insurance policies as original collateral to provide necessary certainty for the law that governs the creation of such encumbrances today. The insurance law had been carefully evaluated and found to be inadequate to support modern financing practices. With respect to security interests in intermediated securities, the draft Act and Rules follow the UNCITRAL Model Law approach in excluding such transactions from its scope of application, leaving the matter to be addressed in specialised legislation. This exclusion should not have any impact on Bangladesh’s economy since the holding of securities in chains of intermediaries remains scarce. The draft Rules exclude bank accounts from the generic notion of account, providing specific rules, including on perfection by control, and a conflict of law rule that utilises the location of the depository institution as the connecting factor. The provision dealing with repossession of collateral97 was adopted from the UNCITRAL Model Law.98 It requires that notice of intention to repossess the collateral be given to the obligor and any third party in possession of the collateral 10 days in advance. In some cases, the drafters believed that better articulation of certain principles and rules than was in the PPSA models is needed to guide the users and courts. For that reason, the PPSA rules were amplified with some articles from the UNCITRAL Model Law. Currently, in Bangladesh, there is some uncertainty with respect to the types of assets that can be taken as collateral.99 Following the example of Article 8 of the UNCITRAL Model Law, the draft Act expressly provides that any type of movable asset, a generic category of movable property, as well as a part or an undivided interest in an asset can be used as collateral. In the PPSA model, conflicts of law between different jurisdictions are governed by certain general and collateral-specific provisions. While the draft Act and Rules adopt the provisions of the PPSA model, they also adopt the UNCITRAL Model Law approach of dealing with conflicts of law that may arise in specific areas, including security interests in bank accounts. In addition, the draft Rules adopted Article 99 of the UNCITRAL Model Law under which the validity, perfection and effect of perfection, and non-perfection of a security interest in intellectual property are governed by the law of the jurisdiction in which the intellectual property is protected. This is because adoption of the law of the obligor’s location would result in one law governing the secured transaction and another law governing the transfer of ownership in the same assets. The transition provisions were also adopted from Chapter IX of the UNCITRAL Model Law rather than the PPSA. The reason for this is that the PPSA model deals with the various transition issues in a collective manner, while the transition articles of the UNCITRAL Model Law are more structured in their application. For example, the chapters of the draft Act and Rules 96 B Whittaker, ‘Review of the Personal Property Securities Act 2009 Final Report’ (Attorney’s General Department, 2015) c 4.3.3.3, www.ag.gov.au/Consultations/Documents/PPSReview/ReviewofthePersonalPropertySecuritiesAct2009 FinalReport.pdf. The Brunei legislation has included the concept of chattel paper, although it is not a practice there: see ch 15 V E. 97 Draft Rules, r 50. 98 UNCITRAL Model Law, Art 77. 99 See Rupali Bank v Haji Ahmed Sabur and Another 43 DLR 464 where the High Court Division of Bangladesh Supreme Court held that money deposited in a bank’s current account cannot be retained by the bank when the depositor defaults on payment of a letter of credit. The judgment, however, is not well-articulated in its reasoning for such conclusion.

354 Marek Dubovec and Junayed Chowdhury are divided according to attachment, perfection, priority, and enforcement of a security interest. As the transitional provisions of the UNCITRAL Model Law exactly mirror these chapters, they are easier to follow. Under the current legal regime, it is not mandatory for contracts to be in writing.100 However, under the draft Act, a valid security agreement cannot be made orally even if the secured party is in possession of the collateral. Such an approach (deviating from the PPSA and UNCITRAL models which permit oral security agreements if the secured party is in possession of the collateral) is particularly important in case of disputes where evidence of a security agreement is required.

VII. Complementary Reforms Bangladesh is undertaking a targeted overhaul of its secured transactions framework that will be accompanied by changes in related areas of the law such as insolvency and special money loan court for enforcement of security interests. In the course of enacting a complete and broad priority regime for security interests in movable property, certain amendments to the Bankruptcy Act 1997 are necessary. The proposed amendment distinguishes the secured parties, as well as the priority, perfection, and enforcement of security interests from the general provisions of the Bankruptcy Act 1997 that are applicable to secured creditors in general.101 Furthermore, in the order of priority for repayment of debt claims, security interests in movable property are proposed to be set in the same class as bank loans, which have the third highest priority, after unpaid taxes and similar dues to the government, and salaries or payments owed to employees.102 Another important issue is the complication created by the Bankruptcy Act 1997 in relation to the power of the secured creditor to deal with the collateral. Section 54(2) of the Bankruptcy Act 1997 states that the secured party is restrained from dealing with the collateral, which stands vested in and taken over by the receiver or the court as the case maybe from the date of the order of adjudication of the bankruptcy court. The date of adjudication under section 31(4) of the Bankruptcy Act 1997 is deemed to take effect when a plaint is filed under section 14 of the Bankruptcy Act 1997. Thus, the combined effect of section 31(4) and 54(2) of the Bankruptcy Act 1997 imposes an automatic stay on the enforcement rights of a secured party. The stay subsists until the disposal and distribution of the property by the receiver/liquidator or the court. The claims of the secured creditor are dealt with by receiver/liquidator or the court. For the enforcement of security interests, a complete chapter is proposed to be included in the Money Loan Court Act 2003. Although the Money Loan Court Act 2003 was promulgated to protect only the interests of banks and financial institutions, the proposed chapter broadens the scope of the Act by including creditors like non-financial institutions under its coverage. The chapter will deal with the establishment, procedure, scope, and jurisdiction of a separate court for addressing disputes on secured transaction. The proposed court (entitled the Money Loan (Secured Transaction) Court) is to be structured in a similar manner to the money loan courts prescribed in the Money Loan Court Act 2003. In order to facilitate out-of-court settlement and avoid a backlog of cases, the proposed chapter contains provisions on alternative dispute resolution. Furthermore, the proposed chapter in the Money Loan Court Act 2003 provides elaborate

100 See

Rezaur Rahman & others v Al-Haj Ahmed Hossain Khan 6 BLD (HCD) 14 and s 10 of the Contract Act 1872. Act 1997, s 54. s 75(1)(c).

101 Bankruptcy 102 ibid

Bangladesh Secured Transactions Framework 355 guidelines on the execution of decrees of the court, further proceedings (including appeals), and other relevant provisions to make up a complete regime for the enforcement of rights and remedies in secured transactions under the draft Act and Rules. Bangladesh, as the pioneer for institutionalising microcredit transactions in the world,103 governs different aspects of microcredit financing through the Microcredit Regulatory Authority Act 2006. The Microcredit Regulatory Authority Act 2006 deals with some aspects of charges created in movable property.104 It also regulates charges created by micro-finance institutions. However, it does not prescribe any mechanism for identifying any prior charge.105 Therefore, an amendment is proposed to section 33 of the Microcredit Regulatory Authority Act 2006 to bring the issue of security interests in movable property under the secured transaction regime of Bangladesh. It is important to note that the Acts governing security interests in aircrafts106 and merchant ships107 have been kept outside the purview of the draft Act, as those statutes sufficiently cover all elements of a secured transaction (ie attachment, perfection, priority and enforcement).108 In December 2008, Bangladesh acceded to the Cape Town Convention on International Interests in Mobile Equipment, and ratified the Aircraft Protocol in April 2009.109 Nonetheless, as Bangladesh is a dualist country, an Act of Parliament is required to give effect to the Cape Town Convention. Initiatives to pass a bill incorporating the Cape Town Convention were commenced in 2011, but there has been no progress since then.110

VIII. Conclusion Bangladesh is another economy in the rapidly growing list that are undertaking secured transactions reforms. After assessing other reforms and the approaches underlying those reforms in the region, particularly India and Pakistan, it chose to follow established models that have been proven to deliver economic growth (Canadian PPSAs) and which have been the basis for the international best practice (UNCITRAL Model Law). If implemented in its present form, the draft Act and Rules will not only institutionalise an international best practice compliant legal regime but will also become a model for legal reforms in the region and beyond. Fundamental concepts like the functional notion of security interest, perfection underpinned by registration in an electronic notice-based system, and efficient enforcement will be accompanied by a number of other significant changes to the current regime. For instance, the existing law on notice dictates that a person shall be said to know a fact when he actually knows it or when he ought to have known it but for wilful abstention from an inquiry or gross negligence.111 103 Norwegian Nobel Committee, ‘Nobel Peace Prize for 2006 Press Release’ (13 October 2006), www.nobelprize.org/ prizes/peace/2006/press-release/. 104 Microcredit Regulatory Authority Act 2006, s 33. 105 World Bank Group (n 69) 24. 106 Governed under the Civil Aviation Rules 1984. 107 Governed under the Merchant Shipping Ordinance 1983, the Inland Shipping Ordinance 1976 and the Inland Mechanically Propelled Vessels Rules 1951. 108 See the Civil Aviation Rules 1984 (promulgated under the Civil Aviation Act 2017) that expressly cater for creation, perfection, and enforcement of secured interests. Although the Civil Aviation Rules 1984 are silent on the question of priority, the outcomes of competitions can be deduced from its overall scheme. 109 International Civil Aviation Organisation, ‘Status of Bangladesh With Regard to International Air Law Instruments’, www.icao.int/secretariat/legal/Status%20of%20individual%20States/bangladesh_en.pdf. 110 Civil Aviation Rules 1984. 111 Transfer of Property Act 1882, s 3.

356 Marek Dubovec and Junayed Chowdhury However, the draft Act expressly discards the notion of ‘constructive notice’. Thus, a person who did not have actual knowledge of a prior security interest but who has the ability to obtain such knowledge by conducting a search of the registry will not be deemed to have constructive notice or knowledge of the prior registered security interest. This amendment helps create certainty and enhances risk assessment to the benefit of creditors seeking security, which is important because Bangladesh’s courts have grappled with the definition of knowledge in specific contexts. In order to address this ambiguity, the draft Act provides specific provisions defining knowledge of different entities such as an individual, a partnership, a company, an association, and a statutory body. While knowledge of a security interest will play no role in allocating priorities in relation to secured transactions, clarification of ‘knowledge’ was considered important for the law more generally. The draft Act will codify a number of common law notions shrouded in uncertainty, including the measure of reasonably foreseeable damages for failure to discharge any obligation imposed under the draft Act.112 It will also provide for a standard of conduct in exercising one’s right or performing one’s obligations. The standard constitutes acting in good faith and in a commercially reasonable manner.113 The latter concept is new to Bangladesh, as it is not recognised under any of the laws of Bangladesh. This standard of conduct includes both a subjective and objective element, thus ensuring that nobody acts out of ill motive or in a commercially unreasonable manner. The draft Act and Rules are not a result of copying and pasting an international standard. They are results of meticulous work examining the text and practical application of various domestic laws, as well as the secured transactions regimes implemented in the region. The draft Act and Rules not only provide for a modern secured transactions regime, but also ensure that it will be properly integrated and aligned with the relevant domestic framework, thereby eliminating a number of uncertainties, particularly in the common law affecting secured transactions. The draft Act and Rules take into account the context of Bangladesh and has been discussed several times with the relevant stakeholders, especially the Ministry of Finance and the Bangladesh Bank. The introduction of a modern secured transactions system in Bangladesh is transformational in nature, forward looking, and has the potential to unlock better credit opportunities for MSMEs through the use of movable assets as collateral.

112 See,

113 This

eg s 27 of the draft Act. is similar to the standard in the UNCITRAL Model Law, Art 4.

17 Secured Transactions Law in India: Suggestions for Reforms M R UMARJI

I. Introduction In the early 1990s, India launched financial sector reforms based on the policies of de-regulation and liberalisation. As a part of such reforms, banks and other financial institutions were directed to undertake asset classification based on income recognition principles. On account of the delay in the recovery of defaulted loans, banks and financial institutions had to make provisions for probable losses, which had an impact on their profitability and ability to maintain capital adequacy as required under the prudential norms prescribed by the Central Bank of India. It was therefore necessary to confer special powers of recovery of defaulted loans on banks and financial institutions. To expedite this recovery process, the Recovery of Debts due to Banks and Financial Institutions Act 1993 was enacted to establish debt recovery tribunals to conduct recovery proceedings by following principles of natural justice. The detailed civil procedure applicable to the courts was not applicable to these tribunals. The establishment of such tribunals resulted in the speeding up of recovery processes for the banks and financial institutions. However, the delays in recovery of defaulted loans persisted, and, hence, the government of India considered many suggestions for new legislation including the following: i. empowering banks and financial institutions to realise secured assets by taking possession of the assets and selling them, without the intervention of the court; ii. facilitating the securitisation of financial assets by banks and financial institutions by the issuance of debt instruments by special purpose vehicles in favour of investors; and iii. the establishment of an Asset Reconstruction Fund for the acquisition of non-performing assets of banks and financial institutions. To expedite the process of reform the government decided to implement all of the above proposals by a single law and enacted the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (SARFAESI Act). The object of the enactment of the SARFAESI Act was to facilitate securitisation or reconstruction of financial assets, and to empower banks and financial institutions to recover loans by the enforcement of security interests without the intervention of the courts. The law, therefore, did not make any specific provisions for the perfection of security interests, or for the rights and obligations of the parties, or for priorities amongst the various claimants to the secured assets.

358 M R Umarji

II. Indian Law on the Creation and Perfection of Security Rights in Property The creation and perfection of security rights in property is not specifically provided for in Indian secured transactions law. The right to property is recognised by Article 300A of the Constitution of India with an implicit right to transfer property or to create a security interest in such property. These aspects of the law are governed by the general principles of the law relating to contracts and transfer of property contained in the Indian Contract Act 1872 and the Transfer of Property Act 1882. Section 5 of the Transfer of Property Act 1882 provides that ‘transfer of property’ means an act by which a living person conveys property, in present or in future, to one or more other living persons, or to himself or to himself and one or more other living persons, and to transfer property is to perform such act. The section also provides that the expression ‘living person’ includes a company or association or body of individuals whether incorporated or not. Section 6 of the Act further provides that property of any kind may be transferred, except as otherwise provided by this Act or by any other law for the time being in force. The section also provides for different categories of property rights which cannot be transferred, for example, that a mere right to sue cannot be transferred. The Transfer of Property Act therefore lays down the principle that any person can transfer property of any kind. The law relating to transfer of property also defines ‘immovable property’ as not including standing timber, growing crops or grass and separately defines ‘actionable claims’ as a claim to any debt other than that secured by mortgage of immovable property or by hypothecation or pledge of immovable property or to any beneficial interest in movable property not in the possession, either actual or constructive, of the claimant which the civil courts recognise as affording grounds for relief whether such debt or a beneficial interest be existent, accruing, conditional or contingent. Section 8 of the Transfer Property Act provides that unless a different intention is expressed or necessarily implied, a transfer of property passes forthwith to the transferee all the interest which the transferor is then capable of passing in the property and in the legal incidents thereof. Where the transaction relating to immovable property is required by law to effected by a registered instrument, any person acquiring such property or any part thereof shall be deemed to have notice of such instrument as from the date of registration. The Transfer of Property Act, therefore provides the law applicable to transfer of property rights and includes transfer for creation of security rights over the property. The expression ‘perfection of security rights’ is not used in the provisions of the Transfer of Property Act but section 47 of the Registration Act 1908 provides that any transaction relating to immovable property is required by law to be registered, and that such registered document shall operate from the time from which it would have commenced to operate if no registration thereof been required or made and not from the time of its registration. Section 48 of the Registration Act further declares that all non-testamentary documents duly registered under the Registration Act and relating to any property whether movable or immovable shall take effect against any oral agreement or declaration relating to such property unless where the agreement or declaration has been accompanied or followed by delivery of possession and the same constitutes a valid transfer under any law for the time being in force. A mortgage by deposit of title deeds as defined in section 58 of the Transfer of Property Act, is made effective against any mortgage- deed subsequently executed. It is clear from the above provisions of the Transfer of Property Act and the Registration Act that perfection of a security interest in a property right is achieved by registration of the

Secured Transactions Law in India: Suggestions for Reforms 359 document by which the security interest is created, if required by law, and that otherwise the security interest is effective by virtue of the document executed for creation of security interest. In view of these provisions in the general law applicable to transfer of property including transfer for the purpose of creation of security interest, no specific provision has been made in the SARFAESI Act for the creation and perfection of security interests. It also should be noted that the SARFAESI Act was enacted in 2002, that is, well before finalisation of the United Nations Commission on International Trade Law (UNCITRAL) Legislative Guide on Secured Transactions (2007) (UNCITRAL Legislative Guide). However some of the concepts of the Uniform Commercial Code of USA have been adopted in the Indian law. These include the following points: i. financial assets are made freely assignable notwithstanding anything to the contrary contained in any law or any agreement;1 ii. a ‘security interest’ is defined in generic terms giving effect to substance over form;2 iii. extra judicial powers of enforcement of security interest have been given to the banks and financial institutions (FIs); iv. the definition of property is wide so as to cover all kinds of property rights;3 v. the pre-existing law in India did not permit extra-judicial enforcement of mortgages of immovable properties, except section 69 of the Transfer of Property Act, which permits power of sale of mortgage property in the event of default without the intervention of the Court in cases where the mortgage is an English mortgage and neither the mortgagee nor the mortgagor is a Hindu, Muhamaddan or Buddhist and the mortgaged property is situated within the towns of Calcutta, Madras, Bombay or any other town notified by the State Government. On account of various restrictions applicable to the right of enforcement of mortgage under s 69, such power could be exercised only in cases where the borrower was a corporate entity and the mortgaged property was located in Presidency towns or notified towns. The effect of this provision was that banks and FIs could rarely exercise the right of enforcement of a mortgage under section 69. For this reason, definition of ‘property’ includes immovable property and mortgages of immovable property are included in the definition of security interest, contained in s 2(1)(zf) with power of enforcement without the intervention of the courts as provided in Chapter III of the SARFAESI Act, which applies notwithstanding the powers of enforcement contained in sections 69 and 69A of the Transfer of Property Act; vi. an enabling provision was included for setting up a registration system for recording security interest on property rights.4 Although the provision for Central Registry was enacted in 2002, the Registry was set up by issue of a notification on 31st March, 2011 after prescribing the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests (Central Registry) Rules, 2011 which were effective from 31st March, 2011.

1 See SARFAESI Act, s 5(1) which relates to the acquisition of financial assets by an Asset Reconstruction Company. See also IV E below. Note that the Factoring Regulation Act 2011 does not override anti-assignment clauses in contracts giving rise to receivables. 2 SARFAESI Act, s 2(1)(zf). 3 SARFAESI Act, s 2(1)(t) defines ‘property’ as ‘(i) immovable property; (ii) movable property; (iii) any debt or any right to receive payment of money, whether secured or unsecured; (iv) receivables, whether existing or future; (v) intangible assets, being know-how, patent, copyright, trade mark, licence, franchise or any other business or commercial right of similar nature[as may be prescribed by the Central Government in consultation with Reserve Bank]’. 4 SARFAESI Act, pt IV.

360 M R Umarji

III. The Salient Features of the Indian Law on Secured Transactions A. Possessory Security Right in Movable Property Sections 172–79 of the Indian Contract Act 1872 contain provisions for pledge of movables and provides for the rights of the pledgee in the event of default in payment of the loan given against the security of the pledge. A pledge is defined as a ‘bailment of goods as security for payment of a debt or performance of a promise’, the bailor is called the pawnor and the bailee is called the pawnee.5 The subject matter of the contract of pledge of goods is movable property capable of actual or constructive delivery. A pledge by deposit of documents of title to goods is valid. A pledge effected by deposit of railway receipts is valid.6 The law relating to possessory securities of movables in the Indian Contract Act 1872 is based on the common law of England. This law governing the rights of creditors lending money against the security a pledge of movables is well settled. The law relating to a pledge of movables is applicable to all lenders irrespective of whether they are banks or FIs. Thus, pledges granted to individual money lenders who lend against the security of gold ornaments, shares or other valuables are governed by the Contract Act provisions. In the event of default lenders have a right to sell the pledged goods without the intervention of the court.7

B. Non-possessory Security Interest As far as non-possessory security interests are concerned, the general principles of contract law are applicable. The definition of pledge requires actual delivery of goods, but a loan secured by hypothecation of goods does not require delivery of goods for its validity nor does the contract law prohibit it.8 Banks in India have been lending against the security of hypothecation of goods for many years so that the borrowers’ business operations or manufacturing activities are not affected. The courts have held that hypothecation not accompanied by possession confers good title upon the person in whose favour it is made and the law recognises the transaction as security and equity gives effect to it.9 The expression ‘hypothecation’ was not defined by any specific statute but was recognised by courts as included in the definition of ‘charge’ contained in section 2(16) of the Companies Act 2013 and the corresponding provision in the Companies Act 1956. In India banks lend working capital facilities to individuals, partnership firms and companies against the security of hypothecation of raw materials, semi-finished & finished stocks, other movable assets and book debts and other receivables. This type of charge satisfies the principal tests laid down in English law10 for a charge to be treated as a floating charge.11 The Apex Court in India considered the nature of a floating charge and held that floating charge refers to a charge created generally against assets held by the debtor at any given point of time during the subsistence of the deed of hypothecation.12 5 Indian Contracts Act 1872, s 172. 6 F Pollock and DF Mulla, The Indian Contract & Specific Relief Acts, 14th edn (LexisNexis, 2013) 1560. 7 Indian Contracts Act 1872, s 176. 8 Pollock and Mulla (n 5) 1566–67. 9 Jatindra Chandra Chowdhary v Rangpur Tobacco Co Ltd AIR 192 Cal 990 (Calcutta High Court) [2]; Punjab National Bank v Union of India (1983) 53 Comp Cas 842 (Delhi High Court). 10 Illingworth v Holdsworth [1904] AC 355 (HL). 11 See ch 15 IV D (i). 12 Indian Oil Corporation v NEPC India Ltd [2006] 6 SCC 355 [23].

Secured Transactions Law in India: Suggestions for Reforms 361 Although statutory company law provisions and other legislation, such as the Motor Vehicles Act 1988, recognised hypothecation, the legislation was silent on the procedure to be followed by creditors holding security as hypothecatee in order to take possession of secured assets without the intervention of the courts. In the absence of any statutory provisions governing enforcement of hypothecation, lenders did not have statutory powers of taking possession of hypothecated goods without the intervention of the court in the event of default. The sale of hypothecated assets by the secured creditors was possible only in cases where the borrowers voluntarily handed over possession of assets. The courts took the view that hypothecatee cannot be permitted to take over the hypothecated assets without the intervention of court and public policy requires safeguards to be provided against arbitrary repossession clauses.13 The SARFAESI Act changed the applicable law to the banks and FIs by specifically conferring powers of enforcement of security interests, prescribing procedure for re-possession of secured assets and by framing rules14 to ensure that secured creditors act in a fair & reasonable manner while exercising powers of extra-judicial enforcement of security interests. Since the existing law had no specific provision defining the expression ‘hypothecation’, when providing for extra-judicial enforcement of such security interest, the SARFAESI Act defined the expression ‘hypothecation’15 and included hypothecation in the definition of ‘security interest’.16 The secured transactions law therefore statutorily recognises hypothecation of goods as a security interest and confers powers of enforcement of such Security interest without the intervention of the courts in favour of banks and FIs. The Indian law on secured transactions is complex and contained in various statutes and also based on principles of common law of England. The applicability of the law depends on the nature of the security interest and the status of the secured creditor. The position of applicability of law is indicated in following table: Table 1 Nature of Security Interest

Status of Secured Creditor

Applicable Law

Possessory security of movables including documents of title to goods

All secured creditors including banks & FIs

Sections 172 to 179 of the Indian Contracts Act, 1872

Pledge of shares /securities in dematerialised form

All secured creditors including banks & FIs

Section 12 of the Depositories Act, 1996 & the Indian Contract Act 1872

Non-possessory security of hypothecation of movables, including fixed & floating charges over a company’s assets

All secured creditors including banks & FIs (i) For loans of less than INR100,000/-

Principles of contract law as provided by the Indian Contracts Act 1872 and provisions relating to registration of charges if the hypothecator is a company incorporated under company law (continued)

13 Tarun Bhargava v State of Haryana AIR 2003 Punj & Har 98. Although, note that this case involved possible inequality of bargaining power, and that in other cases, such as Chirangi Lal v Central Bank of India (1994) 80 Comp Cas 573 (Madhya Pradesh High Court) [6], the court said that ‘the creditor can take possession of the hypothecated goods directly without the court’s intervention’ and that ‘[t]he hypothecatee can exercise his right of sale either privately or through the court’. On any view, the position before the SARFAESI Act was unclear. 14 The Security Interest (Enforcement) Rules 2002. 15 SARFAESI Act, s 2(1)(n). 16 The definition of ‘security interest’ in s 2(1)(zf) is very wide and includes (in relation to tangible assets): ‘Any mortgage, charge, hypothecation, assignment or any right, title or interest of any kind, on tangible asset, retained by the secured creditor as an owner of the property, given on hire or financial lease or conditional sale or under any other contract which secures the obligation to pay any unpaid portion of the purchase price of the asset or an obligation incurred or credit provided to enable the borrower to acquire the tangible asset.’

362 M R Umarji Table 1 (Continued) Nature of Security Interest

Status of Secured Creditor

Applicable Law

Non-possessory security of hypothecation of movables, including fixed & floating charges over a company’s assets

(ii) For loans of INR100,000 or more granted by

Mortgages & other security interests over immovable properties

(i) All lenders

The Transfer of Property Act, 1882 and the Indian Registration Act 1908

Mortgages & other security interests over immovable properties

(ii) Banks & FIs

The Transfer of Property Act, the Indian Registration Act 1908 & SARFAESI Act 2002

banks & FIs

Principles of contract law as provided by the Indian Contracts Act 1872 and provisions relating to registration of charges if the hypothecator is a company incorporated under company law plus the SARFAESI Act 2002

IV. The SARFAESI Act A. The Scope of the Act The SARFAESI Act provisions are applicable to security interests in favour of ‘secured creditors’. A ‘secured creditor’ is defined in the Act, and, broadly, includes banks and FIs and those acting for them as trustee.17 The terms ‘bank’ and ‘financial institution’ are very specifically defined in the Act.18 The Act empowers the Central Government to specify, by notification, other banks as falling within the definition of ‘bank’ and any other FI as falling within the definition of ‘financial institution’ for the purposes of the Act.19 Accordingly, the Central Government has specified regional rural banks, systemically important non-banking finance companies and housing finance companies as banks and FIs for the purposes of the Act. The major secured lending activity is undertaken by banks, non-banking financial companies, (NBFCs) housing finance companies (HFCs) and other financial institutions. 17 SARFAESI Act, s 2(1)(zd) (as amended in 2016), which defines ‘secured creditor’ as: ‘Any bank or financial institution or any consortium or group of banks or financial institutions holding any right, title or interest upon any tangible asset or intangible asset as specified in clause (l); (ii) debenture trustee appointed by any bank or financial institution; or (iii) an asset reconstruction company whether acting as such or managing a trust set up by such asset reconstruction company for the securitisation or reconstruction, as the case may be; or (iv) debenture trustee registered with the Board appointed by any company for secured debt securities; or (v) any other trustee holding securities on behalf of a bank or financial institution, in whose favour security interest is created by any borrower for due repayment of any financial assistance.’ 18 SARFAESI Act, s 2(1)(c) defines a ‘bank’ as: ‘(i) a banking company; (ii) a corresponding new bank; (iii) the State Bank of India; (iv) a subsidiary bank; (iva) a multi-State co-operative bank; or (v) such other bank which the Central Government may, by notification, specify for the purposes of this Act. Section 2(m) defines a financial institution as (i) a public financial institution within the meaning of section 4A of the Companies Act, 1956 (1 of 1956); (ii) any institution specified by the Central Government under sub-clause (ii) of clause (h) of section 2 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993); (iii) the International Finance Corporation established under the International Finance Corporation (Status, Immunities and Privileges) Act, 1958 (42 of 1958); (iiia) a debenture trustee registered with the Board and appointed for secured debt securities; (iiib) asset reconstruction company, whether acting as such or managing a trust created for the purpose of securitisation or asset reconstruction, as the case may be; or (iv) any other institution or non-banking financial company as defined in clause (f) of section 45-I of the Reserve Bank of India Act, 1934 (2 of 1934), which the Central Government may, by notification, specify as financial institution for the purposes of this Act.’ 19 SARFAESI Act, ss 2(1)(c)(v) and 2(1)(m)(iv).

Secured Transactions Law in India: Suggestions for Reforms 363 A ‘security interest is defined as a ‘right, title or interest of any kind … upon property created in favour of any secured creditor’.20 The enforcement provisions21 and the enabling provisions in relation to the registration system22 refer to a ‘security interest’. The registration system, therefore, only applies to interests created by those who fall within the definition of ‘secured creditor’, namely, banks and financial institutions. However, section 26B of the Act23 enables the Central Government to extend the SARFAESI provisions on registration (in Chapter IV) to other creditors who are not ‘secured creditors’, as defined in the Act. It does not appear that this power of extension applies to Chapter III, which provides for out of court enforcement. As discussed above, the SARFAESI Act applies to all banks and other lenders falling within the categories mentioned. There are certain categories of lenders who are not covered by the law but the share of secured lending done by them is insignificant. Thus, the Act provides a system of enforcement of security rights to the majority of lenders in the Indian financial system. However, the non-applicability of the law to all lenders has become a constraint to the growth of credit, and on new entities, including foreign companies, undertaking the lending business. There are other provisions in the SARFAESI Act which affect its applicability. First, the Act prescribes a pecuniary limit of INR100,000/-and above; the provisions of the Act are not applicable to any loans below this pecuniary limit.24 Second, a secured creditor is defined as a person ‘in whose favour security interest is created by any borrower for due repayment of any financial assistance’.25 The definition of the expression ‘financial assistance’ therefore provides the boundaries of the types of transaction covered by the enforcement provisions of the Act. ‘Financial assistance’ is defined to include any loan or advance granted or any debentures or bonds subscribed or guarantees given or letters of credit established or any other credit facility extended by any bank or financial institution including funds provided for the purpose of acquisition of any tangible asset on hire or on financial lease or conditional sale or under any other contract or obtaining the assignment or licence of any intangible asset or purchase of debt securities.26 Hire-purchase and financial lease transactions have been included in the law by a recent amendment of 2016,27 and the effect of the provision is to treat financial lease or hirepurchase or conditional sale transactions as equivalent to secured transactions.28 Third, the expression ‘hypothecation’ has been defined in the Act as a charge in or upon any movable property, existing or future, created by a borrower in favour of a secured creditor without delivery of possession of the movable property to such creditor, as a security for financial assistance and includes floating charge and crystallisation of such charge into fixed charge on movable property.29 Fourth, the expression ‘property’ is defined in wide terms to include a debt or receivable whether secured or unsecured, debts which are existing and may arise in future and intangible assets, and other business or commercial rights.30 The definition of property has thus 20 SARFAESI Act, s 2(1)(zf). 21 SARFAESI Act, ch III. 22 SARFAESI Act, ch IV. 23 Added by amendment in 2016. 24 SARFAESI Act, s 31(h). 25 SARFAESI Act, s 2(1)(zd). 26 SARFAESI Act, s 2(1)(k). 27 This amendment was enacted by the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act 2016 and took effect on 1 September 2016. 28 However, companies who provide financing on hire-purchase or lease terms are not necessarily included in the limited definition of ‘secured creditors’ under the Act as they are non-banking financial companies, which are not necessarily specified as a financial institution under s 2(1)(m)(iv) of the SARFAESI Act. See V above. 29 SARFAESI Act, s 2(1)(n). 30 SARFAESI Act, s 2(1)(t).

364 M R Umarji become very wide indeed, and under the provisions of the Act it is possible to create a security interest over such property which is enforceable under the specific provisions of the Act. The ability of owners of such property to raise loans on the security of such assets has thus been facilitated on account of statutory enforcement regime provided by this Act. Fifth, the expression ‘security interest’ is defined for the first time in this Act.31 The original definition in the 2002 Act implements the principle of giving effect to substance over form. In other words, irrespective of the form of security, if there is any right, title or interest upon property transferred by the borrower in favour of the secured creditor such right, title or interest is treated as security interest for the purposes of this Act. The concept of security interest contained in the Act also equates any security over property with an interest in such property, in favour of the lender whether such interest is specifically provided for by the security document or not. The 2016 amendment Act32 revised the definition of ‘security interest’ to include transactions of hirepurchase, financial lease or conditional sale of tangible properties (which are based on retention of title rather than a transfer or grant of an interest) and assignment or licence or transfer of any other rights in intangible property rights. The definition is now in conformity with Article 1-201(35) of the Uniform Commercial Code which defines the expression ‘security interest’ as an interest in personal property, or fixtures which secures payment or performance of an obligation.33

B. Registration under the Act The SARFAESI Act as originally enacted (in 2002), contained a provision for the establishment of a registration system for recording security interest created over property rights.34 However this chapter relating to registration was not implemented until 2011 when for the first time a registry was established under the provisions of the Act: the ‘Central Registry’.35 Hence, the Act did not immediately provide for the concept of perfection of security interest by registration. Until then, the effectiveness of the security interest created was implemented under the general law of contract and the law applicable to the specific property such as motor vehicle or patent or design. Now, however, the registration provisions are in force and the register is operating.36

C. Enforcement under the Act Second, the SARFAESI Act makes provision for extra-judicial enforcement of security interest by secured creditors. It contains elaborate provisions prescribing the procedure for taking possession of secured assets and sale of such assets extra-judicially,37 replacing the restrictive rules in sections 69 and 69A of the Transfer of Property Act 1882,38 as follows: i. out of court action for the enforcement of a security interest can be taken in respect of a loan in default (which is classified as a non-performing asset according to the directions of the Reserve Bank of India); 31 SARFAESI Act, s 2(1)(zf). 32 Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act 2016. 33 It also conforms with the scope of a secured transactions law under the modern principles: see ch 2 IV B (i). 34 SARFAESI Act, ch IV. 35 SAFAESI Act, ss 2(1)(g) and 20(1). 36 Note that the registration provisions apply to factoring transactions in the same way as they do to transactions under the SARFAESI Act: see Factoring Regulation Act, s 19. 37 SARFAESI Act, s 13. 38 See II above.

Secured Transactions Law in India: Suggestions for Reforms 365 ii. the secured creditor has to give 60 days’ notice calling upon the borrower to repay the loan;39 iii. if the borrower has any objection to the notice, the secured creditor is required to reply to such objection giving its grounds for not accepting the objection;40 iv. if the borrower fails to pay the defaulted loan within 60 days, the secured creditor has various enforcement mechanisms available to it including taking possession of the encumbered assets;41 v. the secured creditor can take possession of an encumbered asset if it is handed over voluntarily and peacefully by the borrower. Otherwise the secured creditor has to file an application before the District Magistrate or Chief Metropolitan Magistrate, who are executive officers, to take possession and hand over the encumbered assets to the secured creditor.42 The procedure for taking possession of movable and immovable secured assets is provided by the Security Interest (Enforcement) Rules 2002. If the assets are movable assets, an inventory has to be prepared by the Authorised Officer of the secured creditor and hand over a copy to the borrower. If the asset is immovable property, public notice of repossession has to be published in English and local language newspapers;43 vi. after taking possession, the secured creditor shall obtain a valuation and set the price for encumbered assets;44 vii. the secured creditor can sell the encumbered assets by public auction issuing an advertisement inviting offers from the public. Private sales are also permitted after notice to the borrower of the proposed sale;45 viii. if any official authorised to take action to enforce a security interest does not act in accordance with the law and in a fair and reasonable manner, the aggrieved borrower has the right to take up the matter with the Debts Recovery Tribunal challenging the action of the secured creditor.46 There is a further appeal provided to the Debts Recovery Appellate Tribunal against order of the Debts Recovery Tribunal.47 ix. The above elaborate procedure ensures that banks and financial institutions exercise powers under the Act in a fair and reasonable manner and act in good faith.

D. Taking Security over Immovable Property The law relating to immovable property, including the creation of a security interest over such property, is contained in the Transfer of Property Act 1882. Unlike in the federal systems of USA and Canada, under the Federal system applicable in India the legislative powers in relation to transfer of immovable property are included in the concurrent list of the Constitution of India. As a result there is a uniform Central law applicable all over the country in regard to the transfer and creation of security interest over immovable property. As far as secured creditors other than

39 SARFAESI Act, s 13(2). 40 SARFAESI Act, s 13(3A). 41 SARFAESI Act, s 13(4). Other available enforcement mechanisms include taking over the management of the business of the borrower, appointing a manager to manage the secured assets and serving a notice on a person who has acquired any of the secured assets to pay money due towards discharging the secured debt. 42 SARFAESI Act, s 14. 43 Security Interest (Enforcement) Rules 2002, r 8(2). 44 Security Interest (Enforcement) Rules 2002, r 5 for movables and r 8(5) for immovables. 45 Security Interest (Enforcement) Rules 2002, r 6 for movables and r 8 for immovables. 46 SARFAESI Act, s 17. 47 SARFAESI Act, s 18.

366 M R Umarji banks and financial institutions are concerned, the mortgage of immovable property is regulated by the Transfer of Property Act and the rights of the mortgagor and the mortgagee are statutorily recognised and provided for in the law. The mortgagees do not have extra-judicial powers for enforcement of a security interest created by a mortgagor except in case of an English law mortgage complying with the provisions of section 69 of the Transfer of Property Act 1882.48 English mortgage provisions are not applicable to Hindus, Muslims and Buddhists and can be taken only in Presidency towns of Bombay, Calcutta and Madras. Hence such mortgages can be taken only from companies, but, on account of the very high rates of stamp duty payable on mortgages created by deed such as English law mortgages, the banks and FIs prefer to obtain mortgages by the deposit of title deeds (thus creating an equitable mortgage) which does not require any written document. However, such mortgages are not enforceable under section 69 of the Transfer of Property Act. Hence, powers of extra judicial enforcement have been conferred on the banks & FIs by the SARFAESI Act.49

E. Asset Reconstruction Companies In some jurisdictions, the problem of a high level of non-performing loans held by banks and financial institutions has been addressed by the government itself establishing an asset reconstruction fund, and the bad loans of the banks were acquired by such fund by providing government guaranteed bonds and other debt instruments. Instead of adopting this strategy, in India the activity of asset reconstruction was thrown open to the private sector by making statutory provision for the registration and regulation of asset reconstruction business undertaken by non-banking financial companies, under the SARFAESI Act. The SARFAESI Act provided for the setting up of a new type of financial institution called an ‘asset reconstruction company’ (ARC).50 Companies registered under the Companies Act can obtain registration from the Reserve Bank of India for undertaking the business of asset reconstruction. The Act gives ARCs the power to acquire loans from banks and financial institutions for the purpose of recovery or reconstruction and recovery.51 The consequences of such acquisition vesting all the rights in the ARCs are also provided by the statute.52 When the SARFAESI Act was enacted, restrictions were placed on the holding of a controlling interest in the share capital of ARCs by any person including banks and financial institutions.53 The object of this provision was to ensure that an ARC was not established by a bank as its subsidiary company to park bad loans. However, under a recent amendment,54 the restrictions on the holding of a controlling interest in the capital of ARCs have been withdrawn and it is now permissible for any company to hold an ARC as a subsidiary company. The Central Government has also issued a press note55 permitting foreign investment in the capital of ARCs. With this relaxation of the limits on the holding of a controlling interest in the capital of ARCs, many new 48 See II above. 49 See IV C above. 50 SARFAESI Act, s 2(1)(ba) defines an ‘asset reconstruction company’ as ‘a company registered with Reserve Bank under section 3 for the purposes of carrying on the business of asset reconstruction or securitisation, or both’. 51 SARFAESI Act, s 5. This power is exercisable ‘Notwithstanding anything contained in any agreement or any other law for the time being in force’ (s 5(1)). 52 ibid. 53 SARFAESI Act, s 3. 54 Effected by the Enforcement of Security Interest and Recovery Debts Laws and Miscellaneous Provisions (Amendment) Act 2016. 55 Press Note No 4 (2016 series) dated 6 May 2016.

Secured Transactions Law in India: Suggestions for Reforms 367 ARCs have been registered, and at present there are 25 companies operating in the financial market to acquire and deal with non-performing assets of banks and financial institutions. Thus, instead of a state sponsored asset reconstruction fund being set up, the business of asset reconstruction is undertaken by non-banking finance companies subject to regulation and supervision by the Reserve Bank. Asset reconstruction in this manner is also facilitated by amendments to the law relating to stamp duty. When ARCs acquire financial assets from the banks the deed of assignment would prima facie attract ad-valorem stamp duty in accordance with various State laws. In exercise of the powers under the concurrent list, the Indian Stamp Act has been amended to exempt such deeds of assignment from State stamp duty.56 Such an amendment has reduced the costs of acquisition of assets and facilitate acquisition of more financial assets. The SARFAESI Act as originally enacted contemplated that even performing assets of banks and financial institutions could be acquired by ARCs by way of securitisation of such assets. However, the Reserve Bank of India took the view that the SARFAESI Act was intended to apply only to non-performing assets, and, therefore, acquisition of performing assets by the ARCs was not permissible. As a result of this interpretation, the entire concept of securitisation was also interpreted by the courts in India to mean the process of taking possession of secured assets for the purpose of enforcing security interests. In the case of Hindon Forge Pvt Ltd v State of UP,57 an application under section 17 of the SARFAESI Act,58 by a borrower challenging the action of the bank taking possession of secured assets, is referred to as a ‘securitisation application’. By implication, the action of a bank of taking possession is being treated as ‘securitisation’. This is a misinterpretation of the concept of securitisation, and needs to be corrected by segregating the securitisation of performing assets from the provisions of the SARFAESI Act, unless such securitisation is for the reconstruction scheme of any debtor under stress. One other reform that could be considered is to amend the SARFAESI Act to make express provision for the creation and perfection of security interest for secured borrowings from banks and FIs.

F. Priority of Various Claimants against Debtors The SARFAESI Act as originally enacted did not make any provision laying down rules of priority amongst various creditors and other claimants against the secured assets or the sale proceeds of the secured assets. Priority was, therefore, decided in accordance with the general law applicable to the exercise of such security rights by secured creditors. This general law operated on the basis of following principles. First, as a general rule, money due to of the government (such as tax and other revenue) had priority over unsecured debts due to unsecured creditors.59 In relation to a security interest created over any asset or property, the secured creditor had a prior right to enforce its security interest over all unsecured creditors including crown debts.60 In cases where the tax or revenue payable to the government was, by a specific statutory provision, made a first charge on the assets 56 SARFAESI Act, s 5(1A), added by the Enforcement of Security Interest and Recovery Debts Laws and Miscellaneous Provisions (Amendment) Act 2016. 57 MANU/SC/1250/2018. 58 s 17 provides that any person may make an application to the court if they are aggrieved by the measures taken by a secured creditor under s 13 to recover a secured debt. 59 Manickam Chettiar v Income Tax Office (1938) 1 MLJ 351 (Madras High Court); AIR (1955) Bom 305 (Bombay High Court). 60 Collector of Tiruchirapalli v Trinity Bank Ltd, Trichirapalli AIR (1962) Mad 59 (Madras High Court).

368 M R Umarji of the assessee, such tax or revenue gets priority even over the secured creditors. However, in the case of the insolvency or winding up of the debtor, a secured creditor has a right to remain outside insolvency or winding up proceedings and realise his security, but has to bear the costs of preservation of the secured assets.61 By virtue of the right to realise the security in a proceeding other than winding up the secured creditor gets priority over unsecured creditors.62 The 2016 amendment to the SARFAESI Act has, however, introduced new provisions relating to priority, clearly providing that, notwithstanding anything contained in any law, the claims of secured creditors have priority over all other claims including taxation dues and the claims of the revenue.63 In addition, these recent amendments to the SARFAESI Act have introduced far-reaching changes to the registration system, and have extended the types of property rights over which security can be created, both of which affect the priority rules. The position is now as follows. Financial leases, and hire purchase or conditional sale transactions are now included in the definition of ‘security interest’.64 Security interests over intangible assets, and assignments and licences of intangible assets by way of security are also included in the definition of ‘security interest’ under the amendment.65 This has the consequential effect that the enforcement, registration and priority provisions now apply to such interests. At present under Indian law, there are various registration systems under the Companies Act 2013,66 the Motor Vehicles Act 1988,67 the Patents Act 1970,68 the Designs Act 200069 and other legislation. Introduction of a new registration system under the SARFAESI Act therefore results in duplication of registration in respect of many types of movable properties. To avoid such duplication and to bring transparency it is proposed to create a new central database by making enabling provision to integrate various registration systems operated by the States and other central laws with the Central Registry. It is also proposed to extend the new registration system to all secured creditors and taxation authorities issuing orders for attachment of assets of defaulting debtors, with the object of creating a central database of all encumbrances on property rights at the national level.70 The amended law also provides that any registration of a security interest by a secured creditor shall amount to a public notice of such security interest and any transfer, sale or other dealing with the secured asset shall be subject to a security interest which is already registered.71 The only exception to this rule is sale of secured assets by the debtor in the ordinary course of business.72 The other major change introduced in the registration system is to make the entire requirement of registration voluntary. The effect of this and the provision mentioned in the previous

61 See ss 52, 110 and 172 of the Insolvency and Bankruptcy Code 2016. 62 See Presidency Towns Insolvency Act 1909, s 17; Provincial Insolvency Act 1920, ss 28(2) and (6), applicable to individuals & partnership firms; Insolvency and Bankruptcy Code 2016, s 52(1), applicable to companies. 63 SARFAESI Act, s 26B–E, which became effective on 24 January 2020; Recovery of Debts and Bankruptcy Act 1993, s 31-B, which is effective from 1 September 2016. 64 SARFAESI Act, s 2(zf). 65 ibid. 66 Companies Act 2013, ss 77–87. 67 Motor Vehicles Act 1988, s 51. 68 Patents Act, ss 68 and 69. 69 Designs Act, s 30. 70 The power for the Central Government to make these modifications by notification is contained in s 26B of the SARFAESI Act. 71 SARFAESI Act, ss 26C(1) and (2). 72 SARFAESI Act, s 26C(2).

Secured Transactions Law in India: Suggestions for Reforms 369 paragraph is that the priority of the secured creditor is linked to registration. In other words, a secured creditor can claim priority over other claims against the secured assets, on a first to file basis, provided its security interest is registered with the Central Registry.73 Since the exercise of amending provisions of the registration systems under different laws would have been a difficult exercise, a provision has been made that the effect of registration under the SARFAESI Act Registry shall be without prejudice to the registration done under any other law for the time being in force.74 The effect of this provision is that on registration under the SARFAESI Act, the consequence of public notice will follow and any person dealing with such secured assets will need to make inquiries in regard to security interest registered under the SARFAESI Act. The operation of the general law relating to registration will continue to be operative and provisions of new registration system will be supplemental to existing law.75 It is also provided that the security interest registered under the SARFAESI Act shall have priority over taxation dues.76 In other words, a secured lender obtaining a security interest in property will be required to register that security interest in order to claim priority over taxation dues as well as other claimants as well as, as mentioned above, to give public notice of their lending against the security created in their favour. The integration of the registration systems under other laws with the Central Registry mentioned above is likely to take some time. The same is true for the contemplated registration with the Central Registry of attachment orders of properties issued by tax recovery officers.77 Such registration has to be worked out with different taxation authorities and, in view of these pending matters, the chapter relating to changes in the registration system introduced by the 2016 Amendment, has only recently been made effective by the Government of India,78 and the notification that would extend the system to all secured creditors and taxation authorities has not yet been given. It is the author’s view that implementation of the amended provisions to reform the registration system would not affect the operation of the registration systems under the other laws. The registration under the SARFAESI Act can be effected immediately after creation of a security interest, whereas the other laws permit registration to be filed within a 30 to 120 day period.79 Such other laws also provide that on registration within the permissible time, the effective date of registration shall be the date of document by which security interest is created. In view of such provisions the effective date under both registration systems will be almost the same because the SARFAESI registration will be done immediately after a security interest is created and the registration under the general law will become effective from the date of creation of security interest. The operation of both the laws would not therefore adversely affect the rights of parties. With the introduction of technology in all the registration systems the new concept proposed to be introduced by the SARFAESI Act will facilitate reforms in the registration systems under all the laws.

73 SARFAESI Act, s 26C. Note that this reflects the modern principles; see ch 2 IV B (ii). 74 SARFAESI Act, s 26C(1). 75 For discussion of the difficulties of this approach, see ch 2 IV B (ii). 76 SARFAESI Act, s 26E. 77 SARFAESI Act, ss 26B (4) and (5). 78 ss 26B–E became effective on 24 January 2020. 79 For example, s 77(1) of Companies Act 2013 provides for a 30 day period and s 23 of Registration Act 1908 provides for a period of four months for registration.

370 M R Umarji

V. Compliance of Indian Law with Modern Principles of Secured Transactions Law In chapter 2 the modern principles of secured transactions law have been elaborately discussed and listed. The extent of conformity of Indian law to the modern principles of secured transactions law is now discussed. First, one feature of the modern principles is that public notice is a general condition for third-party effectiveness. The primary way of giving public notice under such principles is a grantor identifier-based registry for registration of notices of security interests.80 In India the registration system has been established, and notice of creation of security interest by the borrowers is required to be registered with the Central Registry. While the Indian system is not entirely aligned with the notice-filing system discussed in chapter 2,81 a specific provision has been incorporated in the SARFAESI Act declaring that on registration of notice of security interest, such security interest shall be effective against all third parties and any transfer or other dealing with that property shall be subject to such security interest. In other words, the priority rule is the ‘first to register’ rule which is an important precept of the modern principles.82 The modern principles also require that methods for creation of security interests should be clear and easy to achieve.83 Under Indian law before the SARFAESI Act the creation of a security interest can be by execution of a document recorded on a stamp paper, if applicable, and registered in accordance with the law applicable to the property over which the security interest is created. There are certain categories of property such as motor vehicles and property belonging to corporates where the registration requirement still exists under two separate laws, but the new requirement of registration under the SARFAESI Act has stabilised and dual registrations are being done under the applicable laws. The Indian secured transactions law has also been amended to provide clear and predictable priority rules including the general effectiveness of security interests in insolvency proceedings and priority of security interests over other interests.84 The rights of secured creditors have been given a super priority over all other claims including the claims of the Government for tax dues,85 only subject to the claims of the work-men towards unpaid dues which are given pari-passu status along with secured creditors.86 However, as far as the clarity on the nature of priority available to various claimants there are no doubts and the position has been clearly laid down by the recently amended law.87 The Indian registration system is now in conformity with modern principle of secured transactions law that priority rules should be clear and predictable.88 The basic object of the enactment of the secured transactions law in India was to provide the right of enforcement of security to banks and financial institutions. Therefore, provisions relating to enforcement of security, including extrajudicial enforcement, are clearly specified in the law.89

80 Ch 2 IV B (ii). 81 Ch 2 IV B (iii). 82 Ch 2 IV B (ii). 83 Ch 2 II. 84 See IV F above. 85 SARFAESI Act, s 26E. 86 Insolvency and Bankruptcy Code 2016, s 178. SARFAESI Act, s 26E provides that ‘where insolvency or bankruptcy proceedings are pending in respect of secured assets of the borrower, priority to secured creditors in payment of debt shall be subject to the provisions of [the Insolvency and Bankruptcy] Code’. 87 The amendment was brought into force on 24 January 2020. 88 Ch 2 II. 89 SARFAESI Act, ch III.

Secured Transactions Law in India: Suggestions for Reforms 371 The constitutional validity of the law has also been upheld by the Supreme Court, after noting that the banks and FIs are required to act in a fair and reasonable manner in the matter of exercise of rights of enforcement of security.90 The Indian secured transactions law is compliant with the requirement of the modern principles that the law must make provision for effective enforcement of security interests following a debtors default, including extrajudicial enforcement.91 The expression ‘property’ has been clearly defined in the law and includes all kinds of personal property used as collateral, including future assets securing future obligations. All types of property are therefore covered by the law, thus complying with the modern principle that ‘all types of personal property are available as collateral, including future assets securing future obligations’.92 Another modern principle is free assignability of receivables.93 As far as this is concerned, basically receivables are recognised as property in which a security interest can be created, and, to supplement disposition of receivables, a new law titled Factoring Regulation Act 2011 has been enacted facilitating assignment of receivables by any person in favour of a factor. This facilitates borrowing money against the security of receivables or by assigning receivables to a factor, without recourse to assignor.94 Another modern principle is that there is ‘comprehensive coverage of all forms of security devices’.95 The Indian secured transactions law is not applicable to possessory security because the law relating to possessory security has already been on the statute books for more than hundred and fifty years and is a well-settled law.96 The law, however, applies to all other categories of security interests including assignment or licence of intangible property rights as security for a loan. As mentioned above,97 by a recent amendment,98 transactions of hire purchase and financial lease have also been included in the definition of security interest. Thereby there is a comprehensive coverage of all forms of security devices recognised under Indian law. Another modern principle is the ‘extension of security interests to the proceeds of collateral’.99 The banks and financial institutions who lend money against the security of movable property usually take a security interest over the sale proceeds of that property by way of hypothecation of book debts and the security interest created over movables thereby is extended to the proceeds of the collateral property.100 Another modern principle is ‘the general acceptance of freedom of contract for inter-party relations’.101 In India, there is a general acceptance of freedom of contract for inter-party relations of parties to transactions of lending against security of any property. While transactions of hire purchase and financial lease are now included in the definition of ‘security interest’ and are treated on a par with a security interest, the companies who were engaged in the business of giving movable property on hire or financial lease are not necessarily treated as ‘secured creditors’ under

90 Mardia Chemicals Ltd v Union of India AIR (2004) SC2371 (Supreme Court of India). 91 Ch 2 II and IV B (vii). 92 Ch 2 II. 93 ibid. 94 See discussion below at VI. Note, however, that the Factoring Regulation Act does not override anti-assignment clauses, which is a key component of the modern principles: see ch 2 IVB(vi). 95 Ch 2 II. 96 Indian Contract Act 1872, ss 172–79; see III A above. 97 See IV A above. 98 Under the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act 2016, effective from 1 September 2016. 99 Ch 2 II. 100 There is, though, no automatic extension of a security interest to proceeds, as there is under the UNCITRAL Model Law, Art 10. 101 Ch 2, II.

372 M R Umarji the secured transactions law. Such a recognition as secured lenders would require such lenders to obtain registration as a non-banking finance company with the Reserve Bank of India and thereby undertake financial lease & hire-purchase activity subject to regulation by the Reserve Bank.102 In practice this has resulted in some manufacturers of vehicles and other goods which are usually given on hire or financial lease terms to form separate companies for the purpose of lending activity which are then registered with the Reserve Bank of India. In effect there is a general acceptance of freedom of contract for inter-party relations. One final modern principle is that there are clear private international law rules.103 The Indian secured transactions law does not make any provision for such rules, and the general law contained in the Civil Procedure code is applicable to choice of law issues. In accordance with the internationally accepted modern principles of secured transactions law, it would be advisable for choice of law rules to be incorporated in the Indian law.

VI. Factoring Regulation Act, 2011 A new statute entitled the ‘Factoring Regulation Act 2011’ has been enacted for the purpose of facilitating assignment of receivables in favour of factors. Any company registered under Indian company law can obtain registration as a factor from the Reserve Bank of India and undertake business of acquiring financial assets by way of assignment of receivables.104 Provision has also been made for registration of every factoring transaction with the Central Registry.105 The law extends to any receivables for export of goods and services subject to compliance with Foreign Exchange Management Act, 1999.106 Since the document under which the receivables are assigned attracts State stamp duty under respective State Stamp Duty Laws, the Factoring Regulation Act 2011 exempts such documents from stamp duty.107 Although the Factoring Regulation 2011 is not a total adoption of the UN Convention on Assignment of Receivables, it incorporates the major provisions of the UN Convention and is consistent with the principles laid down by the Convention. The Factoring Regulation Act 2011 also furthers the aim of the modern principles for the law of secured transactions to have a wide scope, since assignments of receivables are included in the registration scheme of the SARFAESI Act.

VII. Suggestions for Reform in the Indian Law A. Piecemeal Reform In order to bring the Indian secured transactions law on a par with international standards, and in conformity with the UNCITRAL Legislative Guide, the following reforms and steps should be taken by the Indian government: i. The SARFAESI Act has limited application to banks and FIs as defined in the Act. It is necessary to extend the law to all secured lenders irrespective of whether they are banks and FIs.

102 It

would also be necessary for them to be specified under s 2(1)(m)(iv); see IV A above. 2 II. 104 Factoring Regulation Act, s 3. 105 Factoring Regulation Act, s 19. 106 Factoring Regulation Act, s 7. 107 See the amendment to the Indian Stamp Act 1899 in the schedule of amendments in the Factoring Regulation Act. 103 Ch

Secured Transactions Law in India: Suggestions for Reforms 373 If need be, the right of enforcement of security by lenders other than banks & FIs can be subject to compliance with additional rules to ensure that they do not abuse the availability of extra-judicial enforcement and that they act in a fair and reasonable manner while exercising powers of enforcement of security. But there is a need to make the law universally applicable to all lenders engaged in the business of lending against security over any property. Such a step will create competition for banks & FIs and will facilitate the growth of secured lending, triggering creation of wealth and generating employment and overall growth in the economy. ii. The SARFAESI Act, has already been amended by the Amendment Act 2016 to include transactions of hire-purchase, conditional sale and financial lease as equivalent to security interests in favour of the owners of property which is leased or conditionally sold or subject to hire purchase agreements. Further, the registration system has been modified to give effect to the registration from the date and time of registration and also made the requirement of registration voluntary. The amendment has also given priority to secured creditors over other claims including taxation dues. The only step that was required to be taken by the government to implement the amendments, has also been taken by issue of a notification declaring 24th January 2020 as the date of commencement of the amended provisions. Since the registration system is proposed to be extended to all secured credit transactions and attachment orders issued by taxation authorities, it has to be ensured that its capacity is built up and taxation authorities are directed to register attachment orders. iii. Although all secured lenders take steps to register the security interests created in their favour, when it comes to satisfying security interests on the recovery of the full loan outstanding there is a neglect on the part of the secured lenders as well as the concerned borrowers to file satisfaction of security interests.108 As a result, even after a loan is repaid, the security interest continues to be reflected in the records of the Central Registry. It is therefore necessary to replace the provision for filing satisfaction of security interest, by a provision that any registration shall be effective for a specified number of years and on expiry of the same the security interest shall stand satisfied. In cases where the loan is not fully repaid provision can be made for further extending the registration of the security interest by a specified period. Such a provision would ensure that security interests which are already satisfied are no longer reflected in the records of the Registry and it will also ensure that all concerned parties will take steps to extend a security interest in the Registry if the secured loan is not yet fully paid. iv. It is also necessary to amend the law to segregate securitisation from the provisions of the Act and restrict its applicability to secured transactions and enforcement of security, including registration of a security interest in the Central Registry.109 Asset reconstruction may also be included in the law as one of the modes of recovery of defaulted loans.

B. Wholesale Reform Based on the Legislative Guide for Secured Transactions Law, UNCITRAL has already adopted a Model Law on Secured Transactions.110 India needs to consider enactment of a model law

108 See 109 See 110 See

SARFAESI Act, s 25. IV E above. ch 4.

374 M R Umarji adopting the UNCITRAL Model Law on Secured Transactions (2016) (UNCITRAL Model Law), which is applicable to security interests over movable property rights including intangible property. The reform of enacting a new law based on the UNCITRAL Model Law, needs to be considered so that all the legal provisions applicable to creation of a security interest, the rights and obligations of contracting parties, the registration system and the enforcement of security by secured creditors can be covered by the new law. The existing secured transactions law contained in the SARFAESI Act does not explicitly cover the right of any person holding property or an interest in property to transfer or assign a right, title or interest in the property held by such person as a security for a loan. In a recent case decided by the Supreme Court of India,111 it has been held that a bank cannot accept assignment of any trademark as a security for a loan nor can it assign the right to use the trademark to any person for the purpose of recovery of the loan. Such a view has been taken on the basis that provisions of the Banking Regulation Act 1949 do not permit banks to undertake business of selling goods by using trademarks given as a security and such assignment is therefore not valid. Unfortunately, the decision is not based on the secured transactions law, but purely on Banking Regulation Act and the business activities that can be undertaken by the bank. If a new law is enacted adopting the model of UNCITRAL, the right to use the property, including intellectual property, as the security for a loan would be permissible under the new law instead of relying on the general law of property and contract to assert the right of any person to transfer property as a security for any loan. In view of the above, the other alternative for reforms of secured transactions law in India, is to adopt the UNCITRAL Model Law. Since the present law covers security interest over immovable property, a separate chapter can be added in the new law in regard to security interests over immovable property. As far as security interests over intangible property rights are concerned, the secured transactions law can be supplemental to, and in modification of, existing intangible property law. If such a self-contained new law based on the UNCITRAL Model Law were enacted, the need to rely on general principles of law of contract and transfer of property to establish valid creation of security interest over property rights would disappear. India therefore, needs to consider adoption of the UNCITRAL Model Law, and the replacement of the existing secured transactions law which is not self-contained and has restricted application.

VIII. The Impact of the Insolvency and Bankruptcy Code 2016 on Secured Transactions Law The Insolvency and Bankruptcy Code 2016 (IBC 2016) has become effective in India in regard to insolvency of corporate entities registered under the Companies Act 2013 or the Limited Liability Partnership Act 2008. The Code also contains provisions for insolvency of individuals and partnership firms but these are yet to be brought into force. (Provisions applicable to personal guarantors of corporate debtors have been partially brought into force.) The major difference between the secured transactions law and the IBC 2016 is that initially the IBC provided the trigger for service of an insolvency petition to be default of payment of INR100,000 or more, which has since been amended to INR 1,00,00,000 (1 Crore) with effect from 24th March, 2020, while an action for enforcement of security under the SARFAESI Act can be taken on default of INR 100,000 (1 Lakh) only and after classification of the loan account as a non-performing asset

111 Canara

Bank v NG Subbaraya Setty MANU/SC/0433/2018 [41].

Secured Transactions Law in India: Suggestions for Reforms 375 after 90 days default in accordance with the guidelines of the Reserve Bank of India.112 Hence, secured creditors now have no option but to enforce security interests under the SARFAESI Act in respect of recovery of loans of less than INR 1,00,00,000 (1 Crore). The other major difference is that in an insolvency proceeding, the claims of all secured and unsecured creditors, suppliers of goods and services and other claimants are to be considered, and the process takes longer than taking possession of secured assets and selling them without the intervention of the court. In spite of enactment of the IBC 2016, banks and financial institutions prefer to exercise the powers of enforcement of security under the SARFAESI Act, and the filing of insolvency petitions is only resorted to in exceptional cases. The IBC 2016 also recognises the right of secured creditors to remain outside insolvency proceedings and to enforce security under the applicable law. Hence the SARFAESI Act continues to be effective and relevant for the secured creditors. The major reform of inclusion of hire purchase and lease transactions in the definition of ‘security interest’ and of making the registration of security interests effective against third parties have already been enacted.113 The government of India needs to observe how the new registration system and the amended provisions operate in practice and assess the effectiveness of the new registration system and thereafter consider when the UNCITRAL Model Law may be adopted, to replace the existing law, which will make the law universally applicable to all secured creditors including banks and FIs.

112 See

IV C above. reforms have been effective since 24 January 2020.

113 These

376

18 Pakistan’s Reform of Secured Transactions Law: Challenges and the Road Ahead MAREK DUBOVEC AND ZAHRA ABID

I. Introduction Pakistan’s economic environment is characterised by a lack of access to credit, especially for microbusinesses and small and medium sized enterprises (SMEs), and a high level of non-performing loans (NPLs). Only 5.7 per cent of Pakistan’s SMEs have access to credit, and the percentage of private credit to the GDP has shrunk in recent years. The government, being aware of these negative developments, formulated a national financial inclusion strategy, which included a recommendation to reform the legal framework for secured transactions in movable property. These efforts led to the enactment of the Financial Institutions (Secured Transactions) Act (ST Act) in 2016. Pakistan’s pre-reform legal regime remains in force until the implementation of the ST Act. The ST Act’s is expected to enter into force in May 2020 when the registry should be launched. Pursuant to section 70 of the ST Act, the Federal Government, on 24 January 2020 issued the Financial Institutions (Secured Transactions Registry) Rules (Rules). Earlier, in August 2019, the Securities and Exchange Companies of Pakistan issued Regulations to promote warehouse receipts financing and the issuance of electronic warehouse receipts by authorised parties. Like the ST Act, these Regulations are in the process of being implemented. The secured transactions framework is comprised of two substantively distinct legal structures: one for incorporated entities, and another for unincorporated entities and natural persons. As in many common law jurisdictions,1 a registration system for non-possessory security devices exists only for charges created by incorporated entities, which is one of the main reasons for lenders’ reluctance to extend credit secured with movable assets to other types of borrowers. The demand for credit from a significant majority of Pakistan’s businesses thus remains unmet. Due to constitutional and political limitations, the ST Act, though influenced by the United Nations Commission on International Trade Law (UNCITRAL) Legislative Guide on Secured Transactions (2007) (UNCITRAL Legislative Guide), could not incorporate all the approaches and features of a modern secured transactions law. Certain important matters, such as the rights of suppliers and stamp duties, have historically been within the powers of the provinces, so a conscious decision to introduce a piecemeal reform was made. The reform does not affect the registration requirements with respect to charges created by companies under the Companies Act

1 See

ch 15 IV C.

378 Marek Dubovec and Zahra Abid but provides a set of priority rules to resolve conflicts between registered charges, thus clarifying the common law. Other notable departures include the application of the ST Act to absolute assignments of receivables without requiring registration to attain ‘perfection’, and the availability of extra-judicial remedies only for enumerated security devices. Nevertheless, the ST Act provides an efficient legal framework for securing obligations with rights in movable property, while also prescribing the establishment of an electronic notice-based registry. The adoption of the ST Act was accompanied by an overhaul of the related commercial law framework, especially on insolvency and business companies. The implementation of changes to the commercial law framework holds great promise for jumpstarting business lending in Pakistan. However, a number of challenges caused by the deviations of the ST Act from the international standards already provided an impetus to a revision that is looking at a closer alignment with the criteria set out in the World Bank’s Doing Business Report, the Getting to credit indicator. Given this limited focus, at this point, some broader challenges such as the alignment of the STA with the Regulations that enable the issuance of electronic warehouse receipts with respect to their pledges remain, and should be addressed.

II. Economic Overview Pakistan is a South Asian, lower-middle-income economy that since achieving independence in 1947 has sought to improve the standard of living via economic growth rather than wealth distribution, focusing primarily on increasing the role of industry in the national economy.2 Though Pakistan has developed an industrial base post-independence, political instability, low foreign investment, and failure to diversify its exports have left the economy vulnerable to fluctuations in global demand.3 New policies spurred economic growth throughout the 2000s, resulting in renewed IMF support and increased privatisation, as well as the prioritisation of agriculture and SMEs, oil and gas exploration, and the development of a software industry.4 This period of growth was substantially set back by the 2008 economic crisis and major flooding in 2010, with the economy only regaining pre-downturn GDP growth rates in recent years (4.4 per cent GDP growth in 2015, 5.3 per cent in 2016).5 Pakistan averaged approximately 5 per cent GDP growth per year from 2005 to 2018.6 In 2016, agriculture comprised 24.4 per cent of the GDP, industry 19.1 per cent, and services the remainder.7 Textiles and garments are Pakistan’s largest industrial export, making up 60 per cent of all exports in 2017.8 Other major industries include food processing, pharmaceuticals, surgical instruments, construction materials, paper products, and fertiliser.9 In agriculture, Pakistan is one of the world’s largest producers of raw cotton.10 Other major agricultural products 2 See World Bank, ‘World Bank Country and Lending Groups’, datahelpdesk.worldbank.org/knowledgebase/ articles/906519-world-bank-country-and-lending-groups; see also P Blood (ed), Pakistan: A Country Study (Washington, GPO for the Library of Congress, 1994), countrystudies.us/pakistan/44.htm. 3 World Factbook, ‘South Asia: Pakistan’ (12 January 2020), www.cia.gov/library/publications/the-world-factbook/ geos/pk.html. 4 The Commonwealth, ‘Pakistan: Economy’ (2018), thecommonwealth.org/our-member-countries/pakistan/economy. 5 ibid. 6 ‘Pakistan GDP Growth Rate’ (Trading Economics, 2020), tradingeconomics.com/pakistan/gdp-growth. 7 World Factbook (n 3). 8 Observatory of Economic Complexity, ‘Pakistan’ (2016), atlas.media.mit.edu/en/profile/country/pak/. 9 World Factbook (n 3). 10 Nations Encyclopedia, ‘Pakistan – Agriculture’, www.nationsencyclopedia.com/economies/Asia-and-the-Pacific/ Pakistan-AGRICULTURE.html.

Pakistan’s Reform of Secured Transactions Law 379 include wheat, rice, sugarcane, fruits, vegetables, milk, beef, mutton, and eggs.11 Data from 2017 shows that Pakistan’s major export partners are mostly from Asia (37 per cent) and Europe (38 per cent), though the single largest destination was the United States (14 per cent).12 Pakistan’s major imports are machines, mineral products, chemical products, metals, and textiles.13 Pakistan has 35 scheduled banks,14 one non-scheduled bank,15 and 12 microfinance banks.16 The State Bank of Pakistan (SBP) currently maintains a 13.25 per cent key interest rate.17 In 2018, only 21 per cent of adults in Pakistan had a bank account.18 Since 2008, telecommunications companies and financial institutions have capitalised on mobile penetration and telecommunications distribution networks to deliver financial services to those previously unbanked. Presently, there are eight branchless banking providers servicing 14.5 million branchless bank accounts, facilitated by more than 346,000 agents across the country, with up to 1.3 million transactions a day.19 In 2015, Pakistan became the first country in the world to enable customers with biometrically verified SIM cards to open remotely mobile wallet accounts held at branchless banking agents. This tripled the number of mobile wallet accounts to 15 million that same year.20 Despite significant progress, financial inclusion in Pakistan is low in comparison to regional and global standards. Figure 1

11 World Factbook (n 3). 12 Observatory of Economic Complexity (n 8). 13 ibid. 14 Scheduled banks are banks carrying on a banking business in Pakistan, which are so listed as a scheduled bank by the State Bank of Pakistan. See State Bank of Pakistan Act (1956), s 37. Banks not so listed are non-scheduled banks. 15 Non-schedule banks are those not registered in the list of the Central Bank, and not required to perform banking services according to the policies of the Central Bank. 16 State Bank of Pakistan, ‘Banking Statistics of Pakistan’ (2016), www.sbp.org.pk/publications/anu_stats/2016/intro.pdf. 17 ‘Pakistan’s Central Bank Holds Key Interest Rate at 13.25%’ (Reuters, 22 November 2019), www.reuters.com/article/ pakistan-cenbank/pakistans-central-bank-holds-key-interest-rate-at-13-25-idUSL8N2822RP. 18 S Rasmussen, ‘Pakistan Enigma: Why Is Financial Inclusion Happening So Slowly?’ (CGAP, 30 October 2018), www. cgap.org/blog/pakistan-enigma-why-financial-inclusion-happening-so-slowly. 19 State Bank of Pakistan, ‘Quarterly Branchless Banking Newsletter – April–June, Issue 20’ (2016) 2, www.sbp.org.pk/ publications/acd/2016/BranchlessBanking-Apr-Jun-2016.pdf. 20 N Rashid and S Staschen, ‘Unlocking Financial Inclusion Using Biometrically Verified SIMs’ (CGAP, 26 July 2016), www.cgap.org/blog/unlocking-financial-inclusion-using-biometrically-verified-sims.

380 Marek Dubovec and Zahra Abid Domestic credit available to the private sector has not bounced back from the 2008 crisis, dropping from 28.7 per cent of Pakistan’s GDP in 2008 to as low as 15.4 per cent in 2015.21 2016 saw the first increase in private credit availability, rising to 16.51 per cent.22 Further, NPLs have declined since 2014.23 However, NPLs remain high for the SME loan sector (eg the NPLs at the majority state-owned SME Bank peaked at 82 per cent).24 Of the three million SMEs in Pakistan, only 171,000 (5.7 per cent of SMEs) have formal access to finance through banks and development finance institutions.25 Furthermore, financing to SMEs has shrunk from 17 per cent of total private sector credit in 2007 to just 9 per cent as of June 30, 2017.26 According to the SBP, the challenges facing SMEs since the 2008 economic crisis are the spillover effect of shocks to the larger corporate sector and rising bad debts from corporate failures, causing banks to increase interest rates for SMEs, or avoid these riskier loans altogether.27 In lieu of the long and costly process of attempting to receive finance from formal lending institutions, many SMEs turn to informal sources, which are more readily available, albeit at higher premiums than bank loans.28 Banks reject SME loan applications primarily based on the lack of business records, suitable collateral, and steady cash flows.29 In 2015, Pakistan’s government introduced the National Financial Inclusion Strategy (NFIS) as an initiative to improve access to credit for underserved market segments, including women entrepreneurs and SMEs.30 This strategy seeks to address what the government sees as the biggest weaknesses in Pakistan’s financial infrastructure and legal and judicial framework: i) the absence of an efficient insolvency framework, ii) deficiencies in credit information, iii) the lack of a secured transactions framework and electronic collateral registry for movable property, and iv) difficulties in enforcing security interests outside the judicial system.31 The SBP has also taken steps to improve access to credit for SMEs, primarily by, first, improving the regulatory framework for SME financing, second, providing credit services to SMEs such as subsidised refinance schemes, risk coverage schemes and Islamic SME financing and, third, improving awareness of SME financing services.32 In the area of prudential regulation, the SBP issued updated Prudential Regulations for Small & Medium Enterprises Financing in December 2017, which, among other things, resulted in the reduction of the reserve requirement for unsecured financing to small enterprises from 2 per cent to 1 per cent, and the withdrawal of the general reserve requirement for secured portfolio.33 The requirement that the collateral be insured in order to obtain financing has also been made optional, and banks have been advised to reduce their loan processing times to 15 working days.34 21 World Bank, ‘Domestic Credit to Private Sector (% of GDP)’ (2018), data.worldbank.org/indicator/FS.AST.PRVT. GD.ZS?locations=PK. 22 ibid. 23 ibid 20. 24 ‘SME Bank Ltd’ is the entity resulting from a government-initiated amalgamation of the Development Finance Corporation (RDFC) and the Small Business Finance Corporation (SBFC) in January of 2002. 25 A Hussain, ‘SBP Devises Strategy to Increase SME Financing to Private Sector’ (Pakistan Today, 20 January 2018), profit.pakistantoday.com.pk/2018/01/20/sbps-devises-strategy-to-increase-sme-financing-to-private-sector/. 26 ibid. 27 State Bank of Pakistan, ‘Policy for Promotion of SME Finance’ (22 December 2017) 2, www.sbp.org.pk/smefd/ PolicyPromotionSME-Finance.pdf. 28 Hussain (n 25). 29 ibid. 30 World Bank, ‘Pakistan Development Update’ (November 2016) 25, documents.worldbank.org/curated/ en/935241478612633044/pdf/109961-WP-PUBLIC-disclosed-11-9-16-5-pm-Pakistan-Development-Update-Fall-20 16-with-compressed-pics.pdf. 31 ibid. 32 State Bank of Pakistan (n 27). 33 See State Bank of Pakistan, ‘Prudential Regulations for Small & Medium Enterprises Financing’ (21 December 2017), www.sbp.org.pk/smefd/2017/SME-PRs-Updtd-Dec-2017.pdf. The regulations were first issued in 2003. See also State Bank of Pakistan (n 27) 6–7. 34 State Bank of Pakistan (n 33); State Bank of Pakistan (n 27) 6–7.

Pakistan’s Reform of Secured Transactions Law 381 The SBP has also created subsidised refinance programmes.35 One such scheme is the ‘Refinance Facility for Modernization of SMEs’, which is designed to assist SMEs to modernise their factories in order to produce quality product and meet power shortages.36 The SBP also implemented a credit guarantee scheme for SME loans.37 Plans are ongoing to convert this credit guarantee scheme into a credit guarantee company that will operate as an independent entity.38 Furthermore, the SBP regularly organises capacity-building activities for banks and SMEs. For SMEs, the SBP focuses on improving their understanding of banking procedures and developing necessary business skills.39 The government has championed a number of legal reforms to improve the business environment. These reforms include the enactment of a new Companies Law, the Corporate Restructuring Company Act, the ST Act, and the Corporate Rehabilitation Act. The reform of company law made significant changes to the erstwhile corporate law regime with the aim of bringing it into line with global standards.40 According to the World Bank’s 2018 Doing Business Report, Pakistan’s reforms made it easier to register a business, transfer commercial property, sue directors for prejudicial transactions, and facilitate cross-border trade.41 Despite these reform efforts, Pakistan was ranked 108 out of 190 countries in the 2020 Doing Business Report, and 119 on the Getting Credit indicator.42 Such a low ranking may be attributed to the pending implementation of the newly enacted laws. The government has affirmed its desire to undertake all possible measures for creating an enabling environment for businesses to grow and thrive.43 The ST Act was passed by Parliament in June of 2016, but it will enter into force only upon the Federal Government issuing a notification in the Official Gazette under Section 19(2) of the ST Act. Its entry into force was contingent upon the establishment and operationalisation of the Collateral Registry, which occurred in May 2020.44 The Federal Government has issued the Rules, and the Regulations in April 2020.45 The Regulations cover largely operational aspects of the Collateral Registry, such as the modes of paying fees for the use of its services.

III. Pre-reform Legal Regime Pakistan’s political and constitutional structure has a significant impact on the matters that may be addressed in federal and provincial legislation affecting secured transactions. The historic

35 State Bank of Pakistan (n 27) 6–7. 36 See Faysal Bank, ‘Refinance from State Bank of Pakistan (SBP)’ (2018), www.faysalbank.com/en/business/ commercial-banking-small-and-medium-enterprises/refinance-from-state-bank-of-pakistan-sbp/. 37 State Bank of Pakistan (n 27) 8. 38 ibid. 39 ibid 10. The National Institute of Banking and Finance (NIBAF) conducts the training programmes for SMEs. 40 S Imran, ‘Company Act 2017: A Signal for the Better Economy of Pakistan’ (NetMag, 31 May 2017) netmag.pk/ company-act-2017-signal-better-economy-pakistan/. 41 A Ahmed, ‘Pakistan Ranked 147th in Doing Business Report’ (Dawn, 1 November 2017), www.dawn.com/ news/1367539; ‘Pakistan Progresses in Ease of Doing Business’ (The News, 1 November 2017), www.thenews.com.pk/ print/241009-Pakistan-progressesin-ease-of-doing-business-World-Bank. 42 World Bank, Doing Business 2020: Pakistan (2020) 4, www.doingbusiness.org/content/dam/doingBusiness/country/ p/pakistan/PAK.pdf. 43 ‘Pakistan Creating Enabling Environment for Business: PM’ (SAMAA, 23 January 2018), www.samaa.tv/ economy/2018/01/pakistan-creating-enabling-environment-business-pm/. 44 The Federal Government issued notifications (F No 3(29)-IF.II/2004-226 and F No 3(29)-IF.II/2004-226) on 29 March 2019 under ss 19(1) and 34 of the Act for the establishment of the Collateral Registry, and outsourcing of the functions of the register to the Securities and Exchange Commission of Pakistan. 45 See https://str.secp.gov.pk/Documentation/PK/STR%20Regulations-2020.pdf.

382 Marek Dubovec and Zahra Abid allocation of certain powers between the federal and provincial legislatures has had an effect on a number of approaches in the ST Act.

A. Distribution of Legislative Powers As a federal Islamic republic, Pakistan’s legal system is based on statute, common law, and Islamic law (Shari’a law) under the overarching framework of the Constitution of the Islamic Republic of Pakistan (the Constitution). Further, in developing the legal system, the courts in Pakistan also place reliance on judicial pronouncements of other common law jurisdictions including the United Kingdom, Canada, and India, unless otherwise contrary to statute or public policy. Under the Constitution, legislative power is distributed between the Federal and Provincial Legislatures. The Federal Legislature has exclusive power to enact legislation in respect of matters enumerated in the Federal Legislative List (such as conduct of banking business, negotiable instruments, and intellectual property),46 and all matters outside the scope of the Federal Legislative List fall within the domain of the Provincial Legislature (such as transfer of property, registration, and stamp duty).47 However, with their consent, the Federal Legislature can enact legislation on provincial legislative matters for one or more Provinces. Such consent can be difficult to obtain depending on the political environment.48 Determination of the constitutionality of any law on the basis of legislative competence is based on well-established principles of constitutional interpretation developed through the common law, which, broadly, provide for a liberal reading of the entries in the legislative lists and use of the ‘doctrine of pith and substance’ for determining legislative competence.49 However, since the devolution of more powers to the Provinces with the passage of the Eighteenth Amendment to the Constitution in 2010, issues of legislative competence have acquired greater sensitivity within the legislative, executive, and judicial branches. The judicial branch of the state is headed by the Supreme Court of Pakistan, with its principal seat in the capital, Islamabad. Each province has a separate High Court. The Chief Justice of each province is the head of the judiciary for that province. All of these considerations had to be taken into account in the drafting of the ST Act, and significantly affected its scope.

B. Pre-reform Security Devices Pakistan’s pre-reform legal regime remains in force until the implementation of the ST Act. The secured transactions system comprises of two substantively distinct legal frameworks: one for incorporated entities, and another for unincorporated entities and natural persons.50 Incorporated entities, including public companies (listed or unlisted), private companies, single

46 Items 28, 9 and 25 of pt I, sch 4 of the Constitution of Pakistan 1973. To promote inter-provincial coordination, certain matters enumerated in Part II of the Federal Legislative List are subject to the policies developed by the Council of Common Interest, a constitutional forum with representation of the Federation and the Provinces (Art 154 of the Constitution). 47 ibid Art 142. 48 ibid Art 144. 49 See Elahi Cotton Mills Ltd and others v Federation of Pakistan PLD 1997 SC 582; see also Messrs Quetta Textile Mills Limited through Chief Executive v Province of Sindh through Secretary Excise and Taxation, Karachi and another PLD 2005 Karachi 55; Syed Bhais (Pvt) Ltd v Government of the Punjab Excise and Taxation Department 2000 PLD 20. 50 See ch 15 IV C and also Brunei (ch 15 II B).

Pakistan’s Reform of Secured Transactions Law 383 member companies, and companies limited by guarantee, could encumber assets to secure credit under the system provided for in the Companies Act. Rights of creditors in movable and immovable assets of incorporated entities may be perfected by registration in a registry operated by the Securities and Exchange Commission of Pakistan.51 In contrast, for unincorporated entities, the Registration Act of 1908 provides for registration of documents relating to various transactions in movable or immovable property, but the Act is primarily oriented towards the registration of documents relating to interests in immovable property. Registration of documents relating to interests in movable assets is voluntary,52 and the Act is silent on the issue of priority between competing interests. Registration of documents relating to interests in movable property, if effected at all, must be effected in the office of the sub-registrar (in the Miscellaneous Register) where the document creating the interest is executed.53 The court in Syed Moazzam Ali Shah v Muhammad Suleman held, in relation to priority between a registered and unregistered sale agreement that was not required by law to be registered, that: ‘The question of registration, and the related issue of priority arise only in the context of documents that are required by law to be registered … If it is voluntarily registered, that in and of itself does not, and cannot give it priority over another document of the same nature.’54 As a consequence, the practice of registering documents relating to interests in movable property under the Registration Act is non-existent. Therefore, the legal and practical effect is that the registration of documents recording interests in movable property pursuant to the Registration Act confers no additional protection to creditors. Priority rules affecting buyers and purchasers of encumbered assets have not been codified, instead they are determined through common law, mainly judicial precedents of other common law jurisdictions. Most judicial pronouncements of the Pakistani courts concerns priority conflicts between secured creditors, preferential claims and holders of statutory liens. For instance, in National Bank of Pakistan v Emirates Bank International Limited the court gave priority to an earlier registered hypothecation over a subsequent pledge based on the maxim ‘he has a better title who was first in time’.55 Reliance on such maxims and common law has led to substantial legal uncertainty, as the application of a given rule of priority might vary on a case-by-case basis. This uncertainty negatively impacts the quality of security and disincentivises secured lending. Pakistani law allows secured creditors to enforce their rights without the intervention of the court, but such extra-judicial enforcement was limited to the possessory pledge (only upon a reasonable notice pursuant to the Contract Act of 1872) and assignment of receivables by way of security.56 Out of court enforcement where the debtor is in possession of the collateral is not generally provided for in any law, except in the context of enforcement of immovable property mortgages. Still, such enforcement is currently subject to challenge on constitutional grounds. The following are the security devices that may be presently used to secure obligations with rights in movable property.

51 See also Securities and Exchange Commission of Pakistan, ‘Company Mortgages and Charges’, jamapunji.pk/sites/ default/files/MortgagesGuidedec022010.pdf. 52 ibid s 18. 53 Registration Act 1908, s 29 provides: ‘Every document not being a document referred to in Section 28 or a copy of decree or order, may be presented for registration either in the office of the Sub-Registrar in whose sub-district the document was executed, or in the office of any other Sub-Registrar under the Government at which all the persons executing and claiming under the document desire the same to be registered.’ 54 Syed Moazzam Ali Shah v Muhammad Suleman and others 2011 CLC 1412 (Karachi High Court). 55 National Bank of Pakistan v Emirates Bank International Limited 2004 CLD 1490 (Karachi High Court). 56 Contract Act 1872, ss 172 and 176.

384 Marek Dubovec and Zahra Abid

(i) Pledge A pledge is governed by the provisions of the Contract Act of 1872 and requires the delivery of possession of the pledged asset to the creditor or its agent as security for payment of a debt. Possession provides the creditor with substantial certainty, in terms of control, enforcement, and priority over third parties. Courts have held the essential characteristics of a pledge to be the right to possession (including constructive possession) and the right to sell goods after reasonable notice in case of default.57

(ii) Hypothecation This arrangement involves neither delivery of actual possession nor transfer of title and operates effectively as a charge that confers upon a lender the right to seize and sell the hypothecated property in realisation of the security. Hypothecation also allows for revolving classes of assets to be encumbered as the specification of a particular asset is not a prerequisite to validity. This is a key feature and advantage to hypothecation, as it allows for the collateralisation of future inventory and receivables. However, the term ‘hypothecation’ is not defined in any Pakistani statute and the rights and obligations of the borrower (including the rights relating to creation of additional security interests on, and disposal of, the hypothecated assets) and the rights and remedies available to the lender (including right to possession and sale without court intervention) are determined within the four corners of the hypothecation agreement.58 In National Bank v Emirates International Bank Ltd, the court held that: Whereas ‘hypothecation’ and ‘mortgage of movables’ are not specifically mentioned in the Contract Act, the Courts of Sub-Continent have decided the rights based on hypothecation according to justice, equity and good conscience based on English law, wherever such law is applied and it is only under this principle that the hypothecation or mortgage of movable property, although not specifically provided for in the Contract Act are valid.59

(iii) Floating Charge As with hypothecation, a floating charge is a non-possessory security interest that allows for a charge over a broadly defined, revolving class of present or future assets (such as inventory or accounts receivables). Under the floating charge, the borrower is free to deal with the assets in the ordinary course of business. The charge is floating in that it only crystallises upon the occurrence of one or more stipulated events of default, whereupon the lender is entitled to realise the collateral. Like hypothecation, the floating charge is not defined in any Pakistani statute, and the principles thereof are derived from English common law.60 Hypothecation and floating charges are of greater value to secured creditors of incorporated debtors as they can achieve perfection through registration under the Companies Act (previously the Companies Ordinance of 1984). In the absence of any registration system for charges on assets belonging to unincorporated entities, this form of security is of very limited value to those lenders. 57 Al Baraka Bank (Pakistan) Ltd v Province of Punjab 2018 CLD 626. 58 National Bank of Pakistan v Najma Sugar Mills Limited and 3 others 2015 CLD 1990; Syed Moazzam Ali Shah (n 53). 59 Emirates Bank (n 54); in the case of National Bank of Pakistan v Najma Sugar Mills Limited 2015 CLD 1990, the definition of hypothecation was borrowed from the ‘Hand Book of Banking Terms’ which defined the same as: ‘A constructive delivery of goods without involvement of actual possession of goods given as security for advance; charge on goods without its ownership or possession by the Bank and flexible security in which possession remained with the borrower, lender however could check stocks at intervals to verify payments of instalments.’ 60 See ch 15 IV B and IV D.

Pakistan’s Reform of Secured Transactions Law 385

(iv) Assignment of Receivables by Way of Security A receivable is treated as property under the Transfer of Property Act, 1882. Hence an assignment of receivables under the Transfer of Property Act of 1882 can be by way of security61 and does not require notice to be given to the account debtor for the assignment to be valid. However, in the absence of any notice, the account debtor will not be bound by the terms of the assignment and hence get a valid discharge upon making payment to the assignor. Where the underlying contract has an anti-assignment clause, the rights under a contract cannot be assigned without the consent of the account debtor, and hence any assignment without such consent will be ineffective against the account debtor. The validity of an assignment inter se the assignor and assignee where such assignment has been effected in breach of an anti-assignment clause is an issue that remains unsettled, and the possibility of the Pakistani courts invalidating the assignment (particularly where the assignee has notice of the anti-assignment clause) cannot be ruled out. However, whilst an assignment of future receivables is not permitted under the Transfer of Property Act of 1882,62 the same will be recognised under equitable principles.63 Assignment of receivables by way of security where the lender is not a financial institution is very costly, which makes this security device unattractive in practice.

(v) Quasi-security Interests Other quasi-security interests, such as finance leases, title retention arrangements where the title to the goods is retained until the purchase price or debt is settled, and sale and lease-backs are also common in Pakistan, particularly in the context of Islamic and conventional consumer financing. Title retention is mainly used by financial institutions in the context of leasing and, as a matter of law, takes absolute priority over other secured creditors even without registration. Title retention arrangements in the context of supplier financing are possible under the Sale of Goods Act of 1930 and have been recognised by the courts as a legally acceptable and important mode of security in commercial sale transactions.64

IV. The ST Act The ST Act drew inspiration from the UNCITRAL Legislative Guide, following extensive consultations with the World Bank and other stakeholders, especially the SBP. The ST Act, being a federal law, could not legislate on certain areas that remain within the jurisdiction of the provinces. Enacting the law as a federal statute without limiting it to the aspects within the authority of the federation – by obtaining resolutions from the four provincial assemblies under Article 144 of the Constitution – was not feasible in the existing political environment at that time. One such

61 Transfer of Property Act, 1882, s 134 deals with transfer of debts for the purpose of securing an existing or future debt, and entitles the transferee (or assignee) to recover (without involvement of the transferor or assignor) the debt and apply the same, or the proceeds thereof, to the secured obligation, and to return the surplus (if any) to the transferor (or assignor). 62 Transfer of Property Act, 1882, s 5 provides that transfer of property ‘means an act by which a living person conveys property, in present or in future’. There have been judicial pronouncements of the Pakistani and Indian Courts whereby it has been held that the words ‘in present or in future’ qualify the word ‘conveys’ and not the word ‘property’. 63 Tailby v Official Receiver (1888) 13 AC 523, which is likely to be followed by the Courts in Pakistan. 64 Al Baraka Bank (Pakistan) Ltd v Province of Punjab 2018 CLD 626.

386 Marek Dubovec and Zahra Abid matter that could not be addressed in the ST Act is the inclusion of suppliers in the definition of lenders, which is discussed below. Another matter is stamp duties that affect the cost of secured transactions. The provinces calculate stamp duties differently. For example, the stamp duty payable on an absolute assignment of receivables in Sindh is 2 per cent of the entire consideration amount ie the purchase price paid for the receivable, which effectively hamstrings the receivables financing market. To avoid the payment of a stamp duty, some players in the Pakistani market resort to oral assignments of receivables.

A. Scope The ST Act has a very unique scope in terms of the types of transactions, assets, debtors, and creditors that it covers. The drafters were familiar with the international standards (hereinafter encompassing the UNCITRAL Legislative Guide, Article 9 of the US Uniform Commercial Code (UCC Article 9), and the Canadian Personal Property Security Acts (PPSAs)), but could not incorporate certain aspects thereof due to practical constraints on changing established legal practices and registration systems in Pakistan, socio-political considerations, and conscious decisions by the stakeholders to introduce piecemeal reform to the secured transactions framework of the country. The ST Act implements the functional approach, defining ‘security interest’ very broadly to encompass any interest in movable property (irrespective of its form) created contractually to secure the performance of an obligation.65 In addition, the definition lists the types of rights in movable property that qualify as a security interest, including a charge (fixed and floating), mortgage, hypothecation, assignment, lien, finance lease, hire purchase, sale and lease back arrangement, and assignment of receivables by way of security. Absolute assignments of receivables, albeit not security interests, are covered under the ST Act to promote supplier credit and factoring – though only Part VI of the ST Act applies to absolute assignments of receivables.66 However, an absolute assignment of receivables is treated differently from the way it is treated under the international models insofar as it has not been made subject to registration requirements under the ST Act, in line with the established practice in Pakistan. Section 3 is one of the provisions that negatively delineates the scope of the ST Act by stating the types of transactions to which the ST Act does not apply: i) a security interest in immovable property, ii) a security interest in book-entry securities, iii) a lien created by operation of law (other than Part V that determines the priority of such liens against security interests), and iv) security interests in aircraft and vessels as defined in the applicable ordinances. With regard to the types of debtors, the ST Act applies to ‘customers’, which encompasses both companies incorporated under the Companies Act and ‘entities’, a term defined in the ST Act to refer to unincorporated entities.67 However, the ST Act does not cover the registration of security interests created by incorporated entities, which will remain registrable in the Companies Registry. With regard to creditors, the ST Act is limited in scope to financial institutions or a consortium of financial institutions, as defined in the Financial Institutions (Recovery

65 ST Act, s 2(1)(xlviii). 66 See IV F below. 67 ‘Entity’ is defined as ‘a person other than a company, and includes a natural person, a sole proprietorship, a partnership or association of persons, a non-government organization, a cooperative society, a society, a trust and a body corporate established pursuant to a law’.

Pakistan’s Reform of Secured Transactions Law 387 of Finance) Ordinance, 2001.68 As mentioned above, the ST Act does not apply to supplier financing as it would not fall within the purview of banking business in the Federal Legislative List.69 The ST Act also redefined certain types of assets to clarify that they are movable property in which a security interest may be taken under the ST Act. To that end, specific types of property (which might otherwise have been qualified as immovable property under pre-existing laws by virtue of being attached to the earth or permanently fastened to anything attached to the earth) are now included within the definition of movable property.70

B. Creation Part II of the ST Act deals with the creation of a security interest. Under section 4, a customer may create a security interest in movable property to secure its own obligation or that of a third party, unless the movable property is exempted, in which case the security interest shall be invalid. Exempted property, such as apparel, beds and bedding, and cooking devices may be any property notified by the Federal Government.71 Section 5 sets out the three requirements for a security interest to become effective against the customer, namely: i) an agreement to create a security interest, ii) value, and iii) rights in the collateral or a power to transfer it. While the three requirements follow the UCC Article 9/PPSA model for attachment of a security interest, on their satisfaction the security interest only becomes enforceable against the customer (debtor) and not against third parties.72 This effect is consistent with the UNCITRAL Legislative Guide and the Model Law.73 For a pledge of negotiable instruments and title documents, a security agreement is not necessary as long as possession of the instrument or document has been delivered to the secured creditor.74 In addition, the instrument and the title document must be duly endorsed or issued in the name of the secured creditor.75 A security agreement must reasonably identify the collateral and secured obligations, but it is not necessary to state the maximum amount for which a security interest may be enforced.76 In any case, since the statement to be submitted for registration requires an indication of the maximum amount, security agreements are practically expected to contain such amounts, in keeping with the established practice in Pakistan. A security interest extends to proceeds and continues in the commingled goods.77 Also, the creation of security interests in future assets was previously subject to a number of limitations. For example, under the Transfer of Property Act of 1882, the assignment of future receivables is invalid. However, the dominant view in the market is that such assignment is nevertheless p ermissible under equitable principles. Section 9 expressly permits the creation of security interests in 68 See the definition of secured creditor in s 2(1)(xlvi) of the ST Act. 69 The rights and remedies of suppliers, including unpaid seller’s lien, right of resale, filing suit for price, and retention of title arrangements are governed by the Sale of Goods Act 1930. 70 See the definition of property attached to immovable property in s 2(1)(xxxviii) of the ST Act. 71 See s 2(1)(xix) of the ST Act. A notification under the ST Act has not yet been issued as the ST Act is not effective. Until such time as the Federal Government issues a notification thereunder, s 60 of the Code of Civil Procedure, 1908 [1908: V] would continue to be applicable. 72 See UCC, Art 9-203(b). ‘Attachment’ under the PPSAs gives the security right some limited third-party effect, in that the priority between two security rights that are not effective against third parties is determined by the order of attachment. See further M Dubovec and L Gullifer, Secured Transactions Law Reform in Africa (Oxford, Hart Publishing, 2019) ch 2. 73 See s 2(1)(xxxii) of the ST Act, which defines ‘perfection’. 74 ST Act, ss 6(1) and 12(2). 75 ibid ss 11 and 12. Compare with the UNCITRAL Model Law under which mere delivery would suffice. 76 This feature of the UNCITRAL Legislative Guide and the UNCITRAL Model Law has not been incorporated. See s 6. But compare with s 23(2)(g) of the ST Act, which requires an indication of the maximum amount in the statement. 77 ST Act, ss 7 and 8.

388 Marek Dubovec and Zahra Abid after-acquired property, and section 53(4) reinforces the general rule by specifically validating assignments of future receivables.

C. Perfection Part III of the ST Act covers the perfection of security interests. Perfection is defined as the act that makes the security interest effective against third parties.78 Section 17 clearly stipulates the legal effect of the failure to perfect a security interest, which are that it is void against the liquidator, administrator, or receiver, but that non-registration does not prejudice the right to repayment of the loan as an unsecured creditor. Section 14 recognises three methods of perfection, namely: i) registration, ii) possession, and iii) control. Given the approach of the ST Act with respect to security interests created by companies, section 14 registration in the Secured Transactions Registry (ST Registry) is limited to security interests created by unincorporated entities. Security interests created by companies must be perfected by registration in the Companies Registry. Section 16 requires perfection of security interests in intellectual property rights by registration either in the ST Registry (for entities) or the Companies Registry (for companies), thus overriding any provisions of intellectual property laws providing for perfection by some other means. Regarding pledges, registration has recently been prescribed as a method of perfection for companies under the Companies Act.79 For entities, pledges, other than those of title documents and negotiable instruments, can be only perfected by registration. In order to address the industry wide issue of ‘muqaddams’ (ie agents that take possession of collateral on behalf of a secured creditor) creating multiple pledges on the same collateral in collusion with borrowers, the Companies Act and the ST Act have therefore eliminated possession as a method of perfection for pledges. Possession is the sole method of perfection for pledges of title documents and negotiable instruments, unlike the UNICITRAL Model Law on Secured Transactions (2016) (UNCITRAL Model Law) where possession is an alternative, but superior, method of perfection to registration.80 A secured creditor in possession of a negotiable instrument or a title document has priority over any other security interest in the instrument/document.81 A security interest in a right to payment of funds credited in a deposit account can only be perfected by control.82 This provision should be read to apply to deposit accounts only as original collateral ie it does not apply to funds in deposit accounts that are proceeds. Again, this approach departs from the UNCITRAL Model Law, but follows the UCC Article 9 approach.83

D. Registration Part IV of the ST Act deals with registration. Section 18 clearly states that this Part only applies to entities, and that perfection of security interests created by companies is to be effected pursuant to the Companies Act of 2017. Under the Companies Act, 2017, the particulars of a mortgage

78 ibid

s 2(1)(xxxii). Act 2017, s 100(2) and (5). 80 ibid s 14(2)(b)–(c). 81 ibid ss 47 and 49. 82 ibid s 14(2)(a). 83 See UCC, Art 9-314(a). 79 Companies

Pakistan’s Reform of Secured Transactions Law 389 or charge over movable property, along with a copy of the security instrument, is required to be registered with the Companies Registrar within a period of thirty days commencing from the day after the date of its creation, and failure to register the charge will result in it being void against the liquidator and other creditors, or, in the other words, the creditor being treated as an unsecured creditor.84 The ST Registry is to be set up as a notice-based system, meaning that the security documentation is not required to be filed. Instead, secured creditors must submit only a notice of the security interest in the standard format, called a statement.85 The ST Act allows (but does not make it mandatory) for the security documentation to be filed as an attachment to the statement, as this is presently the standard business practice.86 The financing statement must provide the prescribed information, namely: 1) name, address, type, and an identifier of an entity, 2) name and address of the secured creditor, 3) type of security interest, 4) maximum amount secured by the security interest, 5) a description of the collateral, including a serial number for motor vehicles, and 6) in the case of a floating charge, any restriction on the power of the entity to create further security interests. Section 39 limits the priority of a security interest to the maximum amount stated in the registration, which may also be amended. The priority effect of any restriction on the power to create a security interest is addressed in section 48(3) under which the inclusion of such a restriction in the registered statement would impute notice to a subsequent holder of a fixed charge that would subordinate the fixed charge to the floating charge.87 While this provision applies to a priority conflict between the charges registered under the Companies Act, indicating a restriction in a statement registered pursuant to the ST Act should not have any impact on the priority as between two security interests that is not dependent on knowledge of the restriction. The ST Registry may not reject a statement other than for the failure of the filer to provide the required information or pay the prescribed fee.88 The statement is ineffective if it contains erroneous information in the name or identifier of the entity, which is the main search criterion. An error in the vehicle registration number would also render the statement ineffective as against all parties.89 Unlike the international models, a financing statement may not be submitted for registration prior to the execution of a security agreement. The borrower shall be deemed to have authorised the secured creditor to file the financing statement by executing the security agreement.90 The function of the ST Registry to objectively allocate priorities based on the time of registration therefore depends on the timely and proper execution of a security agreement, potentially increasing the litigation risk with respect to priorities. Nonetheless, the risk remains low given the standard business practice of Pakistani lenders to execute documentation before registration. This decision was taken after a discussion in which the stakeholders expressed discomfort with a system that encourages information to be put on the public record without the existence of any underlying transaction, thus potentially resulting in registrations that have no commercial basis.

84 Companies Act 2017, s 100(1) and (5). 85 ST Act, s 21. Statement is defined as the financing statement, modification statement and termination statement in s 2(1)(xlix). 86 ibid s 25. 87 See IV E. 88 ST Act, s 28. 89 Compare with the effect of errors under the Canadian and New Zealand PPSAs in L Widdup, Personal Property Securities Act: A Conceptual Approach, 3rd edn (Wellington, LexisNexis New Zealand, 2013) 324–26. 90 ST Act, s 23(3).

390 Marek Dubovec and Zahra Abid

E. Priority Part V contains priority rules that are divided into: i) general, ii) special, and iii) taking free provisions. Unlike Part IV on registration, this Part applies to security interests created by customers, and thus to security interests in the form of charges created by entities and companies alike. The general priority rule of section 35 is the ‘first to perfect a security interest’ rule. This priority rule departs from the international standards that take into account the time of registration, which may, and often does, precede perfection.91 The special priority rules recognise certain methods of perfection to be superior to registration, thus allocating priorities on a non-temporal basis. The priority of a security interest in the original collateral flows into the priority of a security interest in proceeds and after-acquired property, as well as any future financing as limited by the maximum amount stated in the registered statement.92 The special priority rules deal with various situations. The first of these rules, in section 42, accords priority to the creditor holding a security interest created by way of a retention of title agreement over any other competing security interest if the creditor registers a statement within 10 days of executing a title retention agreement. Even though the definition of security interest clearly encompasses any title retention of agreement, the ST Act, instead of creating a specific label such as an ‘acquisition security right’ or a ‘purchase money security interest’, chose to continue the existing nomenclature. This is somewhat confusing because, for the purposes of the ST Act, a title retention arrangement is treated as a security interest. It also means that security interests granted over an asset acquired with the secured loan are not covered, and neither is any right over intellectual property rights associated with the asset. Furthermore, this priority rule departs from the international models in a number of aspects. First, it applies only to motor vehicles and any other assets that may be identified as such by the Federal Government in a notification. Second, the time period is comparatively shorter.93 Finally, the time period begins to run on execution of the title agreement rather than delivery of the asset to the debtor. The rule was designed to largely apply to car leasing arrangements and to encourage financial institutions (in particular, leasing companies) to discontinue the existing practice of not registering finance leases on the basis of title retention. Unpaid sellers deriving their rights from the Sale of Goods Act of 1930 (which arise by operation of law) have priority over competing security interests.94 Unlike for title retention arrangements with respect to motor vehicles, the liens of unpaid sellers have priority without registration. The ST Act has thus taken a careful approach towards applying to retention of title arrangements, based on agreements and arising by operation of law. This was to ensure that the ST Act is not opposed in the legislative process, and yet leave an opening for the Federal Government to expand its reach by designating assets other than motor vehicles. Section 43 provides for the priority of the holder of a security interest over a bailee who has a lien pursuant to section 170 of the Contract Act of 1872, provided the security interest was perfected prior to the bailment taking place. This approach departs from the international models but protects secured creditors whose enforcement rights may have been thwarted otherwise. The ST Act provides for two forms of control – one where the depositary institution automatically acquires control and the other where a third party enters into a control agreement with the depositary institution and the customer.95 Control over a bank account is a superior method of 91 Compare with Art 29(a) of the UNCITRAL Model Law. 92 ST Act, ss 36–39. 93 Compare with UCC, Art 9-324(a), under which the time period is 20 days running from when the debtor obtained possession of the collateral that is equipment. 94 ST Act, s 44. 95 ibid s 2(1)(xi)–(xii). See the definition of ‘control’ in s 2(1)(xi) and the definition of ‘control agreement’ in s 2(1)(xii).

Pakistan’s Reform of Secured Transactions Law 391 perfection (over registration) with respect to the bank account as proceeds of some other collateral. Unlike the international models, section 46 does not provide a priority rule between the bank’s control and that of a third party. In any case, the bank is protected by its right of set-off, which has priority over a security interest perfected by the execution of a control agreement.96 Section 48 was designed to codify the priorities between registered fixed and floating charges as determined by English common law and followed by the local business practice among secured creditors of disclosing negative covenants when making registrations in the Companies Registry.97 Under section 48, the general rule is that a subsequent fixed charge has priority over a floating charge that has not crystallised. However, an earlier perfected floating charge has priority over a subsequently perfected fixed charge where the security agreement creating such floating charge contains a provision prohibiting the creation of any further security interest over the same collateral, and the secured creditor holding a subsequent fixed charge over the same collateral has notice of such restriction.98 Chapter III of the Priority Part covers three ‘taking free’ rules that: i) protect buyers in the ordinary course of business and buyers acquiring the collateral pursuant to an authorisation of the secured creditor free of its security interest (section 50 refers to them as purchasers for value), ii) protect the interests of lessees and licensees,99 and iii) protect transferees of funds from a deposit account. The common requirement to all three rules is that purchasers, lessees, licensees, and transferees must take without actual knowledge (and not constructive notice by virtue of a registration in the Companies Registry or ST Registry) that the transaction is prohibited by the security agreement. Chapter III is a material departure from the existing legal framework and practice in Pakistan in two respects. First, it overrides the need for security agreements to permit a sale of the collateral in the ordinary course of business to protect a buyer for value and, second, it eliminates the presumption of constructive notice and deemed knowledge by virtue of registration since the ST Act provides detailed rules of priority.

F. Assignments of Receivables The ST Act reserved an entire Part for assignments of receivables. This Part was inserted specifically to introduce a new legal regime for assignment of receivables by addressing certain limitations and uncertainties within the existing legal framework, and codifies certain equitable principles developed through common law. The ST Act applies to both security and outright assignments of receivables, whether by entities or companies.100 As mentioned above, one uncertainty that has been addressed concerns the possibility of assigning future receivables. The other legal principle codified in this Part is the automatic transfer to the assignee of the right or benefit securing/ supporting the performance of the receivable.101 Furthermore, section 56 expressly states that a number of provisions of the Transfer of Property Act of 1882 will not apply to any assignments of receivables under the ST Act. However, assignments of receivables may continue to be structured under the Transfer of Property Act of 1882. Unlike in other international models, the ST Act 96 ibid s 46(2). 97 ibid s 2(1)(xxi). This section provides a definition of floating charge to clarify the common law. The definition provides that a floating charge can be created by a ‘customer’, which includes an ‘entity’, defined as a person other than a company including a natural person. 98 See English & Scottish Mercantile Investment Co Ltd v Brunton [1892] 2 QB 700. 99 ST Act, s 51. 100 ibid s 53(2). 101 ibid s 53(4) and (5).

392 Marek Dubovec and Zahra Abid does not override anti-assignment clauses.102 Despite the merits of such a provision in promoting receivables financing transactions, the stakeholders decided against such a provision to honour the doctrine of freedom of contract that is well entrenched in the local legal system. The ST Act approaches security and outright assignments differently from the international models. Under section 54(1), the ST Act essentially applies only to security assignments of receivables, which it treats as ordinary security interests. The Parts of the ST Act applicable to security assignments does not include Part IV on registration even though Part III on perfection applies, and under Part III the only method by which to perfect a security interest in a receivable is by registration. It is therefore clear that a security assignment of receivables is required to be registered. However, only Part VI (in particular sections 53, 55, and 56) applies to outright assignments of receivables which, as stated earlier, extends the rule that was previously applicable to companies (ie that outright assignments are not registrable as charges) to unincorporated entities.103 Accordingly, the ST Act does not provide for perfection or priority rules in respect of absolute assignment of receivables. More importantly, the ST Act, being a federal law, was unable to address the material cost implications associated with absolute assignment of receivables, such as stamp duties; therefore, the value of the reforms introduced in the ST Act are limited unless further reforms are introduced to the stamp laws by the provinces.

G. Enforcement In Part VII, the ST Act provides for two means by which a secured creditor may enforce a security interest. The first is by filing a recovery suit under the Financial Institutions (Recovery of Finances) Ordinance, 2001.104 The second is through out of court enforcement. However, extra-judicial enforcement is limited to specific types of security interests: i) a pledge, including security interests in negotiable instruments and title documents in possession of the secured creditor, ii) an assignment of receivables by way of security, iii) a security interest in a right to payment of funds credited in a deposit account that is perfected by control, and iv) a retention of title arrangement in a motor vehicle. The ST Act’s limitation of out of court enforcement to the foregoing comes against the backdrop of sustained litigation, albeit in the context of immovable property, relating to the constitutionality of allowing lenders to take possession of and dispose of collateral.105 Section 15 of the Financial Institutions (Recovery of Finances) Ordinance 2001, was intended to allow financial institutions to foreclose on mortgages without the intervention of the courts. However, section 15 was declared unconstitutional by the Lahore High Court and later the Supreme Court of Pakistan.106 The argument which prevailed in these cases was that banks were not entitled to sell mortgaged property unless and until the amount in dispute had been finally determined by a court. Further, the Supreme Court expressed dissatisfaction over the procedural safeguards available to a mortgagor in case of an out-of-court sale by a bank. Based on the Supreme Court judgment, the Federal Government introduced a revised version of section 15 in the Financial Institutions (Recovery of Finances) (Amendment) Act, 2015. However, even the 102 See III B (iv). 103 Prior to the ST Act, whilst an individual and non-corporate entity may, at its option, register any instrument recording an absolute assignment of receivables under the Registration Act, 1908, the same were not done as a matter of practice. See III A. 104 ST Act, s 58. 105 See National Bank of Pakistan v SAF Textile Mills Limited PLD 2014 SC 283; see also Muhammad Umer Rathore v Federation of Pakistan PLD 2009 Lahore 268. 106 National Bank of Pakistan (n 105); Muhammad Umer Rathore (n 105).

Pakistan’s Reform of Secured Transactions Law 393 revised section 15 has been suspended by an interim order of the Lahore High Court, and the Attorney General for Pakistan has been asked to defend the constitutionality of that section 15.107 Regarding the recently added section 16(3) of the Financial Institutions (Recovery of Finances) Ordinance, 2001, the secured creditor can directly recover possession of the movable tangible property where the security agreement permits the secured creditor to take possession without intervention of the court. Independently of the section 15 controversy, and with the objective of updating foreclosure laws to promote mortgage finance, the Federal Government in July 2019 promulgated the Recovery of Mortgage-backed Security Ordinance 2019, to provide for out of court enforcement of security interests. Although the title of the Ordinance, and its statement of objects, focused on the enforcement of mortgages, it actually provided for out of court enforcement for all security interests, including security interests over movable property. The 2019 Ordinance, however, was subsequently revoked by the Federal Government as it received severe criticism from all quarters for being passed as an ordinance, and not as an Act of Parliament in accordance with the legislative process mandated under the Constitution. The ST Act does not include detailed provisions on notifying competing claimants of the disposal, distribution of proceeds, rights of transferees, etc. Neither does the ST Act provide for the remedy to accept collateral in full or partial satisfaction of the secured obligation.108 Section 60 provides for specific remedies with respect to enforcing a security interest in movable property attached to immovable property, entitling the secured creditor to remove the collateral, but imposing a duty to reimburse the owner or mortgagee for any cost of repair or damage caused by such removal.

H. Rights and Duties of the Parties Part VIII provides a set of minimal rules governing the conduct of a customer who remains in possession of the collateral. Such a customer must act with the standard of a person of ordinary prudence.109 The customer has the right to request material information110 from the secured creditor regarding the secured obligation and the collateral, and the secured creditor must respond within 14 days.111 The secured creditor has the right to inspect the collateral under the conditions prescribed in a security agreement. The duties of the secured creditor when in possession of the collateral are governed by the provisions of the Contract Act of 1872, which broadly provides for the duty to take care of the pledged goods, liability for loss, and restrictions on unauthorised use of the pledged goods.

I. Miscellaneous Provisions Part IX of the ST Act deals with a number of different aspects affecting secured transactions, including the manner in which a notice or demand may be served under the ST Act112 and the designation of the ST Registry staff as public servants.113 This Part also contains critical provisions

107 See

Muhammad Shoaib Arshad v Federation of Pakistan WP No 33872 of 2016 (Unreported). with Art 80 of the UNCITRAL Model Law. Act, s 62(1). 110 ibid s 62(1), para 4. This section identifies the material information, including a copy of the security agreement. 111 ibid s 64. 112 ibid s 65. 113 ibid s 71. 108 Compare 109 ST

394 Marek Dubovec and Zahra Abid that delineate the relationship of the ST Act with other legislation, as well as transitional provisions. Section 66 extends the protection of a security interest to the insolvency proceedings of a customer (debtor). While it leaves the application of the insolvency laws intact, including the priority rules set out therein, it codifies a well-established common law principle that a secured creditor shall have the right to enforce its security interest outside the insolvency proceedings of the borrower.114 In such cases, the secured creditor’s priority shall not, except in the case of a floating charge,115 be subject to any preferential claim (such as government claims, employee claims, etc.), even if such a claim arose before the creation of the security interest. The ST Act does not expressly abrogate any other statutes, but in case of any inconsistency the ST Act is to prevail.116 Three separate sections of this Part provide for the issuance of implementing instruments: i) under section 69, the Federal Government may issue an order to remove any difficulty in giving effect to the provisions of the ST Act, ii) under section 70, the Federal Government may issue rules, particularly to implement the registration-related provisions, and iii) under section 72, the Registrar may make regulations that shall not be inconsistent with the Act, and the rules to regulate certain aspects of registry operations, including the amount and mode of payment of fees. Finally, section 73 deals with transitional matters. It addresses the prior security interests created by entities and companies separately. The latter remain unaffected as the perfection of such security interests has not been altered and remains valid under the Companies Act. For the former, it prescribes a 6-month period, after the publication of a notice on the establishment of the ST Registry, during which prior security interests may be perfected. If perfected during the transitional period, the priority of the security interest will date back to the time of perfection under the prior law.

V. Final Remarks The key objective of financial inclusion is to redress an inequality of access to financial services, between the financially included and the financially excluded. The adoption of the ST Act takes a key step in that direction by redressing an inequality in the financial infrastructure that has hampered Pakistan’s SME sector. After its entry into force in May 2020, unincorporated entities and natural persons have a secured transactions framework that enables their access to regulated sources of finance. The ST Act departs from the international models in a number of aspects, but those deviations cannot be attributed to the lack of familiarity with those models. Rather, the approaches taken were carefully considered to ensure the passage of the Bill in light of the constitutionally mandated allocation of powers between the Federal Government and the provinces, as well as resistance from various stakeholders against revamping established legal practices and registration systems with respect to company charges in Pakistan. Furthermore, certainty in cross-border transactions could have been enhanced by the inclusion of conflict-of-laws rules. Nonetheless, the ST Act provides a number of openings for modifications to bring it closer to the international models. Even before its entry into force, the ST Act was reviewed to more closely align with the international models, including to do away with the distinction between floating and fixed

114 United

Bank Limited v PICIC & Others 1992 SCMR 1731. Act 2017, s 390(3)(b). Act, s 68.

115 Companies 116 ST

Pakistan’s Reform of Secured Transactions Law 395 charges, providing for the perfection by registration in all types of security interests, including any charges of movable property created by companies in the Collateral Registry as well as absolute assignments of receivables, and providing for the acquisition security right concept to deal with the rights of unpaid sellers and other creditors that extend finance to enable the borrower to acquire a new asset. The ST Act is being revised to also facilitate the use of electronic warehouse receipts as collateral by equating the rules on title documents that require their delivery to secured creditors with control over an electronically issued document. Several consequential changes will also be made in the Companies Act. At the provincial level, the high amounts of stamp duty continue to present the most pressing obstacle to receivables-based financing. Revisions or even targeted exemptions to stamp duties can substantially ease access to finance for SMEs. At the federal level, there are several issues that may warrant attention at this stage. Establishing a unified ST Registry for security interests created by all types of customers would eliminate a number of legal risks. Microbusinesses and SMEs often begin as unincorporated entities like sole proprietorships and partnerships, and subsequently opt to become companies. A unified registry would obviate the need for secured creditors to ‘migrate’ their registrations with respect to security interests created by business prior to their incorporation from the ST Registry to the Companies Registry, as well as the need for complicated priority rules and costly due diligence. Finally, regarding judicial determinations, a resolution of the constitutionality of outof-court enforcement in relation to both immovable and movable property, would improve the quality of security for creditors and encourage lending, providing a further basis for the improvement of the statutory framework.

396

19 Secured Transactions Law in Singapore: Living with Untidiness DORA NEO

I. Introduction This chapter discusses the law of secured transactions in Singapore, a small, business-oriented city state with a highly developed market economy based historically on entrepot trade. Singapore was founded by Sir Stamford Raffles of the British East India Company in 1819, obtained internal self-government in 1959, was briefly merged with Malaysia in the early 1960s, and became a fully independent nation in 1965. It has a land area of 725 square km and a population of 5.7 million.1 Its GDP in 2018 was USD 64,582,2 amongst the top 5 per cent in the world. Its economy is highly diversified, with the services industries accounting for 70 per cent and the manufacturing industries for 25 per cent of its GDP.3 Singapore has been ranked globally as a leading maritime centre4 as well as a leading financial centre.5 The general framework of the law of secured transactions in Singapore is similar to that in the UK. Because of Singapore’s history as a former British colony, English common law applied in Singapore in the past6 and remains highly influential. Some English statutes have been re-enacted 1 See Department of Statistics, Singapore, ‘Data’, www.singstat.gov.sg/find-data. 2 See World Bank Group, ‘Singapore Statistics’, data.worldbank.org/indicator/NY.GDP.PCAP.CD?locations=SG. 3 See Department of Statistics, Singapore, ‘Summary of Singapore’s Economy’, www.singstat.gov.sg/modules/ infographics/economy. 4 In 2019, Singapore was ranked top for the sixth consecutive year running in the Xinhua-Baltic International Shipping Centre Development (ISCD) Index: see Baltic Briefing, ‘Xinhua-Baltic Report 2019: Singapore Retains Top Spot as International Shipping Centre’ (11 July 2019), thebalticbriefing.com/member-news/xinhua-baltic-report-singaporeretains-top-spot-as-international-shipping-centre. 5 Singapore has consistently ranked among the top five in the Global Finance Centres Index, published by the Z/Yen Partners in collaboration with the China Development Institute, which compares the competitiveness of the world’s leading financial centres. See Long Finance, ‘The Global Financial Centres Index’, www.longfinance.net/programmes/ financial-centre-futures/global-financial-centres-index. 6 The Second Charter of Justice granted by the British Parliament in 1826 introduced pre-1826 English statutes and also English common law (and equity) into Singapore (as part of the Strait Settlements). However, English law would not apply if it was unsuitable for local conditions, and would be modified if it would cause injustice or oppression. Another important provision in Singapore’s legal history was s 5 of the Civil Law Act (Cap 43, 1988 rev edn), which was first enacted in 1878 (as s 6 of the Civil Law Ordinance, Ordinance IV of 1878, which was the precursor of s 5) and repealed in 1993. This focused largely on commercial law, and provided: ‘Subject to this section, in all questions or issues which arise or which have to be decided in Singapore with respect to [certain specific branches of commercial law] and with respect to mercantile matters generally, the law with respect to those matters to be administered shall be the same as would be administered in England in the like case, at the corresponding period, if such question or issue had arisen or had to be decided in England, unless in any case other provision is or shall be made by any law having force in Singapore.’

398 Dora Neo in Singapore, while others were substantially copied, particularly during the early years.7 In practice, where a legal issue arises that has never before been decided by the Singapore courts, the English common law position is usually taken as a starting point, although this is not binding on Singapore judges, who may, as a matter of practice, occasionally consider relevant cases from other common law countries such as Australia or Canada, before reaching their decision tailored to the conditions prevailing in Singapore. There is no comprehensive code governing secured transactions in Singapore. The applicable law consists of a combination of common law principles and a limited number of statutory provisions, mainly the Bills of Sale Act8 and selected sections of the Companies Act which relate to company charges.9 In the sphere of consumer transactions, there is also the Hire Purchase Act10 and the Pawnbrokers Act 2015.11 Where case law is concerned, there has not been much departure from English common law principles, and many English cases form the foundation of the law in Singapore. The bills of sale and company charges legislative provisions are very similar to historical versions of equivalent English provisions, but more recent statutory reforms in the UK have not been followed.12 The law of secured transactions in Singapore is well developed and works satisfactorily enough. It is at the same time fragmented and complex, and uncertain at the fringes. These problems are not unique to Singapore, as they are a legacy of the English legal system and are typical in common law jurisdictions based on English law.13 There has been relatively little public discussion of the shortcomings of the law of secured transactions, and no strident calls for reform. The general untidiness of the law is accepted and tolerated by the local legal and financial community, who have developed their practices and processes accordingly. This chapter focuses on secured transactions involving personal property in Singapore. Security over real property (ie, land and buildings) will not be discussed. This chapter will use the term ‘secured transactions’ in a broad sense to encompass not just security interests, where the financier is given an interest in an asset belonging to the debtor, but also quasi-security devices (such as retention or transfer of title arrangements), where the financier remains or becomes the owner of the asset that it looks to for protection in the event of non-payment or debtor’s insolvency. For convenience, this chapter may, where appropriate, use the words ‘security’, ‘creditor’ and ‘debtor’ to also refer to the assets, the seller/owner and the buyer/hirer in a quasi-security arrangement. After this introduction, Part II explains the various types of security interests in Singapore law, and how they are created and perfected. Part III discusses quasi-security interests, and shows how they work differently from true security interests. Part IV analyses the complex questions of priority. Part V gives a brief overview of enforcement of creditors’ rights in secured transactions. Part VI examines two studies on reform of aspects of secured transactions 7 A new chapter in Singapore’s legal history began with the passing of the Application of English Law Act (Cap 7A, 1994 rev edn) (AELA) in 1993, and the current position can best be understood by reference to this statute. Under the AELA, 13 English commercial law statutes were specifically listed as being applicable in Singapore, ending more than a century of uncertainty as to precisely which ones were included. The AELA also states that the common law of England (including the principles and rules of equity), so far as it was part of the law of Singapore before 12 November 1993, shall continue to be part of the law of Singapore, and shall continue to be in force in Singapore as long as it is applicable to the circumstances of Singapore and subject to such modifications as those circumstances may require. 8 Cap 24, 2011 rev edn. 9 Cap 50, 2006 rev edn, Pt IV, Div 8 on registration of charges. 10 Cap 125, 2014 rev edn. 11 Pawnbrokers Act 2015 (No 2 of 2015). 12 Recent examples where English legislation has not been followed in Singapore include the 2013 amendments in the UK made to the company charges registration provisions by the Companies Act 2006 (Amendment of Part 25) Regulations 2013 and the outlawing of anti-assignment clauses in certain types of contracts by The Business Contract Terms (Assignment of Receivables) Regulations 2018. 13 In this connection, the discussion in ch 15 of the issues confronting secured transactions law reform in common law countries generally is particularly relevant.

Secured Transactions Law in Singapore: Living with Untidiness 399 law in Singapore. The recommendations that were made have either not been taken up or have led to only minor changes. Part VII assesses the state of the law of secured transactions in Singapore and makes recommendations for improvements along the lines of the modern principles of secured transactions law.14 Part VIII examines the challenges of secured transactions law reform in Singapore. Part IX suggests that despite these challenges, there are good reasons for reform to be considered. Part X concludes.

II. Security Interests A. Introduction to Security over Personal Property (i) Security versus Quasi-security Singapore law takes a strict definition of ‘security’ or ‘security interest’ to refer to a creditor’s right over property belonging to its debtor which the creditor can look to in order to obtain payment if the debtor defaults. In the event of non-payment, the property forming the security can be sold and the proceeds used to pay off the loan. If there is a shortfall after the sale, the creditor can claim the remaining debt from the debtor and if there is an excess, the creditor must account for this to the debtor. There are certain aspects of secured transactions law that apply only to security interests, such as the requirement to register company charges. In contrast, there are also quasisecurity arrangements that help to ensure that a creditor gets paid and is protected from debtor’s insolvency by means other than giving the creditor a right over the debtor’s property. A common example is a sale of goods on credit terms, where the seller provides financing and retains title in the goods until the buyer fully pays for the goods. In the event of non-payment or the buyer’s insolvency before the goods are fully paid for, the seller can reclaim the goods by virtue of its ownership. Quasi-security devices are subject to different rules from security interests, and will be considered in part III.

(ii) Types of Security Interests Security can be taken over all forms of personal property, tangible and intangible. However, the requirements for a successful security arrangement differ according to the type of asset concerned and the form of security used. There are four types of security interests in the common law. These can be divided into possessory security (where possession of the debtor’s property is passed from the debtor to the creditor) and non-possessory security (where security is created by agreement without any transfer of possession). There are two types of possessory security, the pledge and the lien. These apply only to movable tangible property. The lien is usually only relevant in very specific situations15 and will not be discussed further in this chapter, which will focus on the pledge. There are also two types of non-possessory security, the mortgage16 and the charge. 14 A full discussion of the modern principles of secured transactions law can be found in ch 2, where the principles are set out at II. For a summary of the modern principles, see ch 15 III. 15 Liens may arise by the operation of law in particular contexts where the owner of a chattel owes money for services that have been provided to him, and the service provider who is in possession of the chattel has the right to retain the chattel in its possession until the debt is paid. Examples are the repairer’s lien, the solicitor’s lien and the innkeeper’s lien. Liens may also arise by agreement, but as they do not give an implied right of sale upon default, a pledge is a more useful security. 16 A mortgage can be legal or equitable. See H Beale et al, The Law of Security and Title-Based Financing, 3rd edn (Oxford, Oxford University Press, 2018) paras 6.05–6.16.

400 Dora Neo Non-possessory security can be taken over all forms of property, ie, real property as well as tangible and intangible personal property. The difference between a mortgage and a charge is that in a mortgage, the asset forming the security is transferred to the creditor until the debt is paid, whereupon it is transferred back to the debtor; whereas in a charge, the asset is merely earmarked by the debtor and set aside as security for the debt without being transferred to the creditor. A charge has its origins in the law of equity, and it can be taken over future property that does not yet exist or which has not been acquired by the grantor of the security.17 It can be referred to as an ‘equitable charge’, particularly when it needs to be distinguished from a mortgage, or from the use of the word ‘charge’ in a more general sense. Potential confusion arises because the terms ‘mortgage’ and ‘charge’ are often used interchangeably to refer generally to a security interest, and also because in the context of the registration of charges under Companies Act, the word ‘charge’ is used to refer to both equitable charges as well as mortgages, without differentiation.18

B. Creation (i) Pledges A pledge is created by the debtor (pledgor) passing possession of a chattel to the creditor (pledgee) with the intention of creating a security interest in its favour. The usefulness of the pledge as a security is aided by the concept of constructive possession, which allows a pledge to be made by a symbolic transfer of possession, without the need for physical possession to be given to the pledgee. Examples of constructive possession include where the creditor is given possession of bills of lading representing goods which are at sea, or where the goods to be pledged are stored in a warehouse and the warehouse keeper attorns to the creditor and agrees to hold the goods on the creditor’s behalf. A loss of possession of the goods by the creditor generally terminates the pledge.19

(ii) Mortgages and Charges Mortgages and charges are created by agreement. They can be created over any type of property, both real and personal. Accordingly, they cover all forms of personal property, ie, tangible movable property, such as machinery, inventory and vehicles, as well as intangible property, such as book debts, bank accounts, insurance policies, shares and intellectual property rights. There are generally no formalities required for the creation of a mortgage or charge over personal property by a company except under specific statutes. Examples are the Merchant Shipping Act which requires a mortgage over a ship to be in a prescribed form,20 and the respective statutes governing 17 Holroyd v Marshall (1862) 10 HL Cas 191. It is also possible for an equitable mortgage to be taken over future property, and this was in fact the type of security interest that was considered in Holroyd v Marshall. This is in accordance with the broader principle that an equitable security can be taken over future property, whereas a legal mortgage cannot. See further ch 15 IV B (i) (a). 18 Companies Act, s 4 provides that the term ‘charge’ includes a mortgage and any agreement to give or execute a charge or mortgage whether upon demand or otherwise. There is no further elaboration in s 4 of the term ‘mortgage’, but under the general law, this would include both a legal and equitable mortgage. 19 However, when a creditor returns the pledged goods (or more commonly a bill of lading representing the pledged goods) to the debtor for a limited purpose, for instance to enable the goods to be collected from the shipper and sold, the continuance of the pledge is facilitated by the use of trust receipts under which the debtor agrees to hold the goods and their proceeds on trust for the creditor. See, eg North Western Bank Ltd v John Poynter, Son & Macdonalds [1895] AC 56. 20 Cap 179, 1996 rev edn, s 25(1).

Secured Transactions Law in Singapore: Living with Untidiness 401 copyright, patents, trademarks and registered designs, which require the creation of security interests over these intellectual property rights to be in writing and signed by the assignor or grantor.21 As mentioned above, in the Companies Act, the term ‘charge’ refers to both mortgages and equitable charges. Company charges can be fixed or floating. In a fixed charge, the company cannot deal with the charged assets without the consent of the chargee. Conversely, in a floating charge, the company is allowed to deal with the charged assets in the ordinary course of business until a specified event happens and the charge crystallises. At this point, the company’s power to deal with the charged asset comes to an end, and the floating charge becomes a fixed charge. The position is much stricter for security created by individuals or unincorporated businesses. These are governed by the Bills of Sale Act, which only applies to (i) security given by individuals, (ii) security over chattels, and (iii) agreements in writing.22 The requirements of the Act are cumbersome and onerous. For example, every bill of sale must be duly attested.23 It must be accompanied by a schedule listing the personal chattels comprised in the bill, and the bill shall have effect only in respect of the personal chattels specifically described in that schedule and shall be void in respect of any personal chattels not so specifically described.24 Even where personal chattels have been specifically described in the schedule, the bill will be void in respect any of these chattels of which the grantor was not the true owner at the time of the execution of the bill of sale.25 These strict provisions in relation to creating a bill of sale over future property and after acquired property mean that an individual cannot give a floating charge over its personal chattels or over all its assets. Further, a bill given by way of security must be in the prescribed form, failing which the bill will be void.26 Most intangible property consist of choses in action, which are property rights which are enforced by bringing an action in court, and not by taking physical possession of an asset.27 In general, choses in action are transferred by assignment,28 and accordingly, a mortgage of a chose in action is generally done in this manner. Security over choses in action can also be created by way of an equitable charge.29 A person to whom receivables are due under a contract may be prevented from assigning them if the contract from which the they arose contains a non-assignment clause that prohibits the assignment of the benefits of the contract without the consent of the account debtor. Such a clause in a supply contract where the supplier sells goods on credit will prevent the supplier from using the books debts from the sale as security for its own obligations to its creditors. An assignment in breach of a non-assignment clause is ineffective to 21 Copyright Act (Cap 63, 2006 rev edn), s 194(3); Patents Act (Cap 221, 2005 rev edn), s 41(6); Trade Marks Act (Cap 332, 2005 rev edn), s 38(3); Registered Designs Act (Cap 266, 2005 rev edn), s 32(6). 22 The Singapore Bills of Sale Act is based on the UK Bills of Sale Act 1878 and the UK Bills of Sale (1878) Amendment Act 1882. 23 Bills of Sale Act (Cap 24, 2011 rev edn), s 4(1). 24 Bills of Sale Act (Cap 24, 2011 rev edn), s 5(1). 25 Bills of Sale Act (Cap 24, 2011 rev edn), s 5(2). This position is different from the UK position, where such a bill will be void except against the grantor: Bills of Sale (1878) Amendment Act, 1882, s 5. 26 Bills of Sale Act (Cap 24, 2011 rev edn), s 6(b). 27 Intangible property also includes intellectual property rights and digital assets. In Quoine Pte Ltd v B2C2 Ltd [2020] SGCA(I) 2 the Court of Appeal accepted that cryptocurrency could be regarded as property, although the type of property was not analysed ([137]–[143]). 28 An assignment can take the form of statutory assignment or an equitable assignment. Statutory assignments must meet the requirements of s 4(8) of the Civil Law Act (Cap 43, 1999 rev edn) whereas equitable assignment can take any form as long as the intention to assign is clear. One practical difference between a statutory assignment and an equitable assignment is that in a statutory assignment, the assignee can sue the account debtor in his own name, but in an equitable assignment, the assignor has to be joined as a party to the action. 29 A specific regime exists for the creation of statutory security over book-entry securities (scripless shares): see Securities and Futures Act (Cap 289, 2006 rev edn), s 81SS. This regimes exists in parallel with the common law method of creating a floating charge over book entry securities: s 81SS(19).

402 Dora Neo transfer the contractual rights from the assignor to the assignee.30 This means that the account debtor need not pay the assignee. However, the assignment will still be effective between the assignor and the assignee.31

C. Perfection: Rights against Third Parties In order to be fully effective, a security interest must bind not just the debtor, but also third parties, ie, it must be perfected. The following discussion explores the extra steps, if any, that must be taken before a validly created security interest will bind third parties.

(i) Pledges: Transfer of Possession Perfection is straightforward for a possessory security. Upon the passing of possession to the pledgee, a pledge is immediately effective against the world. Nothing more needs to be done, and perfection of the pledge is automatic. In contrast, non-possessory security may need to be perfected by registration under the Bills of Sale Act or the Companies Act. In addition, registration must be done under a few specialist registers. For example, ship mortgages must be registered under the Merchant Shipping Act,32 and security interests over registrable intellectual property rights must be registered in the respective registers.33

(ii) Registration of Bills of Sale Where security is created in writing over a chattel by an individual or an unincorporated entity, the document must be registered within 3 days of its creation, failing which it would be rendered void under the Bills of Sale Act.34 Registration has the positive effect of conferring priority when there is more than one bill of sale given in relation to the same chattel.35 The mode of registering a bill of sale is cumbersome and a specified list of documents, including a statutory declaration, must be presented for registration. An unregistered bill of sale has no effect against the grantor of the bill or against third parties. The registration of a bill of sale must be renewed at least once every 12 months, failing which the registration shall be void.36 There are provisions for rectification of the register and entry of satisfaction.37 Bills of Sale are registered at the Supreme Court Registry, and registration is done online using the e-Litigation system of the Singapore courts, which was launched in 2013. Searches for bills of sale registered after 2013 can be conducted electronically at the LawNet Service Bureau, whereas the non-electronic bill of sale register can be inspected at the Supreme Court Legal Registry. 30 Anti-assignment clauses have hardly been challenged in the Singapore courts. The UK House of Lords decision in Linden Gardens Trust Ltd v Leneseta Sludge Disposal Ltd [1994] 1 AC 85 ruling that such clauses are valid was followed in the context of a non-assignment of a franchise agreement by the Singapore High Court in Total English Learning Global Pte Ltd v Kids Counsel Pte Ltd [2014] SGHC 258. The judge declined to depart from the English position although he was urged by counsel to do so ([64]). See also Arris Solutions, Inc v Asian Broadcasting Network (M) Sdn Bhd [2017] 4 SLR 1 [20]. 31 Linden Gardens Trust Ltd (n 30). See also Arris Solutions (n 30). 32 Merchant Shipping Act (Cap 179, 1996 rev edn), s 25(1). 33 Trade Marks Act (Cap 332, 2005 rev edn), s 39; Patents Act (Cap 221, 2005 rev edn), s 41; Registered Designs Act (Cap 266, 2005 rev edn), s 34. 34 Bills of Sale Act, s 10. 35 Bills of Sale Act, s 11. 36 Bills of Sale Act, s 13. 37 Bills of Sale Act, ss 15 and 16.

Secured Transactions Law in Singapore: Living with Untidiness 403 Although the perfection requirements of the Bills of Sale Act do not apply to choses in action, until recently, the Bankruptcy Act provided that a general assignment of the book debts of an individual who was subsequently adjudged bankrupt was void against the Official Assignee unless the assignment had been registered under the Bills of Sale Act.38

(iii) Registration of Company Charges Perfection of security interests created by companies is governed by section 131(3) of the Companies Act, which sets out a list of 10 categories of charges, (a) to (j), that must be registered within 30 days of their creation.39 This list is wide ranging and covers fixed charges over land and specific items of personal property, including book debts, intellectual property rights, ships and charges over chattels ‘created or evidenced by an instrument which if executed by an individual, would require registration as a bill of sale’. In addition, a floating charge over the property and undertaking of a company must be registered, regardless of the type of asset involved. Although the list is exhaustive (only types of charges that are listed need to be registered), it is not comprehensive (there are types of charges that are not listed and therefore need not be registered). Examples of charges not on the list include charges over financial collateral and insurance policies. A failure to register as required renders the charge void against the liquidator and the creditors of the company.40 Registration is compulsory. If there is a failure to register a charge as required, the company and every officer in default commits an offence and is liable to a fine and also a default penalty.41 Non-registration does not affect the validity of the charge against the company, and the company remains liable to repay the money secured by the charge, which becomes immediately payable.42 A few types of charges which would have otherwise fallen within the list of registrable charges in section 131(3) have been specifically excluded from the coverage of that section, for reasons of expediency or convenience. One such type of charge is an international aircraft mortgage.43 Instead of falling under section 131(3), international aircraft mortgages are governed by a special regime under the International Interests in Aircraft Equipment Act 2009 (IIAEA), which provides for an international registry.44 Another example is a shipowner’s lien.45 This exclusion was made 38 Bankruptcy Act (Cap 20, 2009 rev edn), s 104 (repealed on 30 July 2020). 39 After the commencement of the Companies (Amendment) Act 2014 on 3 January 2016, the charges to which s 131(3) of the Companies Act apply are: (a) a charge to secure any issue of debentures; (b) a charge on uncalled share capital of a company; (c) a charge on shares of a subsidiary of a company which are owned by the company; (d) a charge created or evidenced by an instrument which if executed by an individual, would require registration as a bill of sale; (e) a charge on land wherever situate or any interest therein but not including any charge for any rent or other periodical sum issuing out of land; (f) a charge on book debts of the company; (g) a floating charge on the undertaking or property of a company; (h) a charge on calls made but not paid; (i) a charge on a ship or aircraft or any share in a ship or aircraft; and (j) a charge on goodwill, on a patent or a licence under a patent, on a trade mark or a licence to use a trademark, or on a copyright or a licence under a copyright or on a registered design or a licence to use a registered design. This list is largely similar to the list that applied prior to the amendment, with minor modifications to subsections (d), (e) and (j). 40 Companies Act, s 131(1). It is generally accepted that the term ‘creditors’ in s 131(1) means ‘secured creditors’. See, eg Re City Securities Pte [1990] 1 SLR (R) 413 [76], following Re Ehrmann Brothers Ltd [1906] 2 Ch 697. An unregistered charge is therefore valid against unsecured creditors outside of insolvency. See further H Tjio, P Koh and LP Woan, Corporate Law (Singapore, Academy Publishing, 2015) paras 14.095–14.096. 41 Companies Act, s 132. 42 Companies Act, s 131(2). 43 Companies Act, s 131(3B). 44 Cap 144B, 2012 rev edn. This statute implements the Convention on International Interests in Mobile Equipment ‘Cape Town Convention’ and the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment ‘Aircraft Protocol’ (see first schedule of the IIAEA), which provides for the registration of international interests in mobile equipment. A security interest that is capable of being registered under the IIAEA is also not subject to the registration requirements of the Bills of Sale Act (see Bills of Sale Act, s 2(2)). 45 Companies Act, s 131(3AB).

404 Dora Neo because requiring registration of shipowner’s liens over sub-freights belonging or due to the charterer would be impractical, especially if the charter was a short one or for a single voyage only, and did not accord with the commercial practice in the shipping industry.46

(iv) Fixed versus Floating Charges It is important to distinguish between fixed and floating charges for the purposes of registration under the Companies Act as the requirements are different. The distinction is also important as the priority rules and insolvency consequences are different for fixed as compared to floating charges.47 In a fixed charge, the company cannot deal with the charged assets without the consent of the chargee. Conversely, in a floating charge, the company is allowed to deal with the charged assets in the ordinary course of business until a specified event happens and the charge crystallises. At this point, the company’s power to deal with the charged asset comes to an end, and the floating charge becomes a fixed charge. Distinguishing between a fixed and floating charge is not always straightforward.48 In making this distinction, the court will engage in a two-stage process.49 The first stage involves construing the instrument of charge to ascertain the rights and obligations that the parties intended to grant each other. With this sorted out, the court will move to the second stage, which is to categorise the charge as either fixed or floating. This is a matter of law, which does not depend on the intention of the parties. The one essential characteristic that distinguishes a floating charge from a fixed one is that in a floating charge, ‘the asset subject to the charge is not finally appropriated as a security for the payment of the debt until the occurrence of some future event. In the meantime the chargor is left free to use the charged asset and to remove it from the security.’50 In other words, the distinguishing feature is whether the chargor had control of the charged asset. Taking the example of a book debt, in order for a charge over a book debt to be a fixed charge and not a floating charge, the chargor must not be able to deal with the debt, nor the proceeds of the debt, nor the bank account into which the proceeds are deposited, without the chargee’s permission.51 As far as a book debt is concerned, the issue of whether a fixed or floating charge has been created is not important in the context of registration, because fixed charges over the book debts of a company must be registered, just like floating charges. However, the distinction between fixed and floating charges is also important for the purposes of determining priority against other chargees and preferential creditors, which will be discussed in part IV below. It is sometimes not clear whether an arrangement creates a floating charge, or even a charge at all. In Asiatic Enterprises (Pte) Ltd v United Overseas Bank Ltd (Asiatic Enterprises), the Court of Appeal had to consider the effect of a contractual clause in a loan agreement which provided that the creditor was ‘entitled (as equitable chargee) to attach the Outstandings to any property’

46 s 131(3AB) was inserted into the Companies Act in 2018 to reverse the effect of the Court of Appeal judgment in Diablo Fortune Inc v Duncan, Cameron Lindsay [2018] 2 SLR 129, which decided for the first time in Singapore that a shipowner’s lien over sub-freights and sub-hires belonging or due to the charterer or any sub-charterers was a floating charge which needed to be registered under s 131(3)(g). This had also been the prevailing common law position in the UK and Hong Kong, and both jurisdictions have introduced legislation to counter this rule: [2018] 2 SLR 129 [35], [73] and [74]. 47 See IV below. 48 See Re Lin Securities (Pte) Ltd; Chi Man Kwong Peter v Asia Commercial Bank [1988] 1 SLR(R) 220; Re City Securities Pte [1990] 1 SLR(R) 413 affirmed in Dresdner Bank AG v Ho Mun-Tuke Don [1991] 3 SLR (R) 307. 49 Agnew v Commissioners of Inland Revenue [2001] 2 AC 710 [32]. 50 National Westminster Bank v Spectrum Plus [2005] UKHL 41 [111]. 51 ibid [151].

Secured Transactions Law in Singapore: Living with Untidiness 405 belonging to the debtor in the event of the debtor’s default.52 The Court of Appeal decided that this clause did not create a floating charge. Based on the clause, a charge would only arise if two preconditions were satisfied: if an event of default had occurred, and if the creditor had decided to exercise its rights to attach the amount outstanding to the debtor’s property. This decision attracted some controversy, as it meant that by using such a clause, a creditor could, by unilateral action, create or impose a charge over property belonging to the debtor at some future time.53 An argument might be made that if such an arrangement did not give rise to a registrable charge, this position would undermine the system of registration found in section 131 of the Companies Act, which was intended to notify the public of charges created by a company over its assets so that members of the public would not wrongly assume that the company’s assets were unencumbered.54 One solution that has been suggested to the potential difficulty created by the Asiatic Enterprises case is that the clause in question should be seen as an agreement to create a charge, which would fall within the definition of a ‘charge’ under the Companies Act, and would therefore have to be registered.55

(v) A Modern Registry of Company Charges Company charges are registered with the Accounting and Corporate Regulatory Authority (ACRA), a statutory board under the Ministry of Finance. Singapore moved to an electronic system of registering company charges in January 2003, when the old paper-based system was discontinued.56 This is part of the BizFile System (which was itself part of the Singapore government’s e-services development plan), that is completely online and is the only possible way of filing business or company related transactions.57 Searches and filings are all done online. Charges are registered by lodging with the Registrar an electronic statement containing the prescribed particulars of the charge. The prescribed particulars are: the date of creation of the charge or the acquisition of the property subject to the charge; the amount secured by the charge; a description sufficient to identify the property charged; and the name of the person entitled to the charge.58 The charge instrument, or a copy thereof, does not have to be produced as part of the registration process.59 52 [1999] 3 SLR(R) 976. 53 In order for this to work, an appropriate mechanism must be provided by which the creditor could exercise this right. The Court of Appeal in Asiatic Enterprises did not explain what such mechanism might be, but only ruled that the mechanism used in the case itself, which was the lodgment of a caveat in the land registry, was not an appropriate mechanism to create a right over the debtor’s real property. Articles discussing the Asiatic Enterprises case include Lee Eng Beng, ‘Invisible and Springing Security Interests in Corporate Insolvency Law’ (2000) 12 Singapore Academy Law Journal 210; V Yeo, ‘No Security for the Unsecured Creditor – The Asiatic Enterprises (Pte) Ltd v United Overseas Bank’ (2000) 12 Singapore Academy Law Journal 218; Tan Cheng Han, ‘Springing Security Interests and Registration’ (2001) 13 Singapore Academy Law Journal 451. 54 See Tan (n 53). 55 ibid. As an alternative to its holding that the clause created a floating charge, the High Court in Asiatic Enterprises also thought that the clause could be seen as an agreement to create a charge and therefore registrable: [1999] 2 SLR (R) 671. However, this point was not discussed by the Court of Appeal. 56 See C Chan, ‘Accounting and Corporate Regulatory Authority’s BizFile System’ in G Pan, Dynamics of Governing IT Innovation in Singapore: A Casebook (Singapore, World Scientific, 2013) 111. 57 ibid 106–07. The BizFile system was funded by the Singapore government under the e-Government action plan announced in June 2000. Under this action plan, money was set aside to fund the development of e-services, and a centralised integrated IT platform, known as Public Service Infrastructure (PSi), was also put in place to allow ‘for effective and efficient development and management of e-services’ by the various government agencies. 58 Companies Act, s 134(1). 59 The Registrar has the power to request to inspect the instrument of charge or a copy thereof without having to pay a fee: Companies Act, s 131(1A). Prior to 13 January 2003, it was mandatory to produce the charge instrument or a certified true copy thereof to the Registrar for the purposes of inspection as part of the registration process. The position was changed by the Companies (Amendment) Act 2002 (No 12 of 2002).

406 Dora Neo The company itself must keep the instrument creating any charge requiring registration under the Companies Act, or a copy thereof, at its registered office.60 The instruments or copies thereof and the register of charges shall be open to the inspection of any creditor or member of the company without fee, or of any other person on payment of a fee not exceeding SGD 2 as is fixed by the company.61 The Companies Act also contains provisions for the extension of time and rectification of the register,62 as well as to allow details to be entered regarding the satisfaction and release of property from a charge.63

III. Quasi-security Devices Quasi-security devices were explained in part II A (i) above. Title transfer or title retention devices perform a security function by ensuring that the creditor gets paid and is protected from the debtor’s insolvency by virtue of the creditor’s ownership of the asset which it is looking to for satisfaction of its debt. A common example is where a seller of goods gives credit to the buyer and allows the buyer to pay for them by instalments, and a clause in the contract provides that property in the goods does not pass to the buyer until payment in full has been made. This type of clause is referred to as a retention of title clause, or Romalpa clause, after the case which popularised its use.64 If the buyer defaults on the instalments, the seller, being the owner of the goods, can simply take the goods back, re-sell them, and apply the proceeds to pay the buyer’s debt. In this situation, as the seller is re-selling the goods in its capacity as their owner, strictly speaking, it need not account to the buyer for any surplus realised by the sale. A retention of title clause is valid under the Sale of Goods Act,65 which provides that property in goods passes when the parties intend it to pass.66 This arrangement performs a security function without the creation of a security interest and no registration is required under the Bills of Sale Act or the Companies Act. While retention of title clauses have been successful in allowing a seller/creditor to claim rights over the original goods supplied without activating the rules that apply to a security interest, there is danger that a poorly drafted clause may cause the arrangement to be seen as one that has created a registrable charge, and become void for non-registration.67 The same danger of unwittingly creating a registrable charge exists where a Romalpa seller attempts to claim an interest over mixed or processed goods that incorporate the original goods,68 or an interest over the proceeds from the sale of the original or processed goods.69 The court may find it unlikely that 60 Companies Act, s 138(1). In addition, under s 138(2),every company must keep at its registered office a register of charges containing information of all charges specifically affecting property of the company and all floating charges on the undertaking or any property of the company, with a short description of the property charged, the amount of the charge and the names of the persons entitled thereto. 61 Companies Act, s 138(3). 62 Companies Act, s 137. 63 Companies Act, s 136. 64 Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676. 65 Cap 393, 1999 rev edn. 66 Sale of Goods Act, s 17. Another relevant section is s 19(1) of the same statute, which provides that in a contract for the sale of specific goods, the seller may reserve the right of disposal of the goods until certain conditions are fulfilled, and in such a case, notwithstanding delivery of the goods to the buyer, property in the goods does not pass to the buyer until the conditions are satisfied. Such clauses were held to be valid under the English case of Armour v Thyssen [1991] 2 AC 339. 67 See the English case of Re Bond Worth [1980] Ch 228, where the seller retained ‘equitable and beneficial’ ownership until full payment had been received. The court was of the view that legal ownership had passed to the buyer and the seller’s equitable interest in the goods was granted to it by the buyer by way of charge. 68 See, eg the English cases of In re Peachdart Ltd [1983] 1 Ch 31 and Clough Mill v Martin [1985] 1 WLR 111. 69 See, eg the English cases of Re Bond Worth [1980] Ch 228 and E Pfeiffer v Arbuthnot Factors [1988] 1 WLR 150. Contrast the approach in the Australian case of Associated Alloys Pty Ltd v CAN 001 452 106 Pty Ltd [2000] HCA 25

Secured Transactions Law in Singapore: Living with Untidiness 407 the parties really intended the seller to have the full interest in the processed goods or the sale proceeds without accounting to the buyer for its labour and materials, or any surplus realised by the sale, as this would give the seller a windfall. If so, the court would find that the arrangement creates a charge which would be void if not registered. Other financing structures where the financier retains title over the assets that form the ‘security’ (ie, the assets that the financier will look to for payment in case of default) include hire purchase and finance leases. The Hire Purchase Act70 governs hire purchase agreements involving consumer goods and motor vehicles up to certain specified values,71 and provides for matters including the form and content of regulated agreements, implied terms, rights of hirers and the procedure for repossession. In contrast, a finance lease typically involves higher value assets, such as expensive equipment, where the lessee is interested in using the assets for the duration of their useful life without necessarily becoming their owner. The lessor is the owner of the assets. It receives the lease payments from the lessee and is entitled to the return of the assets when the lease ends or in the event of default. As the arrangements mentioned above do not involve the creation of a security interest with its associated registration and other requirements under the Bills of Sale Act or the Companies Act, they can be used as models to structure other financing arrangements, where title to the assets that function as collateral is transferred to the financier for its protection against default without creating a security interest. For instance, financing can be provided by structuring a transaction as a sale and leaseback or a sale and buyback, rather than a loan coupled with a charge over the debtor’s asset. Here, the debtor sells an asset to the financier, the financer pays the debtor the price, and the financier then leases or sells the asset back to the debtor. In this way, the debtor gets the money that it needs without interrupting its use of the asset in question, and the financier gets ownership of an asset that it can sell upon the debtor’s default. This type of arrangement runs the risk of being re-characterised by the courts as a loan coupled with a charge, but Singapore courts will give effect to it if they are satisfied that the sale structure was truly intended by the parties.72 Receivables financing and factoring are quasi-security arrangements whereby receivables are sold to a financier for less than their face value to raise money. The discounted amount reflects the fact that the owner of the receivables is being paid in advance of the due date of the receivables. The financier will collect the amounts under the receivables from the account debtors when payment is due. The details of the arrangements vary, but what should be noted for present purposes is that such an arrangement, being an outright sale, is not caught by the requirements of the Companies Act regarding the registration of charges. For unincorporated businesses, the Bankruptcy Act previously required a general assignment of existing or future book debts of an individual to be registered under the Bills of Sale Act in order for this to be valid against the Official Assignee.73

where the court decided that a clause purporting to grant the seller an absolute interest in the part of the proceeds that corresponded to the amount owing to the seller at the relevant time did not give rise to a charge but a trust. However, in Associated Alloys, the argument failed on the facts since it was impossible to identify the proceeds in the bank account arising from sale of the goods. 70 Cap 125, 2014 rev edn. 71 The monetary limit for consumer goods is S$20,000 and for motor vehicles is S$55,000. See Sch 1 of the Hire Purchase Act. 72 Thai Chee Ken v Banque Paribas [1993] 2 SLR 609. The question of when a transaction that ostensibly involves a sale and repurchase agreement might be characterised as a loan was considered in H Tjio, ‘When Is an Elephant a Bird’ (2006) 18 Singapore Academy of Law Journal 473. 73 Bankruptcy Act (Cap 20, 2009 rev edn), s 104 (repealed on 30 July 2020).

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IV. Priorities The general rule to determine priority of competing security interests over the same asset is that a security interest that was created earlier will take priority over one created later. This can be seen to be an application of the maxim of nemo dat quod non habet, that a person cannot give a better title than he holds. Applying this principle, the first in time prevails. There are several exceptions to this rule, where priority is determined by other principles. It should also be noted that secured parties may enter into priority agreements with each other to alter their priority position. An important exception to the time of creation rule takes into account the supremacy of legal interests over equitable interests and also the operation of equitable principles. Therefore, a legal interest (eg a legal mortgage) prevails over an earlier equitable interest (eg an equitable charge) provided that it was acquired for value and without notice of the prior equitable interest. Another exception applies for determining priority over successive assignments of choses in action. Here, the rule established in the nineteenth century case of Dearle v Hall74 still applies and priority is determined by the order of giving notice to the account debtor. The first assignee to give notice of assignment to the account debtor obtains priority over an earlier assignee provided that it had no notice of the earlier assignment at the time that its interest was created. However, it is not clear if the rule in Dearle v Hall applies to determine the priority of an assignment of a chose in action against other equitable interests over the same asset.75 The time of registration of a charge under the Companies Act does not give priority, and priority depends on the general rule of time of creation. However, in relation to security created in writing by individuals over chattels, the Bills of Sale Act provides that where two or more bills of sale are given in the same chattels, they shall have priority according to the order of their date of registration.76 Where priority of company charges are concerned, the rules of priority discussed above interact with other factors that might affect their operation. In the case of floating charges, the authority given by the floating chargee to the company to carry on its ordinary course of business potentially allows the creation of other security interests in the charged assets. Security created with the permission of the floating chargee will take priority over the floating charge and displace the first in time of creation rule that might otherwise have applied. The weakness of a floating charge in a priority competition can be shored up by two types of clauses, automatic crystallisation clauses and negative pledge clauses. An automatic crystallisation clause provides that the charge will crystallise upon the happening of defined events that may threaten the debtor’s ability to pay the loan, for instance if the debtor misses an instalment, or if the debtor has breached certain covenants under the loan agreement. Once the charge crystallises, the company’s authority to deal with the charged assets ceases and the floating charge becomes a fixed charge, thereby preventing new security interests from being created that have priority over the crystallised floating charge. Some commentators have argued that the chargor may have apparent authority to create further fixed charges if the subsequent fixed chargee did not know about the crystallisation of the floating charge.77 If this argument is accepted, the floating charge may lose out to a later fixed charge even if the floating charge has in fact crystallised. 74 (1828) 3 Russ 1. 75 For instance, it is not clear if the rule in Dearle v Hall applies in a competition between someone with an equitable tracing right and someone with an equitable assignment. 76 Bills of Sale Act, s 11. Under s 28 of the Merchant Shipping Act, priority of ship mortgages is determined by time of registration of the mortgage at the Registry of Ships. 77 See Beale et al (n 16) para 6.86; L Gullifer (ed), Goode and Gullifer on Legal Problems of Credit and Security, 6th edn (London, Sweet & Maxwell, 2017) para 4-55.

Secured Transactions Law in Singapore: Living with Untidiness 409 In a negative pledge clause, the company undertakes not to create subsequent security interests ranking pari passu or in priority to a floating charge without the permission of the floating chargee. A subsequent creditor who has knowledge of a negative pledge clause and nevertheless goes ahead to take security that is granted by the debtor in contravention of the clause will not be able to claim priority over the floating chargee. It is not clear when someone would be taken to have knowledge of a negative pledge clause. The registration of a charge will give constructive notice of its existence, and any particulars which need to be registered,78 to persons who are expected to search the register.79 Negative pledge clauses are not particulars that need to be registered under the Companies Act and, strictly speaking, do not fall into this category. However, in the electronic form for lodging a statement containing particulars of charge, there is space for any restrictions or prohibitions to be stated, and the prevalent practice is to give details of negative pledge clauses in this space. The effect of a voluntary registration of a negative pledge clause is uncertain. Such registration will at least alert a subsequent creditor who searches the register, who can be argued to have actual notice of the negative pledge. However, it probably does not give constructive notice to those who do not search the register,80 although contrasting views exist.81 This question has come up in one Singapore case, but no decision was given on this point.82 The position of a floating chargee may be affected by the claims of preferential creditors, as provided for by statute. In the winding up of a company or when a receiver is appointed on behalf of a debenture holder, if the assets of the company available for payment of general creditors are insufficient to meet certain specified debts (for example, employee wages, retrenchment benefits and contribution fund contributions), such preferential debts shall have priority over the floating charge.83 Aside from competition with other secured creditors, a secured creditor could also be engaged in a priority battle with a purchaser of the charged asset. The common law priority principles discussed above will apply. For example, a purchaser has a legal interest over the asset and would take free of earlier equitable interests over the same asset of which they had no knowledge, but would take subject to earlier legal interests. Again, notice of a prior transaction is relevant. However, there is some uncertainty whether a purchaser would be taken to have constructive notice of matters that appear on the register of charges. The more common view is that buyers in the ordinary course of business, unlike creditors contemplating the grant of a security, are not expected to search the register,84 and therefore would not have constructive notice even of the particulars that are required to be registered under the Companies Act. The discussion on priority above has so far been in relation the priority of a security interest. The position is quite different in relation to a quasi-security device. A financier who has title to assets under a retention or transfer of title arrangement has an absolute legal interest in the

78 See Beale et al (n 16) paras 12.04–12.05. The particulars of a charge that are required to be registered are set out in s 134 of the Companies Act. 79 The answer to the question to whom registration is constructive notice is not entirely certain. See the discussion in Beale et al (n 16) paras 12.04–12.06 and 12.13–12.14. 80 Wilson v Kelland [1910] 2 Ch 306. 81 These views were discussed in Kay Hian & Co (Pte) v Phua Ooi Yong Jon [1988] 2 SLR(R) 239 [17]. 82 ibid. This case concerned a contest between a prior floating charge and a subsequent fixed charge. The action took the form of an interpleader summons that was heard solely by affidavit evidence. The judge did not think it wise to decide on the important issue of whether voluntary registration of a negative pledge gave constructive notice of its contents without hearing full arguments, when he was able to dispose of the action on a different ground, based on the burden of proof. The judge found that the subsequent chargee had failed to discharge the burden of proving that they had no notice of the negative pledge that had been registered with the prior floating charge. 83 Companies Act, ss 328(5) and 226(1). 84 Beale et al (n 16) para 12.05.

410 Dora Neo assets, and this is the context under which the normal rules of priority apply. This means, for instance, that a quasi-security holder who has title to the relevant assets will have priority over a subsequent mortgagor or equitable chargee over the same assets, by virtue of having a legal interest and also being first in time of creation. From the point of view of a subsequent chargee, there is no way of knowing about prior quasi-security interests as these arrangements do not have to be registered. If the competing interest arose from a subsequent sale of the relevant asset by the debtor, the nemo dat rule would apply, and the holder of the prior quasi-security interest (who is the owner of the asset) would usually have a better title than the subsequent buyer unless the debtor had been given authority to sell the asset.85

V. Enforcement This part gives a very brief overview of enforcement in relation to secured transactions. Enforcement does not pose much difficulty, and can generally be done without the involvement of the court, either as matter of law (for particular types of security such as a pledge or a legal mortgage), or according to the contractual provisions of the security agreement.86 A true security interest can usually be enforced by taking possession of the collateral and selling it. In a pledge, the power of sale upon the debtor’s default is implied. Although only a legal mortgagee has the right by law to obtain possession of the mortgaged property, to sell it or to appoint a receiver over it, an equitable mortgagee or chargee will also have such powers if this is provided for in the security agreement. In the case of a true security interest, a creditor who sells the collateral has the obligation to account to the debtor for any surplus realised by the sale. The exact procedures and requirements for enforcement differ for different types of security interests and there are varying safeguards for the debtor, like the mortgagee’s obligation to act in good faith.87 Special rules of enforcement apply under the Pawnbroker’s Act, by which a recent amendment allows pawnbrokers to forfeit unredeemed pledges instead of selling them at a public auction as was required previously.88 The enforcement of chattel mortgages falling under the Bills of Sale Act must be done according to the procedure set out in the statute.89 The creditor in a quasi-security arrangement who retains title or to whom title is transferred, like a Romalpa seller or a lessor under a finance lease, is able to achieve the effect of ‘enforcing the security’ by virtue of its ownership of the relevant asset. It can repossess the assets according to the terms of the agreement with the debtor, sell the assets, and apply the proceeds to satisfy the debt. Technically, as the creditor in a quasi-security arrangement is the owner of the assets, it does not have to account to the debtor for any surplus realised upon a sale. However, the contract may provide for such accounting to be done.90 Under the Hire Purchase Act, certain safeguards exist to protect the hirer in the event of repossession of the goods by the owner.91

85 Sale of Goods Act, s 21(1). 86 The infrequently used remedy of foreclosure, whereby a mortgagor’s rights to redeem and its equity of redemption is extinguished so that absolute ownership of the asset vests in the mortgagee, requires judicial approval. 87 Downsview Nominees Ltd v First City Corporation Ltd [1993] AC 295, 311. 88 Pawnbrokers Act, ss 61 and 64. 89 Bills of Sale Act, ss 8 and 9. 90 A provision for the owner of the asset to account to the buyer or lessee for surplus monies realised from the sale of the asset may cause a court to find that the agreement creates a charge. 91 See Hire Purchase Act, ss 16–18.

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VI. Law Reform Studies Relatively little attention has been paid to secured transactions law reform in Singapore.92 The implementation of a modern electronic system of registering charges in 2003, discussed above, was a significant development impacting the practice of secured transactions law, although the aim of this was to harness information technology to streamline government processes and services rather than specifically to improve the procedure for secured transactions. Two public reform studies concerning aspects of secured transactions law will be discussed here. The first was a study of the Bills of Sale Act by a Sub-committee of the Law Reform Committee of the Singapore Academy of Law (SAL).93 The Sub-committee’s report in 1996 (SAL Report) made bold recommendations for the reform of the Bills of Sale Act, but these were not implemented.94 The second study was the 2011 Report of the Steering Committee for the Review of the Companies Act (Companies Steering Committee Report) which led to changes in the Companies Act generally, but very limited reform in relation to company charges.

A. SAL Report 1996: Reform of the Bills of Sale Act The SAL Report concluded that the Bills of Sale Act was rigid, restrictive and archaic. It made bold recommendations for the Act to be ‘replaced by a comprehensive personal property security law applicable whether the property to be subject to a security interest is goods or a chose in action and whether the debtor is a corporate or non-corporate person’.95 The subcommittee studied the rules that were adopted or discussed in other parts of the world like the USA, Canada, Australia, New Zealand and the UK, and the specific recommendations in the SAL Report reflected many features of Article 9 of the US Uniform Commercial Code (UCC Article 9) and the various Personal Property Security Acts (PPSAs) modelled after it.96 These included the following: (i) A functional definition of security interest should be taken so as to cover any transaction which in substance secures payment or performance of an obligation. (ii) Financing statements should be filed on a real time basis with a computerised register of personal property. (iii) There should be uniform requirements for the creation of a security interest, whether possessory or non-possessory in nature. (iv) Where several security interests are created in the same property, the first to register/perfect rule should be adopted, ie, priority should be given to that interest in respect of which all the necessary steps for securing priority (taking the collateral into possession in the case of a possessory interest, and filing of a financing statement in the case of a non-possessory interest) were first taken and completed. 92 In the related field of insolvency law, the new Insolvency, Restructuring and Dissolution Act 2018 (No 40 of 2018) is an omnibus legislation which consolidates Singapore’s personal insolvency, corporate insolvency and restructuring laws, which were previously under separate legislative regimes. This statute came into force on 30 July 2020. 93 The Singapore Academy of Law (SAL) is a statutory body headed by the Chief Justice of Singapore. It engages the entire legal fraternity in Singapore and its members comprise judges, practicing lawyers, corporate counsel and legal academics. The SAL Law Reform Committee studies areas of the law that may need legislative updates, consults widely, and makes recommendations to the relevant law-making bodies. 94 Available online at www.sal.org.sg/Portals/0/PDF%20Files/Law%20Reform/1996%20-%20Bills%20of%20Sale.pdf. 95 See executive summary of the report, available online at www.sal.org.sg/sites/default/files/PDF%20Files/Law%20 Reform/1996%20-%20Bills%20of%20Sale.pdf. 96 These principles are set out in ch 2 as the modern principles of secured transactions law.

412 Dora Neo (v) Purchase money security interests which inject new value to the debtor’s business should have super-priority. (vi) In order to facilitate trade, purchasers of goods sold in the ordinary course of the debtor’s business should take free of any security interest in those goods. Industry stakeholders that were consulted for their views on the SAL Report included the Association of Banks in Singapore, the Association of Hire Purchase and Finance Companies, the Monetary Authority of Singapore, the Registry of Companies and Businesses, the Leasing Association of Singapore and the Consumers Association of Singapore. Although the responses that came back were supportive of getting rid of the archaic and troublesome features of the Bills of Sale Act, most were largely cautious or negative about the radical solution of a comprehensive personal property security law recommended by the SAL. Eventually, the recommendations were not adopted by the government, and the Bills of Sale Act remains as it was.

B. Companies Steering Committee Report 2011 The Companies Steering Committee was appointed by the Ministry of Finance in 2007 to carry out a fundamental review of the Companies Act. Their recommendations on the registration of charges were contained in chapter 6 of the Companies Steering Committee Report.97 These recommendations were formulated after an extensive survey of the developments in other common law countries, including the reform initiatives in the UK (starting from the Crowther Report in 1971 to the consultation document Modern Company Law for a Competitive Economy: Registration of Company Charges published by the UK Company Law Review Steering Group in 2010); the laws on the registration of charges contained in the Canadian, New Zealand and Australian PPSAs; and the regime for registration of charges in Hong Kong proposed under the Companies Bill being considered by the legislature at that time. The Companies Steering Committee considered a notice filing system which merely provided that a security interest might exist without definitively establishing its existence to be unsuitable for Singapore as this would involve a complete overhaul of the current system of charge registration, which would affect other relevant government agencies and be beyond the scope of the Companies Act review.98 The committee’s discussion of conceptual issues relating to the registration of charges centred on the list of registrable charges under section 131(3) of the Companies Act. The committee considered this list to be unsatisfactory. They observed that banks and law firms attempted to register charges that did not really fit into any of the categories listed in section 131(3). The motivation for this was not explained in the report, but it is likely to be for the purposes of playing safe, to take advantage of the protection that might be enjoyed by having a registered charge, and to avert the negative consequences of failing to register something that might turn out the be a registrable charge. One example is the practice of registering charges on bank accounts as charges on book debts under section 131(3)(f) although it is arguable that bank accounts are not book debts.99 The Companies Steering Committee Report stated that the list in section 131(3) is ‘practically redundant as it is being ‘stretched’ to take into account charges that 97 Available online at www.acra.gov.sg/docs/default-source/default-document-library/legislation/listing-of-consultationpapers/public-consultation-on-the-review-of-the-companies-act-and-regulatory-framework-for-foreign-entities/ SCReportChpt6RegistrationofCharges.pdf. 98 Companies Steering Committee Report, ch 6, para 19, p 6-5. 99 See Companies Steering Committee Report, para 20; In re Brightlife Ltd [1987] 2 WLR 197, 200–01; Beale et al (n 16) para 10.23.

Secured Transactions Law in Singapore: Living with Untidiness 413 may not fit into the ‘normal’ definition of a charge’, which has made the list ‘artificial’, and that ‘there are now new types of securities and assets that may not fit into section 131(3) as it stands’.100 Two alternative approaches were considered by the Companies Steering Committee. The first was to reform the definition of ‘charge’ and make all charges registrable. The second was to update the list of registrable charges in section 131(3). There was substantial disagreement with the first approach amongst respondents who were consulted for their views, including practicing lawyers and academics,101 and the second approach was adopted in the committee’s recommendations. Recommendation 6.1 stated that ‘[t]he current framework for registration of charges should be maintained but the list of registrable charges at section 131(3) should be reviewed and updated’. In October 2012, the Ministry of Finance (MOF) published its response to the Companies Steering Committee Report.102 The MOF response stated that from the feedback received during the public consultation, all respondents agreed with this recommendation and that some respondents also suggested specific amendments that should be made to the list of registrable charges. Although MOF stated that the specific suggestions made by respondents would be considered when the list of registrable charges was reviewed during drafting of the Bill, the proposed changes to the list of registrable charges in section 131(3) when the amendment Bill was tabled were minimal. The amendments consisted of refinements to three types of charges that were already on the list of registrable charges.103

VII. Assessment and Recommendation A. General The law of secured transactions in Singapore works reasonably well. Significant features of Singapore law, discussed above, are consistent with modern secured transactions law.104 All forms of personal property, including future property, can potentially be used as security, except that chattel mortgages under the Bills of Sale Act cannot be created over future property. With the exception of bills of sale, creation of a security interest is relatively easy, with a minimum of formalities, and enforcement can generally be done out of court. There is a modern electronic registry of company charges and registration and search is easy and quick. Parties have a high level of autonomy and can provide contractually for various aspects of their relationships, including priority and enforcement.

100 Companies Steering Committee Report, ch 6, para 21, p 6-5. 101 For some of the objections, see Companies Steering Committee Report, ch 6, para 23, p 6-6. 102 See Ministry of Finance, ‘Responses to the Report of the Steering Committee of Review of the Companies Act’ (3 October 2012), www.acra.gov.sg/docs/default-source/default-document-library/legislation/companies-act-reform/ ministry-of-finance-completes-review-of-the-companies-act/NarrativeReport(Published)(25Oct)-z.pdf. 103 First, the list of registrable charges over intellectual property rights in s 131(3)(j) was expanded to include also a charge on a licence to use a trademark, or on a registered design or a licence to use a registered design. Second, an amendment to s 131(3)(e) was made which clarified that the requirement to register a charge over land or any interest therein did not include any charge for any rent or any other periodical sum issuing out of land. Finally, s 131(3)(d), which had previously referred to the need to register ‘a charge or an assignment’ which if created by an individual would require registration as a bill of sale, was amended to delete the reference to ‘assignment’. This amendment clarified that, in contrast to the requirement under the now repealed s 104 of the Bankruptcy Act that a general assignment of the book debts of an individual must registered under the Bills of Sale Act, registration of assignments of book debts by companies which do not amount to charges is not required under the Companies Act. 104 See the evaluation of the common law as compared to the modern principles in ch 15 IV B.

414 Dora Neo However, there is no denying that aspects of the law are unprincipled, uncertain, inconsistent and unclear. This is the view of commentators writing specifically on Singapore law.105 It is also the view of various law reform reports from other common law countries where the law of secured transactions is similar to Singapore law or where the law was similar before it was reformed.106 These reports have set out in detail the deficiencies of secured transactions law that is based on the English common law, and can profitably be studied for an in-depth understanding of the issues. The following discussion has the more modest aim of assessing the main weaknesses of Singapore law, and explaining how this can be improved by the adoption of modern principles of secured transactions law as discussed in chapters 2 and 15. These principles are distilled from, and therefore embodied in, the various PPSAs (based on UCC Article 9) and the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Secured Transactions (2016) (UNCITRAL Model Law) (and its antecedent UNCITRAL texts),107 which are currently the two most popular models for law reform. It is probably premature at this point to decide which model, or indeed whether any model, should be used if Singapore decides to reform its law.108 As the PPSA model originated in a common law country (the USA) and has been applied in other common law countries (eg Canada, New Zealand and Australia), it is a useful reference for Singapore. UCC Article 9, and by extension the PPSA model, was also the model recommended for adoption in Singapore by the SAL Report on the Bills of Sale Act.109 For convenience, the discussion below will refer to the ‘modern principles’ or the ‘PPSA model’ interchangeably to broadly denote the set of principles identified has having received widespread global consensus in chapter 2.110 These principles can be used as a starting point for refinement and adaptation in Singapore.

B. Specific Legal Issues Like the SAL Report in 1996, most people today would probably agree that the Bills of Sale Act is a prime example of an aspect of Singapore law that needs reform. It is an archaic and outdated piece of legislation. The rules for creation, registration and renewal are cumbersome. Its strict provisions prevent an individual from granting a bill of sale over future or after-acquired chattels, which has led to pressure being placed on borrowers to incorporate. The Act is partly aimed at 105 Tan Yock Lin, ‘Personal Property Security Interests in Singapore’ in J de Lacy (ed), The Reform of UK Personal Property Security Law: Comparative Perspectives (Abingdon, Routledge, 2009) 393; G McCormack, ‘Reforming the Law of Security Interests: National and International Perspectives’ (2003) 1 Singapore Journal of Legal Studies 1, 9–10. 106 Early reports to this effect in the UK include the Crowther Report in 1972, the Cork Report in 1982, and the Diamond Report in 1989: see L Gullifer and M Raczynska, ‘The English Law of Personal Property Security: Under-reformed?’ in L Gullifer and O Akseli (eds), Secured Transactions Law Reform – Principles, Policies and Practice (Oxford, Hart Publishing, 2016). More recently, see UK Law Commission, ‘Registration of Security Interests: Company Charges and Property Other than Land’, Consultation Paper No 164 (2002) part III; UK Law Commission, ‘Company Security Interests: A Consultative Report’, Consultation Paper No 176 (2004) paras 2.3–2.6; UK Law Commission, ‘Company Security Interests’, Consultation Paper No 296 (2005) paras 1.5–1.7. From Australia, see Australia Law Reform Commission, Personal Property Securities, Report No 64 (1993) paras 2.37–2.41. These criticisms are supported by the general assessment in ch 15 that there are aspects of the common law (and therefore, by extension, Singapore law, with its common law tradition) that are not in accordance with the modern principles of secured transactions: see ch 15 IV C. 107 For a general discussion on the UNCITRAL Model Law, see ch 4. 108 See the discussion in ch 15 V E on the use of models for law reform. This explains the benefits of using a model for the complex task of secured transactions law reform, where many interrelated provisions must be crafted, as this would minimise the chances of gaps or inconsistencies. It makes the important point that a model must always be only a starting point, as the resulting legislation must fit well with the rest of the law of a state and reflect its legal and economic realities. 109 In the UK, the Art 9 /PPSA model was recommended as a model for reform by the Crowther Report in 1972, the Cork Report in 1982, and the Diamond Report in 1989. See Gullifer and Raczynska (n 106). 110 See ch 2 I and II.

Secured Transactions Law in Singapore: Living with Untidiness 415 protecting borrowers from unscrupulous lenders, but its detailed provisions are not limited to consumer borrowers and may provide for a higher level of protection than is needed by a more sophisticated business borrower that happens to be unincorporated, at the same time burdening creditors who might therefore be less willing to provide credit secured by chattel mortgages. At a minimum, the Bills of Sale Act should be amended to make the formalities and registration and renewal requirements simpler and more user-friendly. This option has not been directly considered in Singapore as the recommendations of the SAL Report were ambitious and far reaching, and there was no intermediate position to fall back on when these radical suggestions received a negative response from stakeholders. Several amendments can be considered in relation to company charges. One of the most obvious criticisms of the Companies Act is that only the charges that are specifically listed in section 131(3) must be registered. The Companies Steering Committee Report in 2011 had recommended that the list of registrable charges be reviewed and updated, but the changes that were subsequently made to the list were minor.111 Charges over other types of assets, such as bank accounts, securities and insurance policies, are not listed in section 131(3) and therefore registration is not required.112 There is no good reason for this different treatment. A closed list has the further disadvantage of being unable to cater for the registration of new types of charges that may be devised in future. A principled way of addressing this issue would be to amend section 131(3) to require the registration of all company charges except those that are specifically exempted, just as the UK has done in its Companies Act amendment in 2013.113 This possibility was considered by the Companies Steering Committee Report in Singapore (albeit before the UK amendments came into force), but was dismissed as respondents objected that this approach might not solve the problem of under-inclusiveness as it would still be necessary to decide what to include and exclude. Be that as it may, it would still seem more appropriate to start from the opposite position, that security over all types of assets should be registered unless there is good reason for exemption in any particular case. The Companies Act can also be criticised for not providing for the priority of competing security charges. Registration of a charge does not confer priority, which depends on the time of creation of the charge. As there is a grace period of 30 days within which a charge must be registered, this creates a period of invisibility during which an intending creditor checking the register might not be aware of an earlier charge that will take priority over its own. Although lenders can get round this potential difficulty by disbursing the funds only after the 30 day period is over, the situation is not ideal. The use of negative pledge clauses and automatic crystallisation clauses to shore up the priority position of a floating charge leads to uncertainty. Where a floating charge is coupled with a negative pledge clause, the right of a subsequent creditor taking security over the assets falling under the floating charge will depend on its knowledge about the existence of the negative pledge. In this connection, the issue of whether registration of a negative pledge amounts to constructive notice of it is unresolved. One solution that could be adopted is to require particulars of negative pledge clauses to be entered in the charges register.114 Applying the principle that a creditor has constructive notice of the matters that need to be registered under the Companies Act, this 111 See VI B above. 112 In the UK, in accordance with the EU Directive on Financial Collateral Arrangements, charges over financial instruments, cash and credit claims are covered by the Financial Collateral Arrangements (No 2) Regulations 2003 (if the chargee has ‘possession or control’) and are not registrable under the UK Companies Act. This roughly reflects the position in the UK before the list of registrable charges was abolished by the Companies Act 2006 (Amendment of Part 25) Regulations 2013 No 600, with a few specific exceptions. See Beale et al (n 16) ch 3. 113 The Companies Act 2006 (Amendment of Part 25) Regulations 2013 No 600. 114 This approach was adopted after the 2013 company charges amendments in the UK in the new s 859D(2)(c) of the Companies Act 2006.

416 Dora Neo would give constructive notice of the negative pledge. A provision could also be inserted into the Companies Act to clarify that purchasers of assets are not expected to search the register, so that they will not be prejudiced by being taken to have constructive knowledge of the matters in the register. Crystallisation of a floating charge puts an end to the company’s implied ability to deal with the charged asset in the ordinary course of business. However, the rights of a creditor who takes an interest in the charged goods after crystallisation may not always be clear. The company may still have apparent authority to deal with the goods. Further, when a broad automatic crystallisation clause is included, the chargor and chargee may not be aware that the charge has crystallised, or the event causing the automatic crystallisation may be relatively inconsequential and the chargor could operate the business and act as if the charge is still floating, and the chargee may be content to allow it to do so. This may cause uncertainty about the respective rights of the parties and may lead to the decrystallisation of the floating charge, with its uncertain consequences.115 Using a PPSA approach could avoid these difficulties by doing away with the distinction between fixed and floating charges116 and applying the same priority rule to all charges based on time of registration. To achieve the same effect as a floating charge, the chargor can be authorised to dispose of goods in the ordinary course of business, and legislation can provide that buyers of goods in the ordinary course of business take free of the chargee’s security interest unless they had notice of this.117 Bearing in mind that an important aim of secured transactions law is to enhance the economic well-being of enterprises, two aspects of the modern principles are instructive. Clauses that prohibit the assignment of receivables have been held to be enforceable in the UK based on the principle of freedom of contract, and this position has been accepted in Singapore.118 However, such clauses would negatively affect a merchant’s ability to raise finance, particularly if receivables are the merchant’s main asset which are available to be used as collateral. In line with the Singapore government’s policy to promote entrepreneurship, it would be useful to consider whether clauses prohibiting assignment of receivables should be rendered invalid, as has been done in the UK in relation to certain types of business contracts,119 so as to maximise the creditor’s assets that are available as security. Another reform that could be considered is whether the law should be amended to give special priority to a financier who provides a company with funds to acquire a new asset and takes security over that asset. Such a purchase money financier may lose out to a prior financier who has a charge over after acquired property of the debtor. This might discourage future financiers from coming forward for fear that any security that they have over the company’s assets would be subject to the prior charge, thereby possibly depriving the company of further funding and giving the prior chargee a monopoly over the funding needs of the company. The common law looks in detail at the sequence of events between the borrower and the purchase money financier to see whether the borrower was at any moment in time the unencumbered owner of the new asset. This is relevant as it would enable the prior chargee’s security interest to attach to the new asset, which would take priority over the interest of the purchase money financier. One way to prevent this from happening would be to give the purchase money financier a security interest in the 115 See Beale et al (n 16) paras 6.88–6.93l. 116 A challenge that would arise from removing the term ‘floating charge’ is that a new way must be found to describe and delineate the assets which are to be subject to the claims of preferential creditors in an insolvency, to replace the terminology of the floating charge. 117 See the discussion at ch 15 IV D (i). 118 See the discussion at II B (ii) above. 119 The UK Business Contract Terms (Assignment of Receivables) Regulations 2018. See also L Gullifer, ‘Should Clauses Prohibiting Assignment Be Overridden by Statute?’ in Gullifer and Akseli (n 106) 321.

Secured Transactions Law in Singapore: Living with Untidiness 417 new asset even before its acquisition by the borrower. The conceptual soundness of this technical solution has been criticised.120 The solution adopted by the modern principles, to give a purchase money financier priority over a prior chargee of after acquired property on policy grounds, is more straightforward and predictable.121 The policy rationale of this is that it would enable the company to raise funds from other financiers and, at the same time, this does not unduly prejudice the prior chargee because the new asset, which would otherwise not have been purchased, adds value to the company.

C. Critique of General Features of the System The system of secured transactions in Singapore encompasses several unjustifiable dichotomies or inconsistencies. The main dichotomy is that the system focuses on form over substance. Transactions that create a security interest are treated differently from those that do not, even if the transactions serve the same security function. Only true security interests are subject to the rules that apply to secured transactions, chief of which is the requirement of registration of security interests. Registration serves to negate the appearance of false wealth, and to protect prospective creditors by allowing them to find out if there are any encumbrances against the debtor’s assets, as well as to allow creditors to inform other later creditors of their prior interests. These purposes are equally important where a financing transaction is secured by a quasisecurity device, like a retention of title clause, as much as if it is secured by a security interest, like a charge. This difference in treatment may lead to difficulties in characterisation in order to determine whether something which is presented by the parties as a sale transaction, is actually one that creates a registrable security interest. As the rules of priority differ for security interests as contrasted with absolute interests, the dichotomy of form versus substance also means that the priority of a secured creditor against other secured creditors and purchasers of the relevant asset is unjustifiably different, depending on whether the financing transaction is done by title-based financing or by taking a charge. Even within the sphere of security interests, there are several dichotomies. Security interests created by companies are governed by the Companies Act, while those created by individuals and unincorporated organisations are governed by the Bills of Sale Act. These two statutes are quite different from each other, in relation to the types of assets covered, formalities of creation and enforcement, registration requirements and rules of priority. Treating individuals differently from companies may be justifiable in relation to debtor protection. For instance, although the form, content and procedure required to create a valid bill of sale is burdensome compared with the freedom and ease of creating a charge, this could be explained by the consideration that individuals are less sophisticated than companies and therefore more safeguards are needed to ensure

120 In other words, under the common law, the result of the competition between a prior chargee of after acquired property and a later purchase money financier depends on whether the purchase money security interest was created at the same time that the money was advanced in one seamless transaction so that there was no scintilla temporis, ie, no moment in time, at which the chargor was the unencumbered owner of the new asset. See the discussion at Gullifer (n 77) paras 5-64–5-72. 121 The prior charge over after acquired property could be a floating charge, or a fixed charge over assets like equipment and intellectual property, which are more likely to be acquired using a purchase money loan. In the case of equipment, the purchase money financier could be protected under the common law by using retention of title devices, including hire purchase or leases, so the adoption of the modern principles is most needed to protect the purchase money financier in the case of intangibles such as intellectual property.

418 Dora Neo that they understand the terms of the agreement. However, other inconsistences cannot be justified by the different nature of the entities concerned. Why should the Bills of Sale Act require only the registration of chattel mortgages while the Companies Act require the registration of security over a much wider range of assets? The odd requirement previously imposed by the Bankruptcy Act for a general assignment of book debts by an individual who is subsequently adjudged bankrupt to be registered under the Bills of Sale Act,122 a statute which does not apply to book debts, underlines the desirability for the registration of assignments of book debts by individuals but the lack of a dedicated register to facilitate this. Further, why should priority between competing bills of sale be determined by time of registration whereas priority between competing charges be determined by time of creation? And why should the time for registration of a bill of sale be three days whereas the time given for registration of a company charge is 30 days? These differences may have been appropriate at the time that the statutes were first enacted, but in a modern setting, the differences seem arbitrary. Where different creditors have competing security interests over the same asset, their respective rights should be decided in accordance with rules that are clear, certain and consistent. But the current rules of priority of security interests in Singapore fail to meet these benchmarks. The priority rules are different for security over tangible property as compared to security over intangible property. And there are further variations within the category of tangible property, depending on whether the security is given by an individual or by a company. The fairest starting point might seem to be for priority to be decided according to the time of creation. However, this timing will generally only be known to the parties to the agreement and not to third parties. As registration equalises the knowledge of all persons, it is ultimately fairest to use time of registration as the priority point. All creditors can search the register and obtain the information they need. Applying this principle across the board would mean that the same rules would apply generally for security over chattels as well as choses in action, and for securities created by companies as well as unincorporated entities. This would do away with the question of whether a creditor had actual notice of earlier interests – a matter that is difficult to ascertain, as well as the question of whether the earlier interest was legal or equitable – a question that seems to have more technical rather than substantive relevance. It will also avoid questions of what amounts to constructive knowledge and what facts one is to be taken to have knowledge of. As regards third party purchasers of secured assets, a policy decision to protect commercial transactions and promote business can be applied to clarify that third party purchasers are not expected to search the register and should take free of a security interest that they did not have actual knowledge of. Some of the systemic problems mentioned in the last few paragraphs can be solved by adopting the general principles of registration found in PPSA statutes, which take a functional and unitary approach. Under the PPSA model, generally speaking, all arrangements which perform security functions, ie all security interests and quasi-security arrangements, must be registered in one register. Another prominent feature of the PPSA registration system, unlike the current transaction filing system, is that a notice filing system is used. This has the advantage of allowing creditors to register their intention to create a security in advance of entering into the transaction, and as one filing can apply to different transactions between the same parties involving the same kind of collateral, there is no need to register separately for each transaction. Registration is not compulsory, but there is a strong incentive to register early as priority in the PPSA model is based on time of registration.

122 Bankruptcy Act (Cap 20, 2009 rev edn), s 104(2) (repealed). A failure to register as required would have rendered the assignment void against the official assignee.

Secured Transactions Law in Singapore: Living with Untidiness 419

VIII. The Challenges of Reforming Secured Transactions Law in Singapore The assessment of the law of secured transactions in Singapore in this chapter and elsewhere, either directly, or in the context of a general assessment of the common law of secured transactions, suggests that technically speaking, the law can be much improved. However, the broader question of whether the law of secured transactions in Singapore should be reformed has never been publicly examined by the government or the legal and business community. The Companies Steering Committee’s task was to look into a fundamental reform of the Companies Act, of which company charges formed a small part. The SAL sub-committee’s study was confined to the Bills of Sale Act, which only applies to security over chattels created by individuals in writing, and therefore affects only a limited number of secured transactions. There are at least three types of challenges to be overcome in order for a far-reaching reform of secured transactions law to take place in Singapore. The first challenge is that the law of secured transactions covers several related fields and statutes that are supervised by different government ministries (the Ministry of Finance, the Ministry of Trade and Industry and the Ministry of Law) and different bodies under each ministry. Apart from the Bills of Sale Act and the Companies Act which have been discussed extensively above, law reform on a large scale will also affect the Hire Purchase Act and the Pawnbrokers Act which provide for security in consumer transactions. Stakeholders who have an interest in or will be affected by potential reforms include the financial regulator and the financial industry comprising of banks, finance companies, hire purchase companies, leasing companies, insurance houses, consumer protection bodies and businesses which depend on credit. Legislative change in Singapore generally starts with the government department overseeing that particular area of the law. Few government departments will be prepared to push a unilateral reform agenda that would affect the work of other departments. This compartmentalisation is illustrated by the approach of the Companies Steering Committee to steer clear of addressing the question of whether notice filing should replace transaction filing, because this was too major a change that would involve not only ACRA but also other relevant government agencies, and would be beyond their purview to review just the Companies Act.123 As the discussion in this chapter shows, piecemeal efforts are insufficient. A concerted effort involving all the government departments that deal with matters connected to secured transactions is needed to initiate and follow through with a large scale reform of secured transactions law. The second challenge, and probably the biggest roadblock of all, is that the law of secured transactions works well enough to enable Singapore to achieve relative economic success despite the untidiness of the law, and provides little impetus for government action or cause for private sector complaints. This is illustrated, for instance, by the fact that Singapore’s ranking of 37th in the World Bank’s 2020 Getting Credit ranking, did not hinder the country from, at the same time, being ranked 2nd overall in the World Bank’s 2020 Ease of Doing Business Index, a position that it has held for several years running.124 In 2019, Singapore was ranked as the world’s most competitive economy by the World Economic Forum.125 SMEs are an important component of the Singapore economy. 99 per cent of enterprises in Singapore are SMEs, employing 72 per cent

123 Companies Steering Committee Report, ch 6, para 19, p 6-5. 124 See www.doingbusiness.org/en/rankings. 125 See E Charlton, ‘Singapore Crowned World’s Most Open and Competitive Economy’ (World Economic Forum, 1 October 2019) at www.weforum.org/agenda/2019/10/competitiveness-economy-best-top-first-singapore-secret-consistency/.

420 Dora Neo of the work force, and contributing 48 per cent of its GDP.126 A study from 2018 shows that micro, small and medium-sized SMEs127 had access to different credit facilities from banks and financial institutions such as term loans, factoring, hire purchase, revolving credit facilities, and trade finance facilities.128 A full range of different collateral was taken for these facilities, including commercial, industrial and residential real property, and various types of personal property, including bank deposits, equipment, machinery and vehicles. Unsecured loans are also widely available to qualified borrowers. The availability of funding to SMEs has been enhanced by regulatory changes in 2017 which raised the limit on the aggregate uncollateralised business loans that finance companies were allowed to give, thereby enabling finance companies to provide more unsecured credit to support the working capital needs of SMEs.129 Additional funding to SMEs is provided by government financing schemes including grants for a range of purposes from start-ups to enhancing productivity and international co-innovation, as well as different types of loans whereby the public sector collaborates with participating lenders to share the loan default risk in the event of borrower insolvency.130 The Singapore government also provides temporary facilities to tide SMEs through difficult times. For example, as a response to the global COVID-19 pandemic, the Monetary Authority of Singapore and Enterprise Singapore launched an initiative to lend money to qualifying financial institutions at the low interest rate of 0.1 per cent per annum so that these cost savings could be passed on to SMEs in the form of lower cost loans.131 Another example of the many schemes designed to cushion the negative impact of the pandemic in 2020 is the increase in the maximum loan quantum that SMEs can obtain from participating financial institutions under the ‘Enterprise Financing Scheme – SME Working Capital Loan’ from S$300,000 to S$1 million.132 In recent years, there has been a rise of alternative financing opportunities in Singapore, such as peer-to-peer lending or crowdfunding platforms, which has enabled start-ups and SMEs that do not meet banks’ lending criteria to have an alternative source of funding. A 2017 survey of SMEs by the then-Spring Singapore (now known as Enterprise Singapore) suggests that SMEs do not have a serious problem with getting external debt financing as 90 per cent of SMEs who sought bank loans were successful in securing them in 2017.133 The view of the Monetary Authority of Singapore is that the ‘financing landscape in Singapore supports most SME’s needs’.134 There have been no studies to show that SME financing in Singapore is hindered because of weaknesses in its secured transactions law, or that law reform 126 See www.singstat.gov.sg/modules/infographics/economy. For the purposes of these statistics, SMEs are defined as enterprises with operating receipts of not more than S$100 million or employment of not more than 200 persons. 127 SMEs can be further categorised by annual sales into micro (less than $1 million), small (from $1 million to $10 million) and medium (from $10 million to $100 million) enterprises. Unclassified SMEs refer to SMEs with no further breakdown of annual sales available; these are likely to be new or micro enterprises. See Monetary Authority of Singapore Macroprudential Surveillance Department, ‘Financial Stability Review’ (November 2018) (MAS Financial Stability Review 2018) 46, fn 75, www.mas.gov.sg/-/media/MAS/resource/publications/fsr/FSR-2018.pdf. 128 ibid 50. 129 See Monetary Authority of Singapore, ‘Changes to Finance Company Regulations to Enhance their Ability to Finance SMEs’ (14 February 2017), www.mas.gov.sg/news/media-releases/2017/changes-to-finance-company-regulations-toenhance-their-ability-to-finance-smes. 130 Information about government grants and loans can be found on the website of Enterprise Singapore, the Singapore government agency championing enterprise development. See www.enterprisesg.gov.sg/financial-assistance/grants. 131 See Monetary Authority of Singapore, ‘New Facility at Interest Rate of 0.1% to Help Banks and Finance Companies Lower Cost of Loans to SMEs’ (20 April 2020), www.mas.gov.sg/news/media-releases/2020/mas-sgd-facility-for-esg-loans. 132 See Enterprise Singapore, ‘Enterprise Financing Scheme’, www.enterprisesg.gov.sg/financial-assistance/loans-andinsurance/loans-and-insurance/enterprise-financing-scheme/sme-working-capital/overview. 133 V Shiao, ‘The Evolution of SME Financing’ (The SME Magazine, Sept/Oct 2018), www.businesstimes.com.sg/ magazines/the-sme-magazine-septemberoctober-2018/the-evolution-of-sme-financing. 134 MAS Financial Stability Review 2018 (n 127) 51. Nevertheless, other SME surveys indicate that financing is still a top concern for SMEs and in a separate 2017 SME Development Survey by DP Info, 35% of SMEs cited facing financing concerns such as delays in payments from customers: Shiao (n 133).

Secured Transactions Law in Singapore: Living with Untidiness 421 in this area would significantly improve the financing position of SMEs. The perception that SMEs have sufficient avenues for funding means that there is little motivation for the government or private sector to explore the adoption of a system of secured transactions law that is new and unfamiliar, and of uncertain practical benefit in the context of Singapore. The preference to stick with something that is familiar, which serves its purpose reasonably well, is the third big challenge of secured transactions law reform. The legal and financial community is used to the current way of doing things which has worked for many years. They have invested much effort to understand the complexity in the law, and have come to live with its untidiness and accept its potential uncertainty, tailoring their practices to fit its idiosyncrasies. This resistance to change is aggravated by the fact that the change that is required to reform the whole system in a principled and consistent manner based on the modern principles of secured transactions law, is a massive and radical one. Stakeholders who were used to taking title security or renting goods to hirers without additional formalities would understandably be concerned about the new system. Even those who might benefit from the new system in the form of ease of filing and greater transparency and certainty of rights might be unnerved by the unfamiliarity of notice filing or new concepts such as purchase money security interests (PMSIs). These sentiments were apparent from the industry responses to the SAL Report. Respondents supported doing away with the most inconvenient aspects of the Bills of Sale Act, but were cautious about changing the law beyond that. A similar caution was manifested on the part of the legislature by the very minor tweaks that were eventually made to the list of company charges in section 131(3) 135 despite the Companies Steering Committee’s dissatisfaction with the list and its recommendation that this be looked into with a view to reform. There is no denying that reform of the system would initially disrupt the business and financial community, and this is something the Singapore authorities would want to avoid. The government is vigilant in meeting the expectations and needs of the business community. Changes in the law, if deemed necessary, will be done expeditiously. An example can be seen in the aftermath of Court of Appeal’s decision that liens over sub-freights had to be registered as floating charges. The Court of Appeal stated:136 Nonetheless, it remains an uncontroversial fact that the requirement for registration for liens on subfreights is hugely inconvenient and impracticable. It is also undeniable that the need for registration may have a negative impact on the local shipping industry. Therefore, in order to maintain Singapore’s competitive edge as a leading maritime hub, it may be appropriate to examine suitable legislative reform to carve liens on sub-freights out from the reach of s 131 of the Companies Act.

With Singapore’s competitive edge at stake, the government took swift action. The Companies (Amendment) Bill to remove the need to register liens over sub-freights was introduced in Parliament on 9 July 2018, soon after the Court of Appeal handed down its judgment on 21 May 2018. The Bill was passed in Parliament on 6 August 2018 and came into force on 1 October 2018.137 The Singapore authorities typically act fast. The fact that they have not done so in the realm of secured transactions law reform suggests that they do not think that much is at stake here. The indifference towards secured transactions law reform in Singapore might perhaps be perpetuated partly by the relatively under-reformed state of the law in the UK,138 a jurisdiction that, for historical reasons, Singapore looks towards as a model for its legal development. The fact that the UK, a global financial centre, has not overhauled its law of secured transactions despite

135 See

VI B above. Fortune Inc (n 46) [77]. 137 Companies (Amendment) Act 2018 (Act 35 of 2018). 138 See Gullifer and Raczynska (n 106). 136 Diablo

422 Dora Neo the various studies and reports that have recommended fundamental reform, may seem to indicate that the existing system is serviceable despite its weaknesses. Further strength in numbers in favour of maintaining the status quo might also be provided by the fact that Hong Kong, another Asian financial centre with a common law legal system, has not embarked on a full scale reform of its secured transactions law. If the cautious attitudes on the part of government and private sector players continue to prevail, it would appear that any future reform of the law of secured transactions in Singapore is likely to proceed in a piecemeal fashion, with its inherent limitations. It is difficult to change mindsets to accept, if not welcome, the adoption of a PPSA model, and even more so if the stakeholders are not sure that the end result would necessarily be better. This is understandable when seen from the point of view of a credit provider that hitherto did not have to register its interest, but which would have to do so if PPSA-style registration rules are adopted, for example, a financier under a hire purchase agreement, or a finance lease, or a sale on retention of title, or a receivables financing agreement. Steps could be taken to explain the new system and to highlight its positive points. For instance, the retention of title seller could be made to understand that the notice filing system could be less disruptive than one might imagine because, unlike the system of registering transactions where each transaction must be registered, in a notice filing system, only one filing is required for all transactions between the same parties involving the same kind of collateral. In fact, notice filing might prove to be more advantageous to retention of title sellers than the current system, where an extended retention of title clause that covers proceeds of goods supplied may be re-characterised as a registrable charge which is likely to be void for non-registration simply because it would be impractical to register every sale. In contrast, in a PPSA model, a filing in respect of an asset generally applies also to its proceeds. The SAL Report shows that even in 1996, there were already people in the Singapore legal community who were prepared to support a far-reaching reform of the law along the lines of UCC Article 9. Other legal models based on similar principles are now available, like the newer PPSAs and the UNCITRAL Model Law. Singapore can draw on the experience of other jurisdictions that have reformed their law in order to decide whether, and how, to reform its law. It can choose the framework that best fits its needs, and adapt it as appropriate.

IX. The Way Forward Despite the pragmatic and psychological reasons to retain the existing law of secured transactions discussed above, there are nevertheless good reasons for embarking on a major exercise to reform the law so as to embrace and incorporate the modern principles. The most important reason to do this is an ideological one that stems from the fundamental aspiration of a legal system to have laws that are based on principles that are clear, certain, coherent and consistent.139 This has a signalling effect that upholds the reputation of the jurisdiction concerned. Despite the inconvenience of changing familiar rules and practices, this disruption is likely to be outweighed by the transparency and reduced complexity that are typical of a modern PPSA system. Existing creditors will be able to protect their interests effectively with the straightforward mechanism of notice filing in one register. By searching the register, prospective creditors will be informed of rights that other creditors already have over the assets of its intended debtor. Debtors will have similar protections in enforcement proceedings regardless of the form of security given, and with the outlawing of anti-assignment clauses and the super-priority given to PMSIs, they will

139 See

also the discussion in ch 2 V.

Secured Transactions Law in Singapore: Living with Untidiness 423 be able to use all their assets as collateral and obtain acquisition financing more easily.140 Apart from the UK, where the law remains under-reformed, other influential common law countries like the USA, Canada, New Zealand and Australia have successively overhauled their secured transactions law in favour of a PSA model. An increasing number of countries around the world have adopted or are considering reform based on the modern principles.141 In Asia, international bodies like the World Bank and the Asian Development Bank have been active in supporting secured transactions law reform. Countries such as the Philippines, Brunei, Vietnam and Pakistan have recently reformed their secured transactions law based on the modern principles.142 The law reform process in Bangladesh has reached the stage of a draft Act.143 Other Asian countries like Indonesia, Thailand and Malaysia have identified secured transactions law reform as part of their national development plans and Laos, Cambodia and Myanmar have also started to take steps towards secured transactions law reform.144 The experience of Malaysia and Brunei will be especially relevant to Singapore as these jurisdictions are its close geographical neighbours and important trade partners, and they share similar common law roots. Brunei reformed its law based on the New Zealand PPSA in 2016.145 Following the issue of a consultative paper by the Companies Commission in 2017,146 Malaysia is now considering a new secured transactions legal framework based broadly on policies from the New Zealand PPSA and the PPSAs of the Canadian provinces of Ontario and Saskatchewan. This is still at the proposal stage and further changes may take place. It is striking that each of Singapore’s other nine fellow members of the ten-member Association of South East Asian Nations (ASEAN)147 have started to take steps towards secured transactions law reform and are at various stages of this process. While the diversity of the legal systems of the ASEAN nations makes regional harmonisation of law difficult generally, there might be a real possibility that ASEAN member states could adopt similar legal principles for the law of secured transactions based broadly on the modern principles, thus further facilitating regional business and understanding. Outside of Asia, it is worthwhile to mention that there continues to be strong interest in secured transactions law reform in the UK,148 and it would be interesting to see whether the UK can maintain the resistance that it has put up against major reform of its secured transactions law for decades. In this evolving regional and international environment, Singapore cannot afford to lag behind in the modernisation of its secured transactions law. Adopting the modern principles will enhance Singapore’s reputation as 140 For an explanation of the features described in this paragraph, see the discussion of the modern principles of secured transactions law in ch 2 II. 141 See ch 2 II. For the reforms in Africa which are based on the modern principles, see M Dubovec and L Gullifer, Secured Transactions Law Reform in Africa (Oxford, Hart Publishing, 2019) ch 2. For an overview of the reforms in Asia, see ch 5. 142 See chs 10, 15, 14 and 18 respectively. 143 See ch 16. 144 These developments are discussed in ch 5. 145 See ch 15. 146 See Companies Commission of Malaysia, ‘Consultative Document: Introduction of Personal Property Securities Registration Law in Malaysia’ (8 September 2017), www.ssm.com.my/Pages/Legal_Framework/Public-Consultant-pdf/ konsultasi_awam_ppsr.pdf. 147 The members of ASEAN comprise Singapore, Malaysia, Brunei, the Philippines, Thailand, Indonesia, Vietnam, Cambodia, Laos and Myanmar. 148 There is currently active discussion in the UK about reforming the law of secured transactions. The Secured Transactions Law Reform Project, whose Steering Group is chaired by the Right Hon Lord Saville of Newdigate and includes UK judges, leading academics, solicitors and barristers, argues that UK secured transactions law should be reformed by adopting a PPSA regime. See generally securedtransactionslawreformproject.org. The City of London Law Society has also been working towards legislative reform of the law of secured transactions and recently produced a revised version of its draft Secured Transactions Code in March 2020. See www.citysolicitors.org.uk/storage/2020/03/ Secured-Transaction-Code-and-Commentary-discussion-draft-March-2020.pdf.

424 Dora Neo an international financial and commercial centre and a dispute resolution hub, support the development of institutions such as the Singapore International Commercial Court and encourage the adoption of Singapore law in commercial contracts.

X. Conclusion As is typical in jurisdictions rooted in the English common law tradition, aspects of secured transactions law in Singapore are in need of modernisation. This chapter has suggested that a reform of the law of secured transactions along the lines of the modern principles will make Singapore law more coherent, consistent, clear and certain. One of the primary challenges of reform is the fact that the law of secured transactions works reasonably well and the stakeholder indifference towards reform does not appear to hinder Singapore’s economic success. Other challenges include the perceived availability of funding for SMEs, the unfamiliarity of the concepts adopted in the PPSAs and other models, and the desire to avoid disruption, all of which means there is little impetus to reform the law. However, there is no room for a jurisdiction like Singapore, which prides itself on being forward-looking, to cling to legal rules that are out of sync with the modern principles that have been adopted or are being considered by an increasing number of jurisdictions around the world. These developments in the external environment, together with the unsatisfactory nature of essential aspects the current law, strongly suggest that there should be a concerted effort to consider the reform and modernisation of secured transactions law in Singapore.

20 Conclusion LOUISE GULLIFER

I. Introduction This book has critically examined secured transactions law in a number of Asian countries. The country-specific chapters have assessed the current law, and considered whether reform, or further reform, is needed. They have also reflected on the drivers for reform, the process of reform and the possible content of reformed law. These chapters have been complemented by more general chapters considering various aspects of the content and method of reform in both civil law and common law jurisdictions. This conclusion provides a thematic analysis of the issues discussed in the book, with close reference to the arguments made in the book and the examples found in the country-specific chapters of the book. This chapter is in three main parts. The first considers, broadly, various attitudes to reform that governments and other stakeholders may have, and examines the drivers towards and the factors that militate against reform. The second part considers the reform process and the third considers the legal substance of reform. The final section concludes with an overview of the current secured transactions law in the Asian countries considered in this book, using the modern principles as a general benchmark.

II. Attitudes to Reform The attitude in any particular jurisdiction to secured transactions law reform depends on a number of factors. In this part, these factors are identified and analysed. In most jurisdictions there will be arguments in favour of and against reform in general, and further arguments as to the form that any reform should take. This part largely considers the factors shaping the attitudes to wholesale reform, while the arguments as to whether reform should be wholesale or piecemeal are considered in the first section of the next part.

A. Type of Economy and Economic Incentives The main purpose of secured transactions law reform is usually economic. While the aims may vary in detail,1 they typically focus on improving access to credit, which, in turn, is seen

1 See

ch 1 III C (iii).

426 Louise Gullifer as important for economic growth.2 Broadly speaking, the greater the lack of access to credit in an economy, the greater the driver towards reform. Access to credit is a major problem in many developing economies, including those in Asia.3 The problem is particularly acute in relation to micro, small and medium-sized enterprises (MSMEs).4 The economic benefits flowing from secured transactions reform have been demonstrated in many studies,5 and this type of reform is therefore an important tool for governments and international institutions6 seeking to improve economic growth and financial inclusion. Secured transactions law reform, however, is not the only tool, and is often used in conjunction with other reforms and changes. Other tools that are often used are the introduction of, or improvement of, credit reporting systems and government guarantee schemes.7 Law reform in other areas, such as insolvency law, or the law of warehouse receipts,8 is also likely to contribute to improving access to credit and stimulating economic growth. The lack of access to credit of MSMEs, particularly micro-businesses, may also involve other factors which can be improved by secured transactions law reform. One is that banks and other financial institutions tend not to lend to micro and small businesses,9 or, if they do, require complex formalities with which those businesses cannot comply.10 The very small businesses are then forced to obtain finance from the informal, unregulated, financial sector, which may charge high rates or insist on very short loan terms. Reforming the law to give banks and other regulated financial institutions confidence to lend to small and micro businesses, and to reduce the formalities necessary for secured financing, can increase the availability of affordable credit to these types of businesses. Often MSMEs (and sometimes larger borrowers) cannot use the assets they have as collateral, and uncollateralised loans are hard and expensive to obtain. Typically, MSMEs have few fixed assets, and the assets that they do have relate closely to the production cycle, namely, inventory, receivables and (often briefly) cash. In some cases, a jurisdiction’s law will not permit these asset classes to be used as collateral,11 or will limit the value of that collateral in giving confidence to lenders.12 As a result, lenders will only take certain assets as collateral, typically, land, and maybe motor vehicles.13 In this situation, the reform of the law to expand the scope of eligible assets is likely to have a very beneficial effect on the availability of affordable credit. The consequence of the points made above is that there is a particular impetus towards secured transactions law reform in countries where there is significant lack of access to credit. Although there is no exact correlation, these tend to be developing economies. In developed economies, even though some of the legal restrictions and complexities referred to above and below14 exist, there is less desire on the part of governments for secured transactions law reform. 2 See ch 5 II. 3 See ch 5 II, where it is pointed out that in the East Asia region the unmet demand for credit was estimated at $2bn a year. 4 See ch 10 (Philippines) I A; ch 13 (Thailand) I; ch 14 (Vietnam) I; ch 16 (Bangladesh) II; ch 18 (Pakistan) I. 5 See ch 1 III C (iii). 6 See II B (ii) below. 7 See, eg ch 18 (Pakistan) II; ch 12 Taiwan III B. 8 See ch 10 (Philippines) II; ch 18 (Pakistan) I. 9 See ch 16 (Bangladesh) II. 10 See ch 10 (Philippines) I A. 11 See ch 7 (China) II A discussing the period before the 1995 Guarantee Law, and the increase in eligible collateral brought about by that law and the 2007 Real Property Law; ch 8 (Indonesia) I. 12 See, eg ch 18 (Pakistan) III B, which points out that, pre-reform, registration of security interests in movable property was voluntary and the relevant statute was silent on priority between such interests. 13 See ch 10 (Philippines) I A. 14 II C.

Conclusion 427 Even if the workarounds that have developed to deal with the existing law are complex and potentially expensive, the lack of an immediate economic imperative may mean that secured transactions law reform is not high on a government’s agenda, or that the positive benefits of law reform are outweighed by the (real or perceived) arguments against it.15 Expensive workarounds around problematic legal rules impact most sharply on the access to credit for MSMEs, but even this will not tip the balance in favour of law reform if there are other tools used by the government to encourage MSME financing.16 Further, the better the existing law works, the greater the problems have to be to outweigh the arguments against reform. For example, the law of secured transactions in Singapore is fragmented, but the legal community is content to stick to familiar rules rather than consider reform, as they have, through the years, developed considerable expertise to handle the complexities of the law so that it works relatively smoothly.

B. Role of International and National Institutions International institutions and other bodies can play a large part in shaping attitudes towards secured transactions law reform in a country. This can happen in many ways, some of which are considered in this section, and which are often cumulative rather than alternative. First, the international institution may set standards, which then act as an incentive for a government to instigate a reform agenda. Second, an international institution, such as the World Bank Group (WBG) and its International Financial Corporation (IFC), or a regional development bank17 may advise on what steps are required to eradicate extreme poverty and promote shared prosperity,18 and these will often include advice on secured transactions law reform. The international organisations will then work together with the government and domestic organisations towards that goal. Third, other international bodies, such as trade bodies, may influence reform at a national or international level.

(i) International Standards As discussed in chapter 1, the ‘getting credit’ index of the WBG’s Bank ‘Doing Business’ report acts as a global benchmark of secured transactions law in individual economies.19 As with many benchmarks or standards, improved compliance with it becomes, in some countries, an incentive in itself towards secured transactions law reform. The place of a country, both overall and in particular indices, in the Doing Business rankings can be seen, rightly or wrongly, as a snapshot of how a country is viewed by the world, particularly as a subject for international investment and as a trading partner. By seeking to move up the rankings, a country is signalling to the world that it is ‘open for business’. A desire to move up the ‘getting credit’ ranking is frequently a driver for secured transactions law reform.20 In Asia, examples are Thailand, where improving its ranking has been a factor in the 15 See II E below; ch 2 IV A. 16 See, in particular, ch 9 (Japan) II, which describes how government guarantees, low income rates and, in response to the financial crisis, a law requiring bank lenders renegotiate terms with distressed debtors. See also ch IV (South Korea) (various government guarantee schemes); ch 12 (Taiwan) III B (successful government guarantee scheme). Note, however, the argument that a government could increase its own recoveries under a guarantee scheme if a reformed secured transactions law complying with the modern principles were in place, ch 2 IV A (ii) (a). 17 Different institutions and organisations often work together in this regard: see ch 5 I A. 18 These are the World Bank Group’s two main goals: see www.worldbank.org. 19 See ch 1 III C (ii). 20 See ch 2 IV D (ii).

428 Louise Gullifer recent reform initiative,21 and Taiwan, where this factor has also played a significant role.22 The results of reform can be dramatic, as can be seen from the example of Brunei, which moved from 79th in the ‘getting credit’ rankings in 2016 (pre-reform) to equal 1st in 2020 (post reform).23 Of course, these rankings are only one factor, and may have no influence at all on a reform agenda if a country’s economy is otherwise strong. Singapore ranked 2nd in the overall Doing Business rankings, despite being equal 37th in the ‘getting credit’ index.24 This high ranking reflects the fact that the country is an attractive place to do business, and this has boosted its economic prosperity, so that there is little impetus for secured transactions law reform. Moreover, it should not be forgotten that the substance of reform, and the economic benefit it brings, is much more important than merely rising up rankings. This point is made strongly in the chapter on the Philippines.25

(ii) Work of International and National Organisations The need for support from external organisations and internal champions is noted in a number of chapters in the book. Without this support, which often includes funding as well as advice, encouragement and advocacy, reform of secured transactions law simply will not happen. This is illustrated by the discussion in chapter 5, which highlights the need for a national development plan and public sector champions,26 as well as the importance of regional forums, such as The Association of Southeast Asian Nations (ASEAN) and the Asia Pacific Economic Cooperation (APEC).27 The establishment of a secured transactions law Financial Infrastructure Development Network (FIDN) working group to identify areas for harmonisation and collaboration is also mentioned. The specific work of this body is also discussed in the context of the Philippines.28 The role played by the WBG, the IFC and other international organisations as advisors and sponsors is described in chapter 5.29 However, in some countries reform is largely generated and led by the government and internal bodies, such as the Central Bank.30

(iii) Industry Participation The business climate, and support from industry stakeholders, can be crucial in driving secured transactions law reform. The importance of engaging with key business stakeholders so as to gain their support for secured transactions law reform can be seen from the experience in the Philippines, where understanding amongst industry stakeholders was strengthened by engagement, and (largely international) industry bodies both advised on reform and become champions for it.31 It is pointed out in chapter 6 that ‘strong industry support can deactivate any institutional 21 See ch 13 IV A and VIII A. 22 See ch 12 III A. See also Pakistan (ch 18 II), where improvements to the new Act based on further compliance with the ‘getting credit’ indicators are being considered. 23 See ch 15 II A. 24 www.doingbusiness.org/en/data/exploreeconomies/singapore. 25 Ch 10 IV. 26 Ch 5 III A. 27 Ch 5 III D. 28 Ch 10 I B. 29 Ch 5 I A; see also ch 14 I. 30 See, eg the reform in Pakistan (ch 18 II), which was largely engendered by the State Bank of Pakistan, albeit with external consultants. See also the position in Bangladesh (ch 16 IV), where the WBG provided support and advice, but otherwise the input was largely from Bangladeshi organisations. 31 See ch 10 I B.

Conclusion 429 inertia’ in relation to the critical part played by the support of the international airline industry to the decisions made in many states to accede to the Cape Town Convention in International Interests in Mobile Equipment.32

C. Legal Issues Although, as is stressed above, the main driver for secured transactions law reform is often economic, there are a number of features of existing law which can be said to require reform in order to achieve economic benefit. There are also others which, though less directly linked to lack of access to credit, can mean that the law does not provide a climate conducive to the extension of credit by lenders on a secured basis. It should also be noted that the benefits of law reform are not always economic, and that even where economic benefit is not necessarily an overriding driver for reform, there can be good reasons to reform secured transactions law, such as increases in coherence and certainty.33 This section considers these legal issues, which are divided into three broad categories. The first category covers specific aspects of secured transactions law, which are found in some or all unreformed jurisdictions. The second category is the general issue that the existing law is complex and fragmented, which tends to be the case where secured transactions law has grown up over a long period of time without wholesale reform. The third category are issues that come from need for the law to keep up with digitisation and other electronic developments.

(i) Specific Problems with Existing Law (a) Assets that can be Used as Collateral As mentioned earlier, access to credit can be seriously reduced if the legal regime restricts what assets can be used as collateral.34 The modern principles, as identified in chapter 2, include the ‘availability of all types of personal property as collateral, including future assets securing future obligations’.35 Generally speaking, the common law permits a security interest to be taken in any type of asset (present or future) and the floating charge enables security to be taken over circulating assets owned by companies.36 The problems in this regard in common law jurisdictions are largely to do with fragmentation and complexity,37 so that different rules apply in different circumstances, rather than outright prohibition. As explained in chapter 6, the civil law legal culture requires specificity of an encumbered asset. This is, first, because of the privileged position of a secured creditor, who has the right of priority over other claimants, and the right to resort to the collateral for payment of its debt.38 Other, policy-based, reasons for specificity include the protection of the grantor from overcollateralisation and the need for publicity of the security interest to enable others to assess the credit-worthiness of the grantor.39 The requirement of specificity makes it difficult for a civil law 32 See ch 6 II A. 33 Ch 2 V. 34 See II A above. 35 Ch 2 II. See also indicators 2 and 3 of the ‘getting credit’ topic of the WBG Doing Business report, ch 12 (Taiwan) III A. 36 Ch 15 IV B (i) (a). 37 See II C (ii) below; ch 16 (Bangladesh) III; ch 18 (Pakistan) III B. 38 Ch 6 III D. 39 ibid.

430 Louise Gullifer country to accommodate a right to grant security over future assets, and also a right to grant security over assets described generically, that is, a pool of assets.40 These restrictions, in particular, affect the ability of a grantor, including a MSME, to give security over its inventory and receivables, which, in the case of a MSME, may well be the only collateral it can offer. The problem is clearly spelt out in the chapter on the Philippines in relation to its pre-reform law:41 the position is now changed in the new legislation.42 There is still a requirement in Taiwan that assets over which the various types of security interest are taken must be present and specifically identified.43 Other jurisdictions have developed methods of enabling a creditor to have recourse to future assets without wholesale reform, usually by manipulating the concept of title transfer. For example, in Indonesia it is possible to take fiducia security over a future asset. Fiducia, which was introduced in 1999 by legislation, is a non-possessory security device based on title transfer. Due to the specificity principle, however, the fiducia must be re-registered once the asset is actually acquired by the grantor.44 The position in South Korea is another example: the title transfer device of Yangdodambo was developed by caselaw. In relation to movable tangible property, a pool of assets such as inventory can be used as collateral as a single object, and that security right can include assets added to the pool in the ordinary course of business, although issues still arise sometimes as to whether assets added to the pool fall within the original identification.45 The device works in a similar way in relation to receivables, although this appears to be limited by the fact that the future receivables must be identified at the time of agreement for transfer, and that they must be likely to arise in the near future.46 A similar concept is used in Japan in relation to inventory: the inventory is treated as an ‘aggregate’ which is fictitiously delivered to the secured creditor in order to perfect the transfer (known as joto-tanpo).47 This device is not only achieved by a double fiction, but is limited by a strict requirement of identifiability in relation to the aggregate. As in South Korea, future receivables can be the subject of joto-tanpo, but must be identifiable at the time of the agreement. With the codification of this rule in the recent reform of the Civil Code in Japan, there appears to be no time limit within which the future receivables must arise.48 A number of civil law jurisdictions have also developed methods for security to be taken over a fluctuating pool of business assets, similar to the floating charge, despite the specificity requirement in the general law. Japan has introduced two types of ‘enterprise mortgage’, based on the German concept of the land being the primary collateral and the assets of the business operating from that land being included as accessories.49 In addition, the operation of a joto-tanpo over inventory includes a recognition by the Supreme Court that the grantor has the power of disposal of the inventory.50 In practice, the floating charge is most useful when it covers all the assets of the business, or, at least, all the circulating assets.51 A possible means of achieving a type of security 40 Both these issues are overcome in the common law by the operation of equity, as exemplified in the two cases of Holroyd v Marshall (1862) 10 HL Cas 191 and Tailby v Official Receiver (1888) 13 App Cas 523. 41 See ch 10 III B. 42 See also the gradual extension of the scope of eligible collateral through the various legislative reforms in Vietnam, ch 14 II A. 43 Ch 12 II A and VB. 44 Ch 8 III B. 45 Ch 11 II B (i) (a). 46 Ch 11 II B (i) (b). 47 Ch 9 IV A (ii). 48 Ch 9 IV B (i) and (ii). 49 See ch 9 III B. These are the factory mortgage and the estate mortgage. 50 Ch 9 IV A (ii). 51 All the assets owned by the business as a result of the production cycle (inventory, receivables, cash): see ch 1 IV A. This is how the floating charge is usually structured in a common law jurisdiction, and is mirrored in a reformed law by the rule that a security interest in an asset carries forward into its identifiable proceeds: see UNCITRAL Model Law, Art 10.

Conclusion 431 interest under civil law that mirrors this concept is suggested in chapter 6, on the basis that the proceeds of a pool of assets are usually identifiable.52 The Indonesian approach to fiducia over inventory is a limited example of how a security interest can cover both a fluctuating pool of assets and their proceeds. The Fiducia Law provides that the grantor can dispose of the inventory free of the security interest, and that the fiducia covers any receivables which arise as proceeds.53 The benefits and challenges of introducing a floating charge concept as a means of overcoming the requirement of specificity in a civil law jurisdiction are discussed in detail in the Taiwanese chapter.54 As mentioned above, one of the reasons for the requirement of specificity in the civil law is concern about over-collateralisation. Over-collateralisation refers to where a security interest is granted over assets of much greater value than the debt the interest secures. It has not generally been a cause of concern in common law jurisdictions: the common law imposes no restrictions on the amount or value of assets which can be used to secure a debt, and facilitates the creation of junior security interests in assets, thus making any surplus value available to secure further advances. In civil law jurisdictions, concern about over-collateralisation stems from several sources. First, if the law does not permit junior interests to be created, there is a concern that over-collateralisation locks up the surplus value in an asset.55 Second, there can be a concern that, on enforcing a security interest, an over-collateralised creditor will appropriate the surplus value for itself, or, at least, will fail to obtain sufficient value from the enforcement for the debtor (or its other creditors) to be properly protected.56 Third, there can be a more general concern that a debtor does not encumber all its assets, at least in favour of one single creditor. For example, this is a concern in Japan.57 The discussion in chapter 2 raises the question as to whether these are genuine concerns, and suggests that the reasons behind over-collateralisation should be debated further, taking into account concrete evidence (if any) of the situations causing concern.58 (b) Formalities In some jurisdictions (largely but not exclusively civil law jurisdictions) the granting of security entails lengthy and onerous formal requirements, for example, that the agreement be in a particular written form, that it be witnessed or that it be notarised.59 There are at least two broad reasons for this, identified in chapter 6.60 The first is that these requirements are cautionary: the grant of a security interest puts the secured creditor in a very privileged position vis a vis the debtor, and the debtor needs some protection to make sure it enters into the agreement with knowledge and understanding, and without undue pressure or fraud. The second is the view that an increase in costs and a decrease in efficiency ex ante is preferable to the increase in costs and inefficiency ex post if the grant of security is in some way flawed. This argument is particularly used to justify the use of a notary to check the agreement and the grant of security. 52 Ch 6 III D. 53 Indonesia Fiducia Law, s 21: ch 8 III B (iii). 54 See ch 12 V B. 55 An example of this is the Civil Code in Thailand in relation to ownership-based transactions, and, to a lesser extent, the position under the Business Security Act 2015: see ch 13 (Thailand) III A (iii). 56 This has manifested itself in the ban in civil law jurisdictions on provisions in security agreements for out of court enforcement (pactum commissorium), and also in the steps taken in civil law jurisdictions to ameliorate the effects of that ban: see ch 6 V B (i). See also ch 8 (Indonesia) III E (i). 57 See ch 9 VI C. Note that under English (common) law, an individual grantor is protected in this way by the Bills of Sales Acts, which prohibit the granting of security over future assets by an individual: see ch 15 II B. 58 See ch 2 IV B (iii). 59 As pointed out in ch 6 IV A, there is great variety of approach among civil law jurisdictions in this regard. 60 See ch 6 IV A–C.

432 Louise Gullifer A problem with formal requirements is that they themselves can become the cause of oppression and unfairness if they are particularly onerous and costly to comply with, or if a counterparty can take account of a lack of compliance even where they are not disadvantaged by this lack. It is therefore up to a jurisdiction to determine an optimal level of formalities, so that they do not impede parties, particularly unsophisticated parties, from entering into transactions. This issue was manifested in the pre-reform position in the Philippines, where the formal requirements had become very unclear and also very costly.61 Further examples of how formal requirements can become empty and unduly costly are given in relation to the fiducia law in Indonesia.62 (c) The Registration System (or Lack of It) There are two ways in which the law relating to registration can cause problems: first, in relation to when registration is required (or permitted) and, second, in relation to the way the system itself works. This section will consider both of these. Problems with the registration requirements in a secured transactions legal system can arise in two directions. In some cases the law does not require registration of a type of transaction, leading to lack of publicity and to the priority position being complex or uncertain. In other cases the piecemeal way in which the law has evolved has led to some transactions requiring registration in two registers. Examples of the former are the lack of registration of Yangdodambo over movables in South Korea, leading to potential problems when determining priority of interests.63 Similar problems potentially could arise in Japan, where joto-tanpo of movables can be perfected by fictitious delivery under the Civil Code.64 Moreover, it is possible in Japan for an interest (eg by joto-tanpo) to be perfected by registration, so there could be a priority contest between such an interest and a prior interest perfected by fictitious delivery, which would not then be discoverable by a registry search.65 Some systems do not require registration of the assignment of receivables, but instead require the notification of the account debtor66 for the assignment to be effective against third parties. As pointed out in the chapter on Thailand, where registration of assignment of receivables is not required, this does not give effective publicity to the assignment, compared to that given by registration.67 Another problem can be that the consequences of registration are not clear, and, in particular, where registration, or the lack of it, does not affect the priority status of a security interest, or that the priority rules are very unclear.68 A more difficult problem is where there are dual registration requirements. One reason for this can be if there is a register for asset ownership and a separate one for security rights, without any coordination between the two.69 Another possibility is that reform has been carried out in a piecemeal way without repealing previous legislation,70 so that the previous registration requirements co-exist with the new ones.71 61 See ch 10 III B. The position has been greatly improved by the reformed law: see IV B below. 62 See ch 8 III D (ii) and (iii). 63 See ch 11 II B (ii). 64 Ch 9 V A. 65 See ch 9 V B; ch 2 IV B (ii). 66 The party owing the receivables: see ch 1 IV A. 67 See ch 13 III B (ii). See also ch 9 (Japan) V A; ch 2 IV B (ii). 68 See ch 18 (Pakistan) III B. 69 See, eg the position in Indonesia in relation to motor vehicles (ch 8 III B (ii)). 70 See III A (i) (b) below. 71 See, eg ch 17 (India) IV F; see also ch 5 III B, giving the example of the preservation of dual registration in Thailand under the Plant and Machinery Act, as well as under the new Business Security Act.

Conclusion 433 Typical problems with the registration system itself are that it is fragmented (so that registration has to take place in a specific, local, office72) and that it is paper-based rather than online.73 Another possible problem is the delay caused by a requirement that every registration is checked on a ‘merits’ basis by the registry.74 Another issue can be the ease of searching: the register must be available to the public to search, otherwise it is not of any use.75 A further issue arises if priority does not depend on time of registration, resulting in a time period in which an interest can be registered after its creation. If that priority dates from the date of creation, this gives rise to a potential period in which the interest is valid but invisible.76 Sometimes, problems can be caused by practice rather than by the law itself. In Indonesia, taking security over intellectual property has become common, and is permitted by the reference to ‘intangible property’ in the Fiducia Law, and also recently by specific laws on intellectual property. However, the registry will not accept registration of these fiducia, since the regulations have not yet been promulgated, and it is not the registry’s practice to accept such registrations.77 (d) Anti-assignment Clauses For many businesses, the ability to use their receivables as collateral for financing is critical: they may have few, if any, fixed assets or land, and their business may consist of the provision of services rather than goods. Even in other types of businesses, receivables are an important class of assets. The fact that the use of receivables as collateral can be restricted by the inclusion of anti-assignment clauses in contracts giving rise to receivables can, therefore, impede access to credit. Without a specific legislative override, freedom of contract will usually mean that antiassignment clauses can have a negative effect on the use of receivables in secured transactions.78 (e) The Lack of Extra-judicial Enforcement If the only method of enforcement of security interests involves court proceedings, there is a possibility that these can be lengthy and expensive, and can lead to a drop in the value of the collateral, or even to enforcement becoming pointless.79 There is also a danger of a grantor using the court proceedings to avoid enforcement or to prolong it, without the challenge to enforcement being meritorious.80 As pointed out in chapter 6, it is too simplistic to state that civil law systems are more debtor-friendly in relation to enforcement, and do not permit extra-judicial enforcement.81 Many such systems do allow out of court enforcement in some circumstances, or have ameliorated the difficulties of court enforcement by providing for expedited proceedings or notary-supervised out of court enforcement.82 Another technique is to require a public auction of

72 See ch 7 (China) II A; ch 10 (Philippines) III C; ch 8 (Indonesia) II D (iv) (a); ch 18 (Pakistan) III B. 73 ibid. See also ch 14 (Vietnam) III for an account of the transition from a paper-based system to an online one. 74 See ch 8 (Indonesia) II D (iv) (a) describing how such a system led to a massive backlog. See also ch 12 (Taiwan) V E (ii) for a comparison of a ‘merits’ and a ‘form’ based checking system; ch 6 IV D; ch 15 III C (iv). 75 See ch 8 (Indonesia) II D (iv) (c) describing the problems caused by lack of access even to the online registration system now in operation. 76 See ch 15 IV C (v), in which reasons why this is not a major problem in practice are discussed. See also discussion of advance registration at IV C (ii) below. 77 See ch 8 III B (ix). 78 See ch 9 (Japan) IV B (iii); ch 15 IV C (vi); ch 18 (Pakistan) III B (iv). 79 See, generally, ch 8 (Indonesia) III E. 80 See, eg ch 8 (Indonesia) III E (iv). 81 See ch 6 V A. 82 See ch 6 V B (i).

434 Louise Gullifer the collateral; however, this can be complicated and have the same deleterious effects as judicial enforcement.83

(ii) Fragmentation and Complexity One of the biggest legal drivers for reform of secured transactions law is that the existing law is fragmented and complex, which makes it difficult to understand, and which leads to inconsistent treatment of types of transactions or types of parties.84 A reformed law is almost invariably codified in one single statute, and, if in accordance with the modern principles, will apply to all transactions which have the function of security and to all types of lenders and debtors. This section considers examples of different types of fragmentation, and why these, and the resulting complexity, are undesirable. It should be borne in mind that, while not usually fragmented, the legislation introducing a reformed system can also be complex. Given the wide variety of situations that are covered in such legislation, and the need to be comprehensive in a non-fragmented system, it is inevitable that there is a trade-off between complexity and certainty.85 (a) Different Rules for Different Types of Transactions One type of fragmentation is where a system has many different types of transaction all of which perform the function of security, namely, enabling the creditor to have recourse to a proprietary interest in the event of default. Legal fragmentation results where the legal characterisation of these different transactions is different and where, therefore, different rules apply to various important stages in the life of a secured transaction: creation, perfection, priority and enforcement.86 To some extent, of course, rules need to differ, according to certain variables, such as the type of assets involved. For example, a rule that permits a creditor to perfect an interest by taking possession of the asset can only apply to tangible assets. However, there are two main types of fragmentation which can cause difficulties.87 The first is where transactions which are factually similar (such as those where a creditor has a proprietary interest without having possession of the encumbered asset) attract different legal treatment. This raises the danger of inconsistent treatment, depending on the choice of transaction. Not only is this confusing, it also enables a creditor who has greater knowledge of the system to exploit these differences to the detriment of other creditors. One example of this type of fragmentation is the treatment of retention of title clauses in various jurisdictions. A retention of title clause in a sale agreement has the purpose of giving the seller a proprietary interest to which it can look if it is not paid the purchase price. In that sense, it is factually similar to a non-possessory security interest. However, in some jurisdictions, the legal treatment of retention of title sales and security interests is different.88 The second type of fragmentation is where transactions which are slightly factually different (for example, relate to different types of assets) have different names, and are governed by different rules. Here, the differences are, in one sense, justifiable, but the advantages of the fine-grained distinctions 83 See ch 10 (Philippines) III E; see also IV F below. 84 See ch 2 IV A (iii) (d). 85 See ch 2 IV A (i) (b), where it is pointed out that the current version of UCC Article 9 has veered more in the direction of certainty than lack of complexity. 86 For discussion of these stages, see IV B–E below. 87 For a general discussion of the disadvantages of formalism, which can lead to fragmentation, in civil law jurisdictions, see ch 6 III C. 88 For a discussion of these differences, see IV A (i) (b) below.

Conclusion 435 (such as they are) are likely to be outweighed by the complexity of having different requirements for each type of transaction and the potential difficulties of having to apply a legal characterisation to a particular transaction which may well have been deliberately developed in order to avoid onerous legal requirements.89 One example of this type of fragmentation is where different registration requirements apply to different types of transactions, perhaps because they involve different types of assets or because the legislation enabling a type of transaction occurred at a different time and entailed setting up a separate registry. A good example of this phenomenon is China, which has about 15 registration systems established by different governmental authorities.90 There are some general examples of fragmentation according to the type of transaction in the chapters in this book. In particular, the chapters on Indonesia, Japan and India91 contain tables listing the various types of security interests, and the different legal sources of rules applying to each. Despite having been included in a single statute, which covers most of the area of secured transactions law, the position in China under the Real Property Law 2007 is described in the China chapter as fragmented, and diversified.92 It is divided into various parts, namely, a mortgage over certain categories of personal property, a floating charge over equipment and inventory owned by enterprises, commercial individuals or farmers, a non-possessory pledge over intangibles and a possessory pledge over tangibles. The fragmented registration system has already been mentioned. Not surprisingly, the argument is made in the China chapter that the law should be reformed to create a unified legal and registration system for secured transactions.93 (b) Different Rules for Different Types of Parties94 Another instance of fragmentation is where transactions which are similar are treated differently because of the type of parties involved as either creditor or debtor. In relation to debtors, for example, separate rules, including separate registration systems, developed in the common law in relation to security interests created by companies and those created by individuals, whether in the course of business or otherwise.95 Different treatment according to the type of creditor can be the result of partial reform, where a statute is targeted at only certain types of lenders, such as banks or regulated financial institutions.96 (c) Many Different Sources of Secured Transactions Law Another source of complexity is that unreformed secured transactions law is often found in many sources, which makes it hard for users to find and to understand the complete picture.97 89 See, eg the jurisprudence surrounding the characterisation of a charge as fixed or floating in common law jurisdictions: ch 19 (Singapore) II C (iv). 90 See ch 7 III B. 91 Ch 8 (Indonesia) II A; ch 9 (Japan) III A; ch 17 (India) III B. 92 Ch 7 II B. 93 Ch 7 IV. 94 See discussion at IV A (ii) concerning how some of these distinctions continue in some jurisdictions even after reform. 95 See ch 15 II B (the common law and Brunei); ch 19 (Singapore) II B(ii) and II C(ii) and (iii). This division sometimes continues in common law jurisdictions even after reform: see ch 18 (Pakistan) IV A in relation to registration (security interests created by companies are registrable in the Companies Registry while security interest created by other types of parties are registrable in the Secured Transactions Registry). Compare the position in Bangladesh (ch 16 V B), where interests created by all types of parties are included in the whole draft reformed scheme which is pending. 96 See, eg ch 17 (India) IV A, where the Indian SARFAESI Act only applies to ‘secured creditors’. This term is specifically defined in the Act and broadly covers banks and other regulated institutions (note that the definition was extended in 2016). See also ch 13 (Thailand) II C; ch 2 IV B (iv). 97 See ch 6 III B.

436 Louise Gullifer There can be many statutes dealing with different types or different aspects of secured transactions. Moreover, the relevant provisions may be part of a much larger statute, such as a Civil Code, companies legislation,98 insolvency legislation,99 or legislation dealing with a particular type of asset.100 In many jurisdictions, case law is also an important source of secured transactions law, either in conjunction with statutory provisions or by being the source of a particular type or types of secured transactions. The origin of most common law secured transactions law is case law, with statute law typically just dealing with the registration regime, plus some provisions on creation and enforcement.101 In some civil law jurisdictions, case law has been used to develop a type of transaction which can be used as an alternative to those based on statutory provisions.102 Complexity caused by a multiplicity of sources can also occur where reform happens in a piecemeal way,103 especially where not all fragmentation is dealt with by the reform, but the reform just adds another layer of complexity to the already complex system.104 (d) Why Does a Secured Transaction Law Become Fragmented? Secured transactions law has existed in many jurisdictions for thousands of years. Much of the current law (common law and civil law) has its roots in Roman law, although the two traditions have followed different paths in more recent years. The law has to be adapted to changing circumstances, by judges and legislatures. In addition, those operating in the market often devise different types of transactions to suit particular types of assets or in reaction to legal change, and market practice influences the judicial and legislative development of the law. It is perhaps not surprising that over the years, the law in any particular jurisdiction becomes more complicated as it attempts to deal with different situations and contingencies. This is often done by the introduction of new concepts and rules, which are often introduced in addition to those already existing. Therefore, without a wholesale reform, the law becomes fragmented. Moreover, if the law is formalistic (that is, it classifies different transactions by form instead of function), it will become more and more fragmented as new forms are added.105 At least in theory, a functional approach can withstand change better, since all that has to be considered is whether the rules apply to a new situation, that is, whether a transaction has the functional purpose of security. Having said that, if a functional approach tries to deal with every eventuality that can occur, it too can become very complex.106 As mentioned above, partial reform, which does not consist of codification, or which does not repeal the existing law, can result in an even more fragmented system.

98 See ch 15 (common law and Brunei) II A. 99 See ch 19 (Singapore) II C (iv) and VII B. 100 See ch 9 (Japan) III A. 101 See ch 15 II B. 102 An example of this is the Yangdodambo in Korea (see ch 11 II B) and the joto-tanpo in Japan (see ch 9 III A (ii) (a)). 103 See, eg the way reform was introduced in Vietnam, through a mixture of amended Civil Codes and Decrees, making the law difficult to discover and, in some cases, causing inconsistencies (see ch 5 I B; ch 14 (Vietnam) II A and B). 104 See, eg Thailand, where the pre-reformed law included pledges and mortgages under the Civil Code, and some specialist legislation dealing with security interests over various specific types of assets. A new security interest which could be taken over many types of assets was introduced by the Business Security Act, but the previous legislation was retained leading to an even more complicated system (see ch 13 (Thailand) II). Moreover, this system does not include devices based on retention of title and outright assignment of receivables, which are still dealt with by completely different legal rules (ch 13 (Thailand) III). See also Ch 11 (South Korea) I. 105 See the account of the result of formalism in ch 6 III B and C. 106 See n 85 above in relation to the complexity of UCC Article 9.

Conclusion 437

D. Modernisation and the Introduction of Technology Another reason for secured transactions law reform is so that the legal rules can reflect systemic modernisation, often brought about by technological change. The most obvious example of this is the introduction of a fully online registry. As mentioned above,107 the existence of a paper-based registry can cause many problems, which leads to considerable impetus towards the introduction of an online system. A new law has to be introduced to support the new system, and the consideration of what the new registration rules should be involves consideration of the entire regime. Another example of technological modernisation is where a reformed law enables formal requirements for the creation of a security to be fulfilled by an electronic agreement.108 As stressed in chapter 5, however, it is important that secured transactions law reform is not seen as a purely technological (or even legal) reform: it needs to form part of an overall reform of the financial sector.109 That is not to say, however, that technological developments cannot inform the reform process, and even facilitate the modernisation of the legal concepts and structure. The possibilities in this regard are explored in chapter 6.110

E. Reasons against Reform (i) The Law Works Well There is unlikely to be much appetite for wholesale secured transactions law reform if the current law is perceived to work well. Of course, this depends on what is meant by ‘working well’: a system which enables large businesses to obtain finance at reasonable cost may not do the same for SMEs, or for micro-businesses. Whether the law works well may also depend on who is asked. As is pointed out in chapter 2, legal elites may perceive a system as working well if they understand it and can use it to do what their (large) clients want.111 Lenders who benefit from the system may think it works well if it enables them to thrive without competition. This does not necessarily mean that the system is appropriate for all potential borrowers or lenders.112 However, it is possible that an unreformed system can work well, objectively assessed. For example, in Singapore, there is evidence of good access to finance for SMEs. This appears to be partly a result of the market, and partly as a result of Government initiatives designed to stimulate SME finance, and to protect SMEs in difficult times.113 Other countries where reform has not yet taken place also have Government measures to boost SME lending.114 Moreover, where interest rates are very low or there are other favourable conditions for credit, there is little incentive for change.115

(ii) Institutional Interests There are bound to be winners and losers in any reform, and sometimes reform can be blocked by institutions or interest groups who benefit from the status quo. Examples of legal elites and

107 II

C (i) (c). ch 10 (Philippines) III B. 109 Ch 5 V. 110 See ch 6 V B (ii). 111 See ch 2 IV A (i) (b). 112 See ch 2 IV A (i) (d). 113 See ch 19 (Singapore) VIII. 114 See ch 9 (Japan) II; ch 11 (South Korea) IV. 115 See ch 2 IV A (ii) (d), where it is pointed out that interest rates might not always stay low. 108 See

438 Louise Gullifer market dominators are given in chapter 2,116 and these interest groups could also include those who do not need to register their interests under the current law, such as lessors and outright transferees of receivables. It is also possible that notaries, who are a linchpin of an unreformed civil law system,117 could oppose reform, even where it is sought to replicate the trust function they perform within the new system. It should not be forgotten, though, that institutional opposition is not just a matter of resistance to change, but usually reflects real, though temporary, costs which have to be borne in the event of reform. Lawyers, and their clients, will need to become familiar with the new law, and will need to understand how it will work in the context of their particular business. Lenders who lose their share of the market are usually lending money given to them by others, such as bank deposits, and will need to find an alternative use for that money if it cannot be lent because of competition made possible by the reform. Even the removal of bureaucracy has a human cost. These consequences need to be factored in when the costs and benefits of reform are being weighed against each other.

(iii) Legal Culture The difficulties posed by legal culture to secured transactions law reform are discussed, in particular, in two discrete chapters in the book,118 but aspects of the issues discussed in those chapters are examined in many of the country specific chapters. In many of the countries in Asia, the predominant legal culture originated from a colonial transplant. Despite the presence of other cultural influences on the law of particular countries, the countries considered in this book fall into either predominantly civil law or common law jurisdictions. Each type of legal culture includes doctrines and concepts which are difficult to accommodate in a reformed law which is based on the modern principles. In relation to civil law countries, three particular areas are identified. First, the formalistic nature of the civil law makes it difficult to introduce the unitary concept of a security interest.119 Second, the emphasis put by civil law jurisdictions on ex ante certainty and protection can necessitate onerous formalities in creation and perfection of security interests.120 Third, the debtor-friendly attitude of the civil law towards enforcement of security interests can result in an antipathy towards out of court enforcement and private autonomy, on the basis that the supervision of the court is necessary to protect the debtor’s interests.121 The first point is reflected in discussions in other chapters about the inclusion of devices based on retention of title into a reformed system.122 The difficulties raised by this inclusion in a civil law jurisdiction are particularly explored in the context of Thailand, where the law has been partially reformed, but devices based on retention of ownership such as hire purchase and leases are still not included in the reformed scheme. The Thailand chapter identifies the difficulties raised by the non-inclusion of these devices.123 The first is the secrecy of the ownership right, 116 Ch 2 II A (i) (b) and (d). 117 See ch 6 IV B and C. 118 Ch 6 on civil law and ch 15 on common law. See also IV A (i) (b). 119 Ch 6 I B (i) and III, especially III C, where the formalistic nature of the civil law is examined. As is pointed out in that chapter, common law jurisdictions in the English law tradition could also be called formalist in this regard (see ch 6 I B (i) fn 9; see also ch 15 II B, which sets out the different types of security interest under the common law). 120 Ch 6 I B (ii) and IV. 121 Ch 6 I B (iii) and V. 122 Another aspect of civil law culture which militates against a reform based on the modern principles is an antipathy to the creation of a security interest over a generic class of assets, and/or over future assets: see II C (i) (a) above. 123 Ch 13 (Thailand) III A.

Conclusion 439 since it is not registrable. The second is the possible enrichment of the owner on enforcement, since it can retain any value over and above the amount required to fulfil the outstanding obligation. The third is that the party being financed (the hirer or the lessee) cannot use any surplus value in the asset to secure other obligations. This last difficulty can lead to a lack of competition between financiers. The chapter also sets out the doctrinal arguments against the inclusion of such devices,124 and proposes two alternatives for overcoming these, while still remaining consistent with civil law culture. In both alternatives, the financier continues to retain ownership in the relevant asset, but the limited nature of a security interest (that is, that it is limited to an interest required to satisfy the secured obligation) is reflected in the treatment of the proceeds of the asset on enforcement. Thus, the owner is under a personal obligation to return any surplus value to the debtor, and the debtor can create a junior security interest in the right to claim the surplus. It should, however, be pointed out that some unreformed civil law systems do already treat devices based on retention of title (or some of them) as having some of the features of a security interest.125 The second area in which civil law legal culture can cause difficulties, the imposition of onerous formalities, is discussed above,126 as is the third issue: lack of extra-judicial enforcement.127 In many ways, the modern principles are already reflected in unreformed common law systems,128 and some of the changes necessitated by reform are less a matter of changing legal culture than ‘translating’ existing legal concepts into concepts expressed in a different way and using different terminology.129 Much of the common law system can be explained as a matter of history rather than depending on doctrine, for example, the different treatment of corporate and non-corporate business debtors. However, the common law also has a formalist approach to security devices, justified by an argument based on freedom of contract. Adopting a unitary and functional approach would entail applying the same rules to all devices, rather than permitting lenders to pick the rules which suit them best by choosing a particular device. Another doctrinal obstacle to the modern principles is the common law antipathy to the overriding of anti-assignment clauses, on the basis of freedom of contract, as discussed above.130 However, in the main, the argument against reform in any particular common law jurisdiction is not primarily doctrinal, but is because the existing law, despite its imperfections, works well in practice.131 Sensitivity to legal culture is clearly necessary when any wholesale law reform takes place, particularly where this is based on principles developed elsewhere in the world. As pointed out in chapter 2, reform according to the modern principles conflicts, to some extent, with both civil and common law doctrines and traditions. That chapter goes on to point out, however, that mere doctrinal discrepancy should not be a reason for not reforming, and that attention should be paid to the operation of markets for business credit and the potential economic effects of reforms as well as to doctrinal consistency.132 The analysis in the Thailand chapter offers some further perspectives. Important arguments in favour of doctrinal compliance are considered. First, while a new system can itself be internally consistent, it will also need to be consistent with the different areas of the law which are likely 124 Ch 13 (Thailand) VB (see also IV B (i), where other, less doctrinal, arguments against inclusion are discussed). 125 In Taiwan and Japan a retention of title seller who repossesses must return any surplus value to the buyer: see IV A (i) (b), especially n 261. 126 See II C (i) (b). 127 See II C (i) (e). 128 See ch 15 IV B. 129 See ch 15 IV D, particularly referring to the floating charge and the superpriority of retention of title devices. 130 II C (i) (d). 131 See ch 19 (Singapore) VIII. See also ch 15 IV A. 132 Ch 2 IV A (i) (b). See also ch 13 (Thailand) VIII C and D.

440 Louise Gullifer to intersect with the new law. Some differences can be dealt with by consequential amendments to various aspects of existing law,133 while others will need conceptual ingenuity to enable the existing and new systems to dovetail.134 The fact that these differences can be overcome means that doctrinal non-compliance need not always prevent effective reform.135 Second, a system that is radically different from the current legal culture will be very unfamiliar to most of the people who need to use that system, and can lead to a resistance to use on the part of market players.136 However, as pointed out in the Thailand chapter, unfamiliarity should not be a reason for lack of reform if other reasons for reform are present, since it can be dealt with by capacity building.137 It is clear from several chapters in the book that it is possible to formulate a law consistent with the modern principles which is also in sympathy with civil law doctrine.138

III. Method of Reform Having considered the reasons why reform does or does not take place, this section will consider the way in which reform actually happens, or should happen. Although changing the law is an important part of reform, it will not have any practical effect, particularly the desirable economic effect it is meant to have, if the new regime is not fully implemented and operationalised in a country, nor if capacity is not built so that it can be used by the business population of that country. These two aspects are considered in the third and fourth parts of this section, which discusses many examples of how reform has been implemented in the Asian countries included in this book. The first two sections focus on the law itself. The first section considers the difference between piecemeal (or partial) law reform and a wholesale overhaul of the system, while the second section considers the use of models in helping to determine the form, substance and drafting of the new legislation.

A. Partial or Wholesale? Three types of reform were briefly discussed in the introduction to this book.139 The first, wholesale reform, is where the secured transactions law is codified into one statute (with possibly an additional piece of primary or secondary legislation governing the operation of the registration system). The second, partial reform, is where the reform is limited, either to only one or more types of security device as opposed to all types of security, or in other ways. The third is where only one aspect of the law is reformed in a very targeted way. Various issues concerning wholesale and partial reform are now considered before their merits are compared.

133 See ch 5 I B, giving examples of the need for this in the reforms in East Asia; ch 15 V D, discussing the necessary reforms to insolvency law resulting from a secured transactions law reform based on the modern principles. 134 See ch 15 V B, discussing how a reformed system in a common law country can interact with the existing system based on legal and equitable interests. 135 Ch 13 (Thailand) VIII C and D. 136 See, eg ch 8 (Indonesia) III A, where it is pointed out that many market players still find the 1999 Fiducia Law confusing. 137 Ch 13 (Thailand) VIIE; see also III C (ii) below. 138 See ch 13 (Thailand) VIII B; ch 6 III and VI. Successful wholesale reform has occurred in the civil law jurisdictions of the Philippines (ch 10) and Vietnam (ch 14). 139 See ch 1 III B. See also ch 6 II A.

Conclusion 441

(i) Wholesale Reform (a) Structure of the Legislation Wholesale reform, even in a common law jurisdiction, will have to be by legislation: it cannot be done purely by caselaw. As mentioned in the introduction, the reforming legislation will usually include provisions covering creation, perfection, priority and enforcement, and is also likely to include provisions on the conflict of laws and transitional provisions, though one or both are sometimes omitted. Detailed provisions about the registry and registration are often contained in a separate legislative instrument.140 Of course, there will be variations in structure depending on the legal tradition of the reforming jurisdiction and the model used. Where an international model is used, the structure tends to be similar whether the legal tradition is common law or civil law. Thus, the statute in the Philippines, which is based on the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Secured Transactions (2016) (UNCITRAL Model Law), largely follows its structure.141 It starts with definitions and general provisions, then deals with creation, perfection, priority, registration, enforcement and transitional provisions. It concludes with provisions concerning interaction with and repeal or amendment of other laws. Unlike the UNCITRAL Model Law, it does not include conflict of laws provisions, and the registration provisions are included within the statute and not found in separate regulations. The Pakistan Financial Institutions (Secured Transactions) Act 2016 follows roughly the same structure,142 except that the registration section comes before the priority section, and there is a section on the rights and duties of the parties. While the same types of provisions are included within it, the draft Bangladesh Secured Transaction (Movable Property) Act follows the Personal Property Security Act (PPSA) model, and so is differently ordered and structured.143 The legislation was also split into a draft Act and draft Rules at a late stage, after the Ministry of Finance required the Act to be shortened.144 In contrast to these bespoke statutes, the reform in Vietnam was carried out through amendments to the Civil Code, plus additional decrees. While much of the law is now included in the 2015 Civil Code, other rules are still found in particular decrees. For example, some special priority rules are in Decree 163 (which is still to be reformed),145 and the registration rules are contained in many different decrees.146 (b) Treatment of Existing Law As mentioned in the introduction to this book,147 problems can be caused when enacting wholesale reform by failure to repeal or amend existing statutory provisions, or even to abrogate whole registrations systems. The need for statutes governing other areas of law which intersect with secured transactions to be amended in order to dovetail with the new statute is pointed out 140 The UNCITRAL Model Law, which is drafted as a codified instrument, contains a section, which can form a separate piece of legislation, entitled ‘Model Registry Provisions’. 141 See ch 10 III. 142 See ch 18 IV. 143 See ch 16 V. The Brunei Secured Transactions Order 2016 also follows the PPSA structure as it is based on the New Zealand PPSA. 144 Ch 16 IV. 145 See ch 14 (Vietnam) II C. 146 See ch 14 III A (i) fn 77, which explains that Art 298 of the Civil Code 2015 authorises registration in general terms while the rules are found in the following instruments: the Law of Enforcement of Civil Judgements (as amended), Resolution 42, Law on Bankruptcy, Decree 102 and Decree 163. 147 Ch 1 III B (i).

442 Louise Gullifer clearly in chapter 5. Here, examples are given of statutes which may require amendment. These are civil and commercial codes, bankruptcy and company legislation, and statutes on contract law, intellectual property law, and securities law.148 Amending these types of statutes is not merely to prevent inconsistencies and technical legal problems. If a reformed secured transactions law is going to achieve its economic objectives,149 it is probably necessary to reform the whole business environment. For example, when reforming its secured transactions law, Pakistan also reformed its corporate law by introducing a new Companies Act, the Corporate Restructuring Companies Act, and the Corporate Rehabilitation Act.150 Bangladesh is undertaking a number of law reforms which are complementary to its secured transactions law reform.151 Complexity and even confusion can also be caused when a reforming statute does not repeal the existing law covering the same area. For example, in some cases, the existing method of registration of security interests is left intact. After the reform in Thailand, which introduced a new registration regime, the registration requirements under the Plant and Machinery Act were not repealed, so that registration in two places is now required.152 The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (SARFAESI Act) in India did not repeal the existing registration systems, so that at present there are still dual registration requirements for some types of interests, although a new central registry has been proposed.153 An example of complexity, though not a requirement of dual registration, is the Pakistan Financial Institutions (Secured Transactions) Act 2016, where registration in the new Registry is only required for security interests created by individuals and unincorporated entities, while those created by companies are still registrable in the Companies Registry under the Companies Act.154 In Brunei, on the enactment of the Secured Transactions Order in 2016, most of the Hire Purchase Order was not repealed, with the result that those financing vehicles on hire purchase must perfect their interest in the ‘old’ way, by taking possession of the vehicle’s ownership papers, as well as by registering their interest.155 Another example, relating to common law jurisdictions, is the treatment of the floating charge by the reformed legislation. If the legislation abolishes the distinction between fixed and floating charges, insolvency law needs to make new provision for a trigger to determine over which security interests preferential creditors have priority.156 The distinction between fixed and floating charges, however, is retained in the reforming legislation in Pakistan.157 This cuts across the unitary approach,158 and means that characterisation issues159 and the priority rules retain the complexity of the old common law, but does have the result that the insolvency legislation in relation to preferential creditors can remain in place. While, in many cases, specific repeal of previous legislation is desirable for clarity, a ‘catch-all’ method is used in the draft legislation in Bangladesh, where a ‘non-obstante clause’ is included, 148 See ch 5 III B. For an example of how secured transactions law reform is likely to require reform to insolvency law, see ch 15 V D. 149 See ch 1 III C (iii). 150 See ch 18 II. 151 See ch 16 VII describing reforms to the Bankruptcy Law, the Money Loan Court Act (which will introduce a new court to deal with secured transactions disputes and legislation to implement the Cape Town Convention and Aircraft Protocol which Bangladesh has ratified). 152 See ch 5 III B. 153 See ch 17 IV F. 154 Ch 18 IV D. An ‘entity’ under the Act is any person who is not a company, including a natural person: see ch 18 IV A. 155 See ch 15 II C. 156 See ch 15 V D, where the provision made by Australia and New Zealand is discussed, but where it is pointed out that no provision has been made in Brunei. 157 See ch 18 IV E and I. 158 See IV A below. 159 See ch 19 (Singapore) II C (iv). See also ch 12 (Taiwan) V B.

Conclusion 443 providing that the provisions of the Act will prevail notwithstanding anything contained under any law for the time being in force.160 However, specific consequential amendments of previous statutes will be included.

(ii) Partial Reform It is almost inevitable that partial reform will lead to a proliferation of different rules and registration systems, since only part of the secured transactions legal system is changed and the rest is left intact. One example is in South Korea, where the introduction of the Act on Security over Movables and Claims, which created a new type of security interest, did not lead to the repeal of any existing security interests, with the result that multiple security interests co-exist.161 Moreover, some of the existing security interests are not required to be registered, so that a creditor who takes a security interest after searching the new register could still be subject to an earlier, unregistered, interest of another type.162 Similar phenomena can be observed in China, where, after the 2007 Real Property Law introduced a new registration system run by a company established by the Central Bank, the previous system of possessory pledges still remained, so that the priority position between a registered interest and a pledge is not clear.163 While partial reform can be criticised as increasing fragmentation and complexity,164 it also has other consequences. For example, in South Korea the system created by the new Act is rarely used, and, as the relevant chapter points out, one of the reasons is the existence of other, better known devices.165 On the other hand, in China, the new registration system created for pledges of accounts receivable was so efficient and accessible, it has been used to register many different types of secured transactions in addition to pledges over accounts receivable.166

(iii) The Merits of Partial and Wholesale Reform In a perfect world, wholesale reform (with appropriate attention to dealing with existing law) is probably the best method of reform. It enables a system that complies with the modern principles to be effected in one reform operation, and, given the infrastructure reform, the capacity building and the development of markets needed to accompany reform,167 it certainly makes sense for all this work to happen only once. Further, the bedrock of a reformed system is a single secured transactions registry, and its development and introduction is largely predicated on reform taking the form of a single piece of legislation, even if the registry rules are effected by complementary secondary legislation. The relevant international instruments, such as the UNCITRAL Model Law, are also predicated on wholesale reform, and this is the type of reform envisaged by the World Bank in its Getting Credit index168 and in its literature.169 160 See ch 16 V B. See also ch 18 (Pakistan) IV I. 161 See ch 11 III A (i). 162 See ch 2 IV B (ii). 163 See ch 7 III D (iii). 164 See II C (ii) above. 165 See ch 11 III and IV. 166 See ch 7 III C (ii) (a). These other types of registration were permitted by the rules of the registry, but there is still no primary or secondary legislation permitting or giving legal effect to such registrations, except in relation to a pilot scheme running in Beijing and Shanghai. 167 See III C below. 168 Part of the annual World Bank Doing Business report: see ch 1 III C (ii); ch 12 (Taiwan) III A. 169 See, eg World Bank, ‘Secured Transactions, Collateral Registries and Movable Asset-Based Financing: Knowledge Guide’ (Washington, DC, World Bank, 2019), https://openknowledge.worldbank.org/handle/10986/32551 License: CC BY 3.0 IGO.

444 Louise Gullifer However, in countries where the reasons against reform170 are strong, partial reform (or even single issue reform) may be all that is achievable at any particular moment. The question arising, then, is whether partial reform is better than no reform, or whether it is better to hold out for a wholesale reform when the time is right.171 Some of the examples discussed in this book of partial reform do not at first glance indicate that it is a beneficial way forward, since it has led to more fragmentation, complexity and, therefore, probably increased costs. However, there are also arguments in favour of partial reform. First, introducing a reformed system in a specific sector may be all that is possible at a particular moment, because it is only in that sector that the need for reform is appreciated. This appears to have been the position in India, where the SARFAESI Act was originally introduced to facilitate the use of financial assets as security for bank loans, largely by improving the rules on enforcement.172 The original Act was therefore limited to creditors who were banks or other financial institutions, and devices based on retention of title such as hire purchase and financial leases were not included in its scope.173 Second, a partial reform can be built on, to extend its scope more widely until it begins to resemble a wholesale reform. India, again, is a good example. The SARFAESI Act did originally make provision for a central registry, but those provisions were not brought into force until 2011, when a registry was established.174 Moreover, once the benefits of the Act became apparent, it was extended in 2016 to cover a much wider variety of lenders,175 to cover title based security devices176 and to include rules of priority and consequential amendments to the registration provisions.177 In Vietnam, however, the process of gradual reform appears to be have been quite tortuous, with different legal reforms being introduced at different times and in different instruments, so that although some built on others, in other cases the reforms resulted in some fragmentation and even inconsistency.178 Finally, in 2015, the law was largely incorporated into one statute, and is close to international best practice, although fragmentation still exists within that statute, and further consolidation would be desirable.179 Perhaps however, the lengthy process did at least enable some capacity building to be carried on alongside the legal reform, so that the lengthy period of acclimatisation took place earlier than it might otherwise have done. Third, partial reform can be used to overcome unfamiliarity with the new thinking underlying a reformed system or reluctance to accommodate such a system within a particular legal culture. This argument is made in the Thailand chapter, in which the example is given of lenders gradually getting used to being able to take a security interest over all the assets of the debtor and becoming more willing to accept a functional approach. Not only does partial reform enable stakeholders to get used to the new legal and practical concepts, they will, eventually, come to criticise the shortcomings of the partial approach and, it is argued, welcome a more wholesale reform.180

170 See II E above. 171 See ch 17 (India) VII, where the merits of partial and wholesale reform to overcome the shortcomings of the current law are discussed. 172 See ch 17 I. 173 See ch 17 IV A. 174 See ch 17 IV B. 175 See ch 17 IV A. 176 ibid. 177 See ch 17 IV F. 178 See ch 14. 179 See ch 14 V. 180 See ch 13 VIII E and G.

Conclusion 445

B. Use of Models Preparation for any domestic law reform usually includes a comparative study of the law of other jurisdictions to inform the reform process. In some situations, though, reform is carried out by actually ‘borrowing’ a law from another jurisdiction. This process of legal transplant is discussed in chapter 2,181 and has led to considerable academic debate as to the optimum method of successful transplant.182 Much of this debate focuses on the significance, or otherwise, of the ‘fit’ between the transplanted law and the existing legal, social and political cultures of the receiving state. No transplant (or any other reform) can be a perfect ‘fit’ for the existing law. Much emphasis in the literature, therefore, is put on matters other than the content and structure of the law, some of which are discussed in other places in this conclusion, such as the involvement of local stakeholders, the support of international organisations, the development of infrastructure and markets and capacity building. In terms of the content of the law, there is a strong argument against ‘reinventing the wheel’,183 as the industry and experience of lawmakers in other countries can be leveraged to the benefit of the receiving state. This argument supports the use of a model for the reformed law, as advantage can be taken of the experience of other countries that have already reformed their law, and of international expertise. It also should enable the process to be quicker and smoother than if a country has to start drafting from scratch. Three other arguments also support the use of a model. First, many states, when reforming secured transactions law, will do so with the help and support of international organisations,184 and these, not surprisingly, advocate the use of models which reflect the modern principles. Second, many states wish to signal to the world that their law complies with best practice and international standards. Third, the use of models promotes harmonisation, and even some uniformity, which can lead to reduced transaction costs and is particularly important where a state wishes to encourage cross-border lending. As mentioned above, reform of secured transactions law will be by the passing of legislation. Any model, therefore, will usually be legislative, or, at least, will take the form of some sort of legislative guide.185 The use of a legislative model is obviously particularly important where secured transaction law reform is wholesale, and often a model can give a structure and basis to the entire new law. However, concepts developed through case law can also be influential. One example of this is the influence of the common law floating charge, which developed entirely through case law,186 on reform in Thailand187 and the debate in Taiwan.188

181 See ch 2 III. 182 See, eg A Watson, Legal Transplants: An Approach to Comparative Law, 2nd edn (Athens, GA, University of Georgia Press, 1993); A Watson, ‘Comparative Law and Legal Change’ (1978) 37 CLJ 313; O Kahn-Freund, ‘On Uses and Misuses of Comparative Law’ (1974) 37 MLR 1; L Mistelis, ‘Regulatory Aspects: Globalization, Harmonization, Legal Transplants, and Law Reform – Some Fundamental Observations’ (2000) 34 International Lawyer 1055; D Berkowitz, K Pistor and J-F Richard, ‘The Transplant Effect’ (2003) 51 American Journal of Comparative Law 163. 183 See Mistelis (n 182) 1067. 184 See II B above. 185 An example is the UNCITRAL Legislative Guide, which was used by many states before the UNCITRAL Model Law was developed, including (among countries discussed in this book) Pakistan, South Korea and Vietnam. 186 See H Beale et al, The Law of Security and Title-Based Financing, 3rd edn (Oxford, Oxford University Press, 2018) paras 6.66–6.68. 187 See ch 13 IV A. 188 See ch 12 V B.

446 Louise Gullifer

(i) Choice of Model If the decision is taken to use a model, an initial choice to be made is between the use of the domestic law of another country or an international model. The use of a domestic model is attractive if there is another jurisdiction with very similar law, since, if that model has integrated well into the law of that jurisdiction, it is likely to integrate similarly well into the law of the reforming jurisdiction. However, reform is about more than legal integration, and an imported law is unlikely to prosper if the economic and market conditions of the model jurisdiction are different from those of the reforming jurisdiction. For example, the model jurisdiction might not have many securities held through chains of intermediaries while the reforming jurisdiction does, or vice versa. A domestic model will also be firmly rooted in the legal culture of the model jurisdiction, so use of that model is unlikely to work in a reforming jurisdiction with a different legal culture.189 Despite originating from the functional approach of the US model presented in Article 9 of the US Uniform Commercial Code (UCC Article 9), many international models have been developed with differences in legal culture in mind.190 For example, the Model Inter-American Law on Secured Transactions was developed for use in Latin American countries with a different legal tradition from the US. The UNCITRAL Legislative Guide and Model Law were developed with input from states of all kinds of legal traditions, and their purpose is overtly to assist states from all legal cultures in developing their secured transactions laws.191 Nor are these instruments tied to the economy or idiosyncrasies of any particular region or state. They also include alternative approaches to certain issues which can be chosen according to the needs and policies of a particular reforming state. As one might expect, many jurisdictions consult a variety of models in the course of drafting their reformed secured transactions laws. For example, in Thailand, UCC Article 9 and the European Bank for Reconstruction and Development Model Law were consulted when the Business Security Act was drafted192 and in Bangladesh a number of PPSAs and the UNCITRAL Model Law were examined in the course of drafting the draft Act.193 In the end, the choice of model can depend on many factors. The choice by the Philippines of the UNCITRAL Model Law appears to have been made because of the factors mentioned above, and also because the technical working group appointed to consider the drafting of the new law ‘found that the successful passage of modern secured transactions legislation that had its origins in the UNCITRAL Model Law was a catalyst of positive change in the other jurisdictions studied’.194 The chapters on Bangladesh and Pakistan discuss in some detail the choice of model in each jurisdiction. Bangladesh, in choosing their model, looked carefully at the existing structure of the law in that jurisdiction, and concluded that it would be beneficial to take advantage of the depth of experience and judicial wisdom in common law countries that had already reformed their law. As a result, it was decided to use as a model the Canadian PPSAs, particularly those of Saskatchewan and Ontario, with, in some specific cases, particular provisions included from the UNCITRAL Model Law.195 However, Pakistan largely drew its inspiration from the UNCITRAL

189 For the difficulties posed by using a common law model in a civil law jurisdiction, see ch 6, especially at I B. 190 For lists of international models, see ch 1 III C (i) and ch 2 II. 191 See UNCITRAL Legislative Guide, p 1, paras 1 and 3. 192 See ch 13 IV A. 193 See ch 16 IV. See also ch 10 (Philippines) II, in which the initial consideration of various national statutes is described, before it was decided to use the UNCITRAL Model Law as a model. 194 Ch 10 II. 195 See ch 16 IV. The situations in which the UNCITRAL Model Law provisions are used are pointed out in the chapter.

Conclusion 447 Legislative Guide on Secured Transactions (2007) (UNCITRAL Legislative Guide), as the Model Law was not adopted until after the Pakistan Act had been finalised.196

(ii) Challenges Arising from the Use of Models However good a model is, it will need to be adapted to local conditions. These conditions include the legal culture and particular legal principles which need to be accommodated, as well as economic and market conditions. For example, in a country where agriculture is the predominant industry, the available types of collateral will be different from those in a country where much of the economy is involved in the financial services industry.197 Another example is where the constitutional structure of a country restricts the scope of reform. For example, in Pakistan, the Financial Institutions (Secured Transactions) Act 2016 was a federal statute, but certain aspects of the relevant law were within the jurisdiction of the provinces, and it was not politically feasible to obtain the necessary consents for these aspects to be included. Thus, the Act does not cover supplier credit, the regulation of which was within the provincial jurisdiction.198 Another reason for adaptation is to accommodate the views of market participants or governments, or to fulfil particular policy objectives.199 The UNCITRAL Model Law anticipates some of these variations, and has given enacting states various options to choose from in relation to particular issues. Where a national model is used, it is necessary for the reforming state to make sure that any idiosyncrasies of the model are not inappropriately incorporated into the new legislation. One example of this is the concept of ‘chattel paper’, which originated in the US and Canada in the early 20th century, initially in the context of the financing by motor dealers of a purchase of a vehicle. Typically, the purchaser would pay for the vehicle by instalments, and the financing would be secured, probably by some form of title retention device such as a conditional sale or hire purchase arrangement. The debt plus the security arrangement would be recorded in writing. When the dealer itself wished to obtain financing, it would offer the ‘debt plus security’ as collateral for its own borrowing, and would transfer the document to its lender. Over time, the document evidencing the purchaser’s debt and the security arrangement obtained negotiable status.200 Because of the importance of this type of financing in certain contexts, chattel paper was included expressly as an asset class in UCC Article 9 and the Canadian PPSAs and specific rules applied to it.201 When New Zealand and Australia reformed their laws, using the PPSAs as a model,202 the concept of chattel paper was retained in the legislation.203 However, this form of financing was unknown in Australia and New Zealand, and the inclusion of the concept proved confusing.204

196 See ch 18 I. 197 For examples of different economic conditions in the Asian countries considered in this book, see ch 1 V B. 198 See ch 18 IV and IV A. 199 For example, in Bangladesh writing is required for the creation of a security interest even if the creditor has possession: this is a deviation from the Canadian PPSA model used. The policy purpose of this requirement is to minimise the risk of disputes. See ch 16 V D. 200 See T Jackson, ‘Embodiment of Rights in Goods and the Concept of Chattel Paper’ (1983) 50 University of Chicago Law Review 1051. 201 See UCC Article 9, § 9-102(a) (78) (definition of chattel paper) and, inter alia, §§ 9-312, 9-318 and 9-330, which all include rules specifically for chattel paper. See also Saskatchewan PPSA, s 2(1)(f) (definition) and, inter alia, s 31(7). 202 The New Zealand Act was specifically based on the Saskatchewan PPSA; the Australian Act did not have any specific model, although UCC Article 9 and the Canadian PPSAs were used as background information in its development. 203 See New Zealand PPSA, ss 17 and 98; Australian PPSA, ss 10 and 71. 204 See A Duggan, ‘Chattel Paper’ (2013) 41 Australian Business Law Review 214; B Whittaker, ‘Review of the Personal Property Securities Act, Final Report’ (Commonwealth of Australia, 2015) 4.3.3.3.

448 Louise Gullifer When the Canadian PPSAs were used as a model for the reform in Bangladesh, the suitability of including chattel paper in the legislation was specifically considered, and, since the financing practice does not exist in Bangladesh, it was decided to omit it.205 However, when the New Zealand model was used in Brunei Darussalam, the concept of chattel paper was retained,206 despite the fact that there is little evidence that it is a concept used in that jurisdiction, since it does not appear in any other relevant legislation.207

C. Implementation and Operationalisation As pointed out in chapter 5, there needs to be a long timescale for secured transactions reform.208 Legal reform is only a relatively short part of this timescale, and its success will depend, in large part, on the work done beforehand, and afterwards.209 Three phases are suggested in chapter 5, taking, at minimum, 10 years. Phase 1 is the development of the legal and institutional infrastructure. Legal reform comes into this phase, but so does the development of a registry (which needs to be in place before the legal reforms can operate at all). Phase 2 involves building the knowledge of key stakeholders, and changing behaviour of financiers, so that the relevant markets can develop. Phase 3 involves the deepening of these markets, which will include the development of ancillary services, such as collateral managers, valuation experts and effective secondary markets. There is also an earlier, pre-reform, stage, which is also considered in many of the chapters of the book. Given the focus of this book, much of the discussion is of the pre-reform phase and phase 1. It is critical to remember, however, that reform of the law alone is not enough,210 and that implementation, operationalisation and capacity building work is absolutely vital to the success of legal reform. It is also important to remember that even after these three phases are substantially completed, a reformed system needs to be kept under constant review.211 This is partly in order to deal with any problems arising from the specific provisions of the legislation, and partly in order to keep up with commercial and technological developments.212 The funding of such reviews is a difficult problem: review of the operation of the registry can come from the registration fee income, if the market will bear this,213 but other types of review will typically need to be funded by other means, and may, even in wealthy countries, have to take place on a very limited budget.214 This section will consider in more detail two very important aspects of implementation and operationalisation. The first is the involvement of stakeholders in shaping the reformed system and in achieving ‘buy-in’ from the local community. The second is the capacity building work that is required alongside and after the legal reform. There are, of course, other aspects of 205 See ch 16 VI. 206 See Brunei Secured Transactions Order, ss 3(1) and 41. 207 See ch 15 V E, which also contains other examples of idiosyncrasies in the New Zealand Act which have become part of the Brunei legislation, such as the very unusual provision that unregistered security interests are not void on the insolvency of the debtor as against the insolvency officer. 208 Ch 5 III C. 209 For a similar account of what is needed for a successful reform besides legal reform, see ch 14 (Vietnam) I. 210 Ch 5 III C. See also ch 2 IV. 211 For discussion of the need for review, and a comparison of the review procedures in Canada, the United States and Australia, see ch 3 III. 212 Ch 3 V. 213 See ch 3 IV. 214 See, eg the position in Canada in ch 3 III A.

Conclusion 449 operationalisation that are not discussed here, such as the development of a registry215 and of other aspects of credit infrastructure which complement secured transactions reform, such as credit bureaus and insolvency regimes.216

(i) Pre-reform Work: Stakeholder Involvement The importance of involving local stakeholders at all stages of a reform process has been highlighted by writers on legal transplant theory.217 It is also considered best practice by international organisations.218 There are at least two important reasons for this involvement. First, it enables the local conditions, customs and idiosyncrasies which will entail alteration of the basic model used for reform to be identified. Second, it encourages ownership of the reform by the local population. This is vital if the reformed system is to be used widely and operated effectively. There are a number of examples given in the book of engagement with stakeholders, some of which has been positive and assisted reform greatly and some of which has stultified reform. This negative engagement is, however, important as it enables the arguments against reform to be identified and evaluated, and the need for reform to be more accurately assessed. In the Philippines great efforts were made to include local and regional stakeholders.219 Not only were stakeholders from the public and the private sector consulted on whether reform should take place, they were also strongly represented in the Technical Working Group which actually developed the draft legislation. The types of stakeholders involved are extensive. They include public bodies such as the Departments of Finance and Trade and Industry, the Central Bank and the Securities and Exchange Commission, as well as private stakeholders such as banks and other financial institutions, MSMEs, and farmers. Many of these bodies and categories were represented in the Technical Working Group, together with the Small Business Corporation, MSME organisations such as GoNegosyo and KaEntrep, the Bankers’ Association and the Rural Bankers’ Association of the Philippines and the Cooperatives Association. The development of the draft legislation was also discussed with public sector stakeholders and lenders’ organisations in Bangladesh.220 The influence of stakeholders on the content of reformed law is discussed in general terms in chapter 5, where it is commented that trade-offs often have to be made to get the reform passed, resulting in legislation which is not entirely in conformity with international best practice.221 One example that is given is where vested interests prevent the repeal of a previous registration system, which may therefore continue to operate alongside the new reformed system.222 Another example of an aspect of the content of the reformed law which can be influenced by stakeholders is whether non-bank lenders (such as those who use ownership-based security devices such as leases) are included.223 The experience of law reform described in the Pakistan chapter includes other examples of the types of trade-offs discussed in chapter 5. The law was drafted with input from 215 See IV C below. 216 See ch 5 III A; ch 14 (Vietnam) I. 217 See III B above. See, in particular, Berkowitz et al (n 182). See also the analysis in ch 13 (Thailand) VI B (i) of the importance of stakeholder involvement at the pre-adoption stage. 218 See, eg World Bank (n 169) ch 3A. 219 These are described in ch 10 I B and II. 220 See ch 16 IV. 221 Ch 5 III. 222 See ch 5 III B; see also II C (i) (c) above. 223 See ch 5 III B; see also IV A (ii) below.

450 Louise Gullifer stakeholders, including the State Bank of Pakistan.224 In several respects, the draft deviated from the UNCITRAL Legislative Guide (which was the main model used) because of the views and contributions of stakeholders. For example, the scope of the Act was limited by conscious decisions by stakeholders to introduce piecemeal reform to the secured transactions system.225 Another example is that registration in advance of creation of a security interest is not possible under the reformed system. This deviation from the notice filing system (a significant facet of the modern principles) came about because stakeholders were not happy with a system whereby information about a transaction which may not, in the end, take place could be on the public record.226 Further, the Pakistan legislation does not include an override of antiassignment clauses, since the stakeholders felt that this was too much of an encroachment on freedom of contract.227 An example of stakeholder involvement slowing down a reform process comes from the chapter on Thailand, which describes the opposition of the Thai Bankers Association to the Government plan to repeal and reform the Business Security Act, as well as to the inclusion of ownership-based interests and outright assignments of receivables.228

(ii) Capacity Building The critical importance of capacity building to the success of reform of secured transactions law is stressed in a number of the chapters in the book,229 as well as by international organisations.230 Capacity building has various aspects. First, and perhaps foremost, it involves education of the various parties who will interact with the new secured transaction system. It also involves the development of new types of transactions and finance markets. Other markets need to develop as well, including secondary markets for the realisation of value on enforcement of security interests. These aspects will now be discussed in turn. It is likely that the reformed system will be unfamiliar to most of its potential users, both lenders and borrowers. An example of unfamiliarity stultifying implementation of the system and adoption of new lending opportunities is given in the chapter on Indonesia, where the point is made that even twenty years after the introduction of the Fiducia Law 1999, many stakeholders still do not fully understand the law.231 Lenders need to understand the benefits of the new system, and how they can manage credit risk by developing new collateralised transactions, which may well involve a change of attitude.232 They also need to appreciate what they need to do to take advantage of the new system, such as registering their interests, and being aware of the priority rules and the requirements to be fulfilled in extra-judicial enforcement.233 The way in which the IFC has worked with lenders in Vietnam is explored in the relevant chapter in this book.234 Seminars, workshops and courses were run, and, in particular, focused on changing 224 Ch 18 IV. 225 Ch 18 IV A and V. 226 See ch 18 IV D. 227 Ch 18 IV F. 228 Ch 13 V A (i). 229 Ch 2 IV D (i); ch 5 III C; ch 13 (Thailand) VI B (ii); ch 14 (Vietnam) I, IV and V. 230 See World Bank (n 169) ch 5. This chapter gives a full description of the types of public awareness building and training necessary to enable a law reform to operate successfully. See also the UNCITRAL Practice Guide to the Model Law on Secured Transactions at https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/19-10910_e.pdf. 231 Ch 8 III A. 232 Ch 5 III C. 233 Ch 13 (Thailand) VI B (ii). 234 Ch 14 IV.

Conclusion 451 banking culture from reliance on real estate collateral to movable collateral, the development of new types of transactions such as accounts receivable financing, factoring and supply chain financing, inventory financing and financial statement financing, and other techniques such as the monitoring of loans.235 It is also important to educate borrowers, especially MSMEs, about the new system. They need to understand their rights and responsibilities under the new law, as well as their opportunities.236 To take advantage of these opportunities, they not only need to know what collateral needs to be offered, but that they also need to have a good credit record and transparent accounting to be attractive to lenders.237 Again, the Vietnam chapter describes the training provided for MSMEs, which especially focused on how the new law enabled them to use the value of their movable assets as collateral.238 Capacity building among other constituencies is also vital. One particular category identified in the book are judges and those administering the court system. The courts still have an important role in enforcement of security interests in a reformed system, and also in resolving disputes. Often, only a few judges will have specialised knowledge of secured transactions law, so capacity building involves not only training judges in respect of the new law, but building more knowledge of the law relating to secured transactions more generally.239 It is, of course, important that not only judges but all lawyers in a country are familiar with the new law, and several chapters make the point that the way to achieve this is via continuing education through professional associations, and also for law schools and universities to educate the future generations of lawyers and judges.240 As mentioned above, capacity building also includes the development of credit markets and new types of transactions. It also includes the building of secondary markets. This type of initiative is particularly important because, as pointed out in chapter 2, one major impediment to the use of secured credit in a country is the inability to value collateral and the lack of secondary markets in which that value can be realised. It is also pointed out that these secondary markets are unlikely to develop while loans secured by movables are rarely made. It is therefore necessary to build both the market for credit and the secondary markets at the same time as each supports the other.241

IV. Substance of the Law Some substantive legal aspects have been discussed in the previous sections as examples of the general points about attitude to reform and method of reform made there. This section focuses on particular aspects of the modern principles, and examines, in a thematic way, how they are treated in the legal systems considered in the book. The following section then briefly considers how the various legal systems as a whole accord with the modern principles.

235 ibid. See also ch 13 (Thailand) VII F. 236 Ch 5 III C. 237 Ch 13 (Thailand) VI B (ii). 238 Ch 14 IV. 239 See ch 5 IV; ch 13 (Thailand) VI B (ii). In Vietnam, the IFC provided training not only to judges but also to court clerks, who could then facilitate the work of the judiciary: see ch 14 IV. 240 See ch 5 IV, where the need for education in both secured transactions and insolvency law is stressed; ch 13 VI B (ii); ch 14 (Vietnam) IV. 241 See ch 2 IV A (iii) (b) and IV D (i). On the importance of secondary markets, see also ch 5 IV.

452 Louise Gullifer

A. Functional Approach and the Scope of the Law The wide scope of the term ‘secured transactions’ is discussed in chapter 1 of this volume,242 where it is pointed out that it covers all financing transactions in which the creditor is protected by a proprietary interest in an asset, whether by having recourse to that asset in the event of default by the debtor or by virtue of being the absolute owner of that asset. The ‘functional approach’ builds on this definition, as it is an approach whereby the relevant law consists of an integrated and comprehensive set of rules which apply to all ‘secured transactions’. This approach is described in detail in the UNCITRAL Legislative Guide, on which the UNCITRAL Model Law is based.243 The Guide points out that there are two ways of achieving such an approach. One is to retain different names for different security devices which already exist in the legal system, but to provide that the rules applicable to them are common. The second is to abolish the different names and concepts, which are all subsumed into a single uniform notion of a security interest.244 Either route is in accordance with the modern principles,245 but the latter has been followed in most wholesale reforms discussed in this book.246 One exception is the law in Vietnam, which has been extensively reformed and which has a modern registration system, a ‘first to perfect’ basic rule on priority and rules on enforcement, but which retains nine different types of security devices, with separate provisions in the Civil Code governing each security device.247 The functional approach has several aspects, which will be discussed in turn. The first is that discussed above, namely that the same set of rules should apply to all types of consensual devices used to enable a creditor to have recourse to one or more assets if the debtor defaults on the secured obligation. The second is that the same set of rules should apply to these types of devices irrespective of the identity of the creditor or debtor. The third is that the set of rules can also apply to other transactions which do not fall within the first aspect, such as non-consensual interests, outright transfers (usually of receivables) and other types of transactions such as operating leases. Fourth, in theory, the functional approach logically would include devices relating to any type of asset. However, most reformed systems exclude certain assets, for example, land. This aspect will also be discussed in this section.

(i) Coverage of All Consensual Security Devices248 (a) Interests Created by Grant by the Debtor The functional approach presents challenges to civil and common law jurisdictions, some of which are common to both. Jurisdictions in each legal tradition are likely to have a number of different devices by which a debtor grants an interest in its asset to a creditor so that the creditor can have recourse to that asset on default.249 As mentioned above, these devices have all been subsumed into a single concept in the Philippines, Brunei, Pakistan and in the draft legislation 242 See ch 1 III A. 243 UNCITRAL Legislative Guide, ch I, para 110. 244 Different systems have slightly different names for this unitary concept: see ch 1 IV B. 245 See ch 2 II ‘comprehensive coverage of all security devices’ and IV B (i). 246 See, eg the legislation in the Philippines (ch 10), Brunei (ch 15) and Pakistan (ch 18) and the draft legislation in Bangladesh (ch 16). 247 See ch 14 II A (iv). All relevant security interests are registrable in the central system, however: see ch 14 III A (ii). 248 See ch 4 III. 249 See ch 6 (civil law) I B (i), III A and C, citing the charge, chattel mortgage, pledge and non-possessory pledge as examples; ch 15 (common law) IV C (iii), citing the pledge, lien, mortgage (whether legal or equitable) and the charge (whether fixed or floating).

Conclusion 453 in Bangladesh. In India, all non-possessory security interests are now covered by the SARFAESI Act, although pledges (possessory security) remain governed by the Indian Contracts Act 1872.250 In the other jurisdictions discussed in this book, different security devices remain.251 Some of the chapters make the argument for a more unified approach,252 pointing out the difficulties of fragmentation discussed above.253 (b) Interests Created by Retention by the Creditor (Title-Based Devices) Both civil law and common law jurisdictions treat transactions whereby the creditor retains an interest in an asset it owns in order to have recourse to that asset on default differently from interests created by grant.254 These devices are often known as ‘title-based’ devices and are used to finance the acquisition of assets by the debtor.255 The UNCITRAL Legislative Guide suggested two possible approaches to this acquisition financing.256 The first (the ‘unitary approach’) is where title-based devices are subsumed into a class of ‘acquisition security rights’ which includes all title-based and security devices, with no differentiation between the two.257 The second (the ‘nonunitary approach’) is where acquisition security rights are delineated from title-based devices. In the latter devices, ownership remains with the creditor, but the rules produce the same functional outcomes as those for acquisition security rights.258 The inclusion of title-based devices in either of these approaches has several consequences, which are the functional outcomes mentioned in the previous paragraph.259 The first is that they become registrable, with registration being required for effectiveness against third parties. The inclusion of title-based devices in a registration system is justified on the basis of the greater publicity this gives to the creditor’s interest, which can easily be discovered by searching the registry.260 The second is that, on enforcement following default, the debtor is entitled to any surplus value realised by the creditor.261 The third, related to the second, is that this surplus value can be used as collateral to secure an obligation owed to another creditor, who will rank below the title-based creditor in the order of priority.262 250 The SARFAESI Act, however, does not cover every aspect of secured transactions law, nor are security interests created by all creditors or all debtors included. There is also a minimum amount of secured obligation for inclusion within the Act. See ch 17 II and IV A. 251 See II C (ii) (a) above. See, in particular, ch 7 (China) II B; ch 8 (Indonesia) II A; ch 9 (Japan) III A; ch 11 (South Korea) I; ch 12 (Taiwan) II; ch 13 (Thailand) II; ch 14 (Vietnam) II A (iv); ch 17 (India) III B; ch 19 (Singapore) II A (ii). 252 See, in particular, ch 7 (China) IV A; ch 12 (Taiwan) III A and V D (pointing out that one of the benefits of a unified regime is that there is only one set of priority rules applying to all possible security interests in an asset). 253 See II C (ii) above. 254 See ch 6 (civil law) III A and C; ch 15 (common law) IV C (iii). 255 Examples are sales on retention of title terms (including but not limited to instalment sales), hire-purchase agreements and financial leases. 256 See UNCITRAL Legislative Guide, ch I, paras 111–12. 257 See UNCITRAL Legislative Guide, ch I, recommendation 9(a). 258 See UNCITRAL Legislative Guide, ch I, recommendation 9(b). 259 See also ch 15 IV C (iii). 260 See ch 13 (Thailand) III A (i). 261 This feature exists already in Japan and Taiwan despite title-based devices not being otherwise treated as security interests, in that, if the ROT contract is terminated for non-payment by the debtor, and the goods are repossessed by the creditor, any surplus value must be returned: see ch 9 (Japan) III A (ii) (b); ch 12 (Taiwan) II B. In countries where titlebased devices are not treated as security interests (such as Singapore: see ch 19 III), a holder of a security interest who enforces against the asset is obliged to account to the debtor for any surplus value over and above the amount required to extinguish the secured debt. 262 See ch 13 (Thailand) III A (iii). While this consequence is a change to the status quo in some civil law jurisdictions, it is not necessarily so in common law jurisdictions. If the debtor has a contractual right to any surplus value (as is likely: see ch 15 IV C (iii) fn 88), a charge can be granted over this contractual right to a creditor other than the seller or lessor.

454 Louise Gullifer The fourth is that special priority rules are required in order to give the title-based acquisition financier priority over previously registered secured creditors with interests in future assets. This ‘super-priority’ for what are often called ‘purchase money security interests’ is achieved in a system which does not adopt a functional approach by the fact that the title-based acquisition financier remains owner of the assets.263 However, in a system which does adopt the functional approach, the special rules make this type of super-priority conditional on the acquisition financier having taken certain steps, designed to protect the other secured creditors, such as registration of the acquisition security right within a certain number of days of the obtaining of possession of the asset by the debtor and, in the case of inventory, notice being given to any other creditor with an interest in the debtor’s inventory. The Bangladeshi chapter provides an example of these types of rules,264 as does the Vietnam chapter.265 The legislation in Pakistan provides for super-priority for a security interest by way of a retention of title agreement, and therefore does not cover acquisition finance provided by way of secured loan.266 There are also other restrictions, with the result that the super-priority largely applies to car leasing agreements, although it could be extended by notification by the Federal Government.267 The reformed systems of the Philippines, Pakistan (subject to the point in the previous paragraph) and Brunei include title-based devices fully within the systems, as does the draft legislation in Bangladesh. Vietnam also includes these devices within the system, although they are not included into a single definition of ‘security interest’ but separately delineated.268 The SARFAESI Act in India now also includes hire-purchase transactions, financial leases and sales of retention of title terms within the definition of ‘security interest’.269 The position in other countries discussed in this book is more mixed. In China, there is not yet any requirement to register title-based devices, although this is included in a draft of an amended Civil Code published in December 2019. Even under this draft, since title-based devices are included in the ‘contract’ and not the ‘property’ part of the Code, the position as regards priority over other security interests is not clear.270 In practice, some creditors in China have been registering title-based devices in the registry set up for the registration of assignments of receivables, and this has been permitted by the rules of that registry, though not reflected in the statute law.271 In Indonesia, leases are not included in any general secured transactions law, nor are they registrable. In fact, the chapter comments that the enforcement rights of a lessor are, in practice, inferior to those of a secured creditor with a fiducia, and so some lessors attempt to obtain a fiducia security over the leased object.272 In Japan, retention of ownership and leases are important commercially, but are not part of a general system and are not registrable. However, as mentioned earlier, on enforcement the seller or lessor must return any surplus value to the buyer or lessee.273 Therefore, some of the functional outcomes mentioned above exist in Japan. In South Korea, retention of title devices remain outside the scope of Act on Security over Movable Property and Claims.274 263 See ch 15 IV D (ii). 264 See ch 16 V F. 265 See ch 14 II C. 266 This is not in accordance with the modern principles, one of which is ‘general equality of treatment of creditors providing acquisition financing’: see ch 2 II (modern principle x). 267 See ch 18 IV E. 268 See ch 14 II A (iv). See also Vietnamese Civil Code 2015, Pt 3, ch XV, s 3, sub-s 5, which contains provisions on creation, registration and enforcement of retention of title devices. 269 This extension took place in 2016: see ch 17 IV A and V. 270 See ch 7 IV A. 271 See ch 7 III C (ii) (a). 272 See ch 8 III A. 273 See ch 9 III A (ii) (c) and (d). 274 See ch 11 III A (i).

Conclusion 455 The position in Taiwan is particularly interesting. Conditional sales (one form of title-based device) are included within the statute effecting a partial reform of the law, the Personal Property Secured Transactions Act.275 Therefore, conditional sales are registrable, and any surplus must be returned to the debtor on enforcement.276 The question of super-priority does not arise, since a security interest cannot be taken over future property. In any event, the fact that the seller is the owner of the asset would result in super-priority over any interest granted by the buyer. In Thailand, despite the introduction of the Business Security Act, title-based devices are not included within the secured transactions legal system. As pointed out in the Thai chapter, this leads to a lack of publicity for title-based devices, as they are not registrable. It also leads to a possible windfall for the creditor on enforcement, as there is no obligation to account for a surplus, and to the inability of the debtor to use any surplus value in the asset as collateral.277 Despite advice from the World Bank that these devices should be included in the system, this has not yet occurred due to opposition based on the difference in nature of an ownership right and a security right in civil law.278 The Thai chapter includes two proposals to enable this integration to happen which, it is argued, are not inconsistent with this civil law conceptual distinction.279 The difference between an ownership right and a security right is also the reason why titlebased devices in common law jurisdictions do not result in all the consequences set out above (namely, the devices are not registrable and there is no inherent obligation to account for a surplus on enforcement, although a contractual term to this effect may be included in the agreement).280 This is the position in Singapore.281 The Singaporean chapter points out that the distinction between title-based devices and ‘true’ security interests can lead to issues of characterisation.282 As well as the conceptual reason given in some jurisdictions for treating title-based devices differently from security devices, another reason emerges from some of the chapters. This is that the identity of the financiers is different in the two classes of transactions. Security devices are typically used to secure obligations arising from loans made by banks while title-based devices are used by other types of financiers, such as those financing the acquisition of equipment as financial lessors,283 or those selling inventory who are not even in the business of providing finance, but do so because the market requires them to give buyers a credit period. If, for example, secured transactions legislation is designed to target finance provided by banks or other regulated financial institutions, these other types of financiers (and, therefore, the title-based devices they use) may not be included within this legislation.284 A particular example of this is the Pakistan legislation, which does not apply to credit provided by suppliers of goods. This type of credit did not fall within the scope of Federal legislative power in Pakistan, and so a conscious decision was taken not to include it.285 Specific types of financiers who are powerful interest groups can also lobby against inclusion.286 275 See ch 12 II B. 276 ibid. 277 See ch 13 III A. 278 See ch 13 IV. See also ch 6 I B (i). 279 See ch 13 V B and VI A. See also II E (iii) above. 280 See ch 15 IV C (iii). 281 See ch 19 III. Note, however, that a contractual term purporting to cover proceeds or products of the assets sold in a sale on retention of title terms will be treated as creating a security interest. 282 See ch 19 VII C; see also II C (ii) (a) above. 283 See ch 5 III B. 284 This was the position in India initially under the SARFAESI Act: see ch 17 (India) I and IV. Even after the definition of ‘secured creditors’ was extended in 2016, to be a secured creditor a lender has to register with, and be regulated by, the Reserve Bank of India, which is not the case for equipment suppliers. These suppliers now often form separate (regulated) companies for the purposes of financing: see ch 17 (India) V. 285 Ch 18 I and IV A. Supplier credit continues to be governed by the Sale of Goods Act 1930. 286 See ch 5 III B.

456 Louise Gullifer

(ii) Coverage of All Creditors and Debtors The functional approach includes security interests created in favour of all types of creditors by all types of debtors.287 In most of the countries discussed in this book which have introduced secured transactions legislation, the legislation applies to all types of creditors.288 The common law rules in Singapore also apply to all types of creditors.289 However, some legislation defines the types of creditors to which it applies, and therefore has a more limited scope. The Business Security Act in Thailand only applies to secured parties which are financial institutions as defined by the Act, and other entities specified by ministerial regulations, although it appears in practice that the scope is actually very wide.290 As mentioned above, in India, the SARFAESI Act only applies to lenders who fall within the definition of ‘secured creditors’.291 This definition, though now quite broad, is still limited to defined banks, financial institutions and other institutions. The Central Government can, by notification, add to the definition, and it can also extend the range of lenders to whom the registration provisions of the Act apply, even if those lenders do not fall within the definition of ‘secured creditors’ and therefore cannot benefit from the enforcement provisions of the Act. Although, since the 2016 reforms, most of the types of lenders who operate in the credit markets in India are covered by the Act, not all are (including foreign lenders) and, as the India chapter comments, this has become a constraint on the growth of credit.292 The Financial Institutions (Secured Transactions) Act in Pakistan, while a wholesale reform in that it covers all aspects of secured transactions law, only applies to lenders who are financial institutions, as defined in the relevant Ordinance,293 and, as mentioned above, does not apply to suppliers who finance acquisitions of goods.294 In terms of application to all types of debtors, some countries’ legislation is less comprehensive. Of those with wholesale reform, the legislation in the Philippines, Vietnam, Bangladesh and Brunei apply to all types of borrowers. The Financial Institutions (Secured Transactions) Act in Pakistan, however, while it applies as a whole to all types of borrowers, does not provide for the registration of security interests created by companies, which are still registrable in the Companies Registry.295 Of those with partial reform, China, Taiwan, Thailand296 and India have legislation which applies to all borrowers. However, in Japan, the Act which specifically introduces the enterprise mortgage (a security interest that covers all the assets of a business) is limited to a mortgage granted by a company,297 and registration under the Act on Registration is again limited to pledges of goods and services granted by companies.298 The application of the Korean 287 The term ‘debtors’ here includes grantors who are granting security to secure a debt owed by someone else: see ch 1 IV B. 288 Philippines (ch 10) (Personal Property Security Act), China (ch 7) (Real Property Law), Indonesia (ch 8), (Fiducia Law), South Korea (ch 11) (Act on Security over Movable Property and Claims), Taiwan (ch 12) (Personal Property Secured Transactions Act), Vietnam (ch 14) (Civil Code of 2015), Brunei (ch 15) (Secured Transactions Order), Bangladesh (ch 16) (draft Act). By contrast, in Africa, some reforming statutes are limited only to lending by regulated financial institutions: see M Dubovec and L Gullifer, Secured Transactions Law Reform in Africa (Oxford, Hart Publishing, 2019) ch 3 (Ghana) C 1 and s 38 Borrowers and Lenders Act 2008 and ch 9 (Sierra Leone) C 2. See also ch 2 IV B (iv). 289 See ch 19. 290 See ch 13 II C. 291 See SARFAESI Act 2002, s 2(1) (zd) (as amended in 2016) (ch 17 (India) IV A). 292 See ch 17 IV A and VII A (i), where reform of this aspect of the law is suggested. 293 See ch 18 IV A. 294 IV A (i) (b) above. 295 See ch 18 IV D. 296 See ch 13 II C, where it is pointed out that though there are no restrictions on who can be a borrower under the Business Security Act, the Act was intended to apply to business, rather than consumer, credit. 297 Ch 9 III B. 298 Ch 9 VIII B (i).

Conclusion 457 Act on Security over Movable Property and Claims is limited to security rights created by corporate grantors or grantors which are persons whose trade name is registered in accordance with the Commercial Registration Act, so that a natural person without a registered trade name cannot create a security right under the Act.299 The position under the common law is that different regimes apply to security interests created by companies and those created by non-corporate debtors (including consumers). To the extent that they are non-statutory, the regimes overlap, but non-possessory security interests created by companies fall within the registration system provided for by the companies legislation, while non-possessory security interests created by non-corporate debtors are governed by the Bills of Sale Acts, which cover not only registration, but also creation and the scope of permissible collateral.300

(iii) Coverage of Transactions which do not Create Consensual Security Devices Secured transactions legislation often covers some types of transactions which are not consensual security devices, but which raise similar issues, or create interests which are likely to be in competition with security interests. This section considers two consensual transactions, and non-consensual interests. The consensual transactions (the outright transfer of receivables and long term leases) are typically included in secured transactions legislation for several reasons. The first is that it is sometimes difficult to tell whether a transaction creates a security interest or not (the characterisation problem). The second is that it is considered useful for the registry to publicise these sorts of transactions. The fact that these transactions are publicised also means that the priority rules of the secured transactions system (particularly ‘first to file’) can apply to an interest created by such a transaction, which could be over an asset which is also potentially subject to a security interest. This reason also explains the inclusion of non-consensual interests in the system. (a) Outright Assignments of Receivables The free assignability of receivables is one of the modern principles of secured transactions law,301 and the use of receivables by businesses to raise financing, either by using them as collateral or by selling them, is a critical part of access to finance in most jurisdictions. Under both the civil and common law, however, the outright transfer of receivables is viewed as a different concept from the creation of a security interest in receivables, and, at least to some extent, is subject to different rules. An example from the common law is that priority between transferees typically depends on the order in which the account debtor is notified, and there is no requirement to register outright transfers.302 However, legislation reflecting the modern principles will apply to such transfers except for the provisions on enforcement. These provisions are largely excluded as the buyer of the receivables already owns it and does not need to enforce its rights against the seller (the financed party). Out of the countries discussed in this book, the Philippines, Bangladesh and Brunei include outright transfers of receivables within their secured transactions legislation. The legislation in Pakistan includes outright transfers of receivables as well, but, unlike in most other reformed systems, these are not registrable.303 In India, the legislation dealing with factoring (financing by

299 See

ch 11 III A (i). ch 15 II B and IV C (ii); ch 19 (Singapore) II B (ii), II C (ii) and (iii). For reform discussion, see ch 19 VI A. 301 See ch 2 II. 302 See ch 19 III and IV; ch 15 IV C (iii). 303 See ch 18 IV A, where it is pointed out that this is in line with established practice in Pakistan. 300 See

458 Louise Gullifer assignment of receivables)304 is separate from the SARFAESI Act, but complies with the principles of the UN Receivables Convention305 and outright assignments of receivables are registrable in the Central Registry established by the SARFAESI Act.306 In other countries, the position is more fragmented, although some do provide some sort of registration system for transfers of receivables. In China, outright assignments of receivables are now registrable in the same way as pledges of receivables, although this is a recent phenomenon as a matter of law, and followed some years in which the registration rules permitted the registration of assignments with no statutory backing.307 In Japan, an outright assignment can be made effective against third parties by the same methods as a security interest over receivables: by registration or by notice to the debtor. Both methods have equal status.308 While in Thailand, outright assignment are not yet part of the secured transactions legislation, and are still governed by the Civil Code,309 the Thai chapter considers in detail the merits of this move, together with suggestions as to how it is achievable in a civil law system.310 (b) Long-term Operating Leases Less frequently, secured transactions legislation includes long-term operating leases (as opposed to financial leases) within its ambit, for the reasons given above. This is the position in New Zealand, and so the Brunei legislation, which follows the New Zealand model, also includes such leases if they are over one year in length.311 Long-term operating leases are also included in the Philippine legislation312 and the draft Act in Bangladesh.313 In all three cases the enforcement provisions do not apply to long-term leases. (c) Non-consensual Security Interests Some secured transactions legislation also includes non-consensual liens which arise by operation of law. Thus, the Brunei Secured Transactions Order includes such interests,314 as does the Philippines legislation.315 This inclusion enables publicity to be given to such interests by registration, and for the priority rules to apply to them.

(iv) Coverage of Assets which can be the Subject of Security Interests One of the modern principles identified in chapter 2 is that all types of personal property should be available as collateral, including future assets. The past or present limitations on the scope of assets which can be used as security in some of the Asian jurisdictions are discussed generally above.316 304 Factoring Regulation Act 2011. 305 UN Convention on the Assignment of Receivables in International Trade (2001), https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/ctc-assignment-convention-e.pdf. This Convention reflects the modern principles. 306 See ch 17 VI. See s 19 of the Factoring Regulation Act 2011. 307 See ch 7 III C (ii) (b). 308 Ch 9 V B. 309 See ch 13 III B. 310 Ch 13 VI A. 311 See ch 15 II C. 312 Ch 10 III A. 313 See ch 16 V B. 314 See ch 15 II C. 315 See ch 10 III C and D. 316 II C (i) (a).

Conclusion 459 Currently many of the systems considered in this book permit security to be taken over a wide scope of assets, either through legislative reform or through the flexibility of the common law. This section considers the treatment of certain classes of assets which varies between jurisdictions. (a) Future Assets The ability to take security over future assets is a fundamental tenet of the modern principles. It is not surprising, then, that most reformed systems included in this book permit security to be taken over all future assets, either by means of the reforming legislation or because it was already the case under the unreformed law.317 This is the case in the Philippines,318 Vietnam,319 Brunei, Bangladesh,320 India321 and Pakistan.322 Two other jurisdictions considered in this book have included provisions on taking security over future assets in legislation which effects a partial reform. For example, in China, the Real Property Law 2007 permits the creation of a mortgage over the future tangible property of a business.323 It appears that a pledge can also be created over the future receivables which will result from the sale of inventory, but that the mortgage over the inventory and the pledge over the future receivables are registered in different registries, and this lack of transparency could enable fraud to take place.324 In Thailand, the Business Security Act specifically permits future assets to be used as security.325 In Singapore, as in most common law jurisdictions, a charge or equitable mortgage can be created over future assets,326 although, when the grantor is an individual, a security interest cannot be created over future tangible property.327 In other jurisdictions, the law relating to taking security over future assets has developed in a more piecemeal way. Examples of this phenomenon in Japan, South Korea and Indonesia are discussed above.328 In Taiwan, it is still not possible to take security over future assets.329 (b) Receivables The importance to SMEs, in particular, of the ability to use receivables to obtain finance is well established. A small business may have little to offer as collateral in terms of land, or even equipment (which, if it has any, is likely to be leased). It may have inventory, which, when sold, generates receivables, and if the business provides services and not goods, it will have no movable assets except its receivables. It is therefore important that a secured transactions law should provide that receivables can be the subject of a security interest, that they can be easily transferred outright, and that they are freely assignable.330 In most jurisdictions considered in this book, the first two of these requirements are met.331 However, in Taiwan, security over receivables is not included 317 For example, where the unreformed law was the common law: see ch 15 IV B (i) (a). 318 See ch 10 III B. 319 Ch 14 II A (iii) and (iv). 320 These two jurisdictions follow the PPSA approach, which permits security to be taken over future assets. 321 See ch 17 IV A and V. 322 Ch 18 IV B. 323 Ch 7 II B, citing Arts 180 and 181 of the Real Property Law 2007. 324 Ch 7 III D (iv). 325 See ch 13 II C; Business Security Act, s 9. 326 See ch 19 II A (ii); ch 15 IV B (i) (a). 327 See ch 19 II B (ii); Bills of Sale Act (Cap 24, 2011 rev edn), s 5(2). 328 See II C (i) (a). 329 See ch 12 II A and VB. 330 This last point is stated to be one of the modern principles in ch 2 II. 331 See ch 7 (China) III A (i), which points out that the Real Property Law 2007 provided, for the first time, that security could be taken over receivables; ch 8 (Indonesia) III B (iv); ch 9 (Japan) IV B (i) and (ii), although there is still a

460 Louise Gullifer in the Personal Property Secured Transactions Act, and, although a pledge over intangible property can take place under the Civil Code,332 a pledge over future receivables does not seem to be possible.333 The third requirement is not met if receivables can be made unassignable by the inclusion by the account debtor of an anti-assignment clause.334 Systems reformed according to the modern principles usually include a provision overriding such clauses, at least in relation to trade receivables. A provision of this type is included, for example, in the Philippines Personal Property Security Act.335 The draft Bangladeshi Act contains a similar provision. However, a provision overriding anti-assignment clauses was deliberately omitted from the legislation in Pakistan, on the ground of preserving freedom of contract,336 and the Brunei Secured Transactions Order follows the New Zealand Personal Property Act in also omitting such a provision.337 An override of anti-assignment clauses can be introduced as a free-standing reform, separate from any other secured transactions law reform. This has recently been the position in Japan, which introduced such a provision as part of a new law on obligations.338 (c) Proceeds Another of the modern principles is that security interests should extend to the proceeds of collateral.339 Proceeds typically include not only proceeds of sale, but anything received in respect of the collateral, including rental payments, insurance payment and claims for damages for loss. The reasons for the inclusion of this principle are, first, that it protects the interests of the secured creditor if the asset is disposed of,340 second, that it overlaps with the rule in some jurisdictions that a security interest should extend to the fruits of the asset,341 and third that it reflects the commercial expectations of the parties.342 The automatic extension of a security interest to proceeds also assists in the secured financing of circulating assets, that is, inventory and receivables, and enables security over these types of assets to be taken more easily in some jurisdictions. Reforming legislation in the countries discussed in this book usually include this automatic extension to proceeds.343 In other jurisdictions, the position is mixed. In civil law jurisdictions, a requirement that the receivables be identified; ch 10 (Philippines) III A; ch 11 (South Korea) II A (ii), II B (i) (b); III A (i) and D; ch 13 (Thailand) II A (outright transfer of claims covered by the Civil and Commercial Code) and II C (security interests over receivables covered by the Business Security Act); ch 14 (Vietnam) II A (ii); Brunei (ch 15 II C); ch 16 (Bangladesh) V B; ch 17 (India) IV A; ch 18 (Pakistan) IV F, which points out that although both security interests over and absolute assignments of receivables are covered by the Financial Institutions (Secured Transactions) Act, only the former are registrable, and the latter are not subject to the perfection and priority rules of the Act, but are governed by the previous law. 332 See ch 12 (Taiwan) IV B (i) fn 73. 333 Ch 12 II A and VB. 334 See II C (i) (d) above. 335 Philippines PPSA, s 10. 336 See ch 18 (Pakistan) IV F. Anti-assignment clauses are also not overridden in the Indian Factoring legislation: see ch 17 VI. 337 See ch 15 IV C (vi), which points out that freedom of contract was also the reason for such a provision not being included in the NZPPSA. 338 See ch 9 IV B (iii), which discusses the effect of the override in the context of an unreformed law of assignment of receivables. See also ch 2 IV B (vi). 339 See ch 2 II. This principle is exemplified, for example, in the UNCITRAL Model Law, Art 10. 340 UNCITRAL Legislative Guide, ch I, para 17. 341 UNCITRAL Legislative Guide, ch I, paras 16–24. As pointed out in ch 10, when discussing the law in the Philippines before the reform, ‘fruits’ in this context include natural accessions, growing fruits and proceeds of insurance claims (ch 10 III B fn 28). 342 UNCITRAL Legislative Guide, ch II, para 78. 343 See ch 10 (Philippines) IV; Brunei Secured Transactions Order, s 15; draft Bangladesh Secured Transaction (Movable Property) Act, s 41; ch 18 (Pakistan) IV B and E.

Conclusion 461 security interest will generally extend to fruits of the encumbered asset,344 but not necessarily to the proceeds of disposition (although the right to proceeds of a disposition is one the four major attributes of a security interest under the Japanese Civil Code345). Instead, the secured creditor will have the right to follow the asset that has been disposed of into the hands of a transferee.346 However, as discussed in chapter 6, this right is less effective if the encumbered asset is not specifically identified, and the argument is made that if the requirement for specific identification is to be relaxed to allow security to be taken over a pool of assets, the ability to trace into proceeds, widely defined, should also be present.347 In common law jurisdictions, a secured creditor only has a right to the proceeds of a disposition of an encumbered asset if the disposition is unauthorised, or if its security interest covers the asset class into which the proceeds fall (such as receivables or cash in a bank account). In the chapter on India, for example, it is pointed out that a bank lender will typically take a hypothecation over the book debts which will be the proceeds of encumbered movable property.348 Since security can be taken over all the debtor’s assets, or over any number of generically described classes of assets, under the common law, the lack of an automatic right to proceeds is not a major problem. However, in title-based devices where title is reserved, any attempt to protect the creditor by providing for an interest in proceeds (including products) of the asset is likely to be recharacterised as a charge, and will therefore be registrable. Since it is unlikely to be registered, it is likely to be void against secured creditors and on the debtor’s insolvency.349 (d) Land As pointed out in several chapters, many lenders prefer to take security over land (immovable property) to taking it over movable property, and will, in some cases, refuse to lend at all unless land is available as collateral.350 The law relating to security interests in land has, therefore, been well developed in all jurisdictions covered in this book for some time, but, in many countries, the law relating to taking security over movable property has been undeveloped and/or fragmented and complex.351 Reform, therefore, has focused on transactions secured with movable property, both tangible and intangible. This phenomenon is not limited to Asia, and most reformed jurisdictions in the world, together with the internationally developed principles and models, are restricted in this way.352 One particular reason for this approach is that land law generally is seen as a specialist area, usually including an asset-based registration system for ownership rights, which will include a facility for registering security rights over identified land.353 This system is therefore differently orientated from a notice filing system354 and combining the two is likely to

344 See ch 10 (Philippines III B); ch 11 (South Korea) II B (i) (a) and III A (iii) (a). 345 See ch 9 III A (i). 346 See ch 6 describing the ‘ius perseguendi’. 347 Ch 6 III D. 348 See ch 17 V. There is no legislative provision, however, that a security interest extends to the proceeds of disposition of the encumbered asset. 349 See ch 15 IV C (iii) and D (ii); ch 19 (Singapore) III. The priority consequences of changing the common law position to one based on the modern principles are discussed in IV F below. 350 See ch 5 III C; ch 8 (Indonesia) I; ch 9 (Japan) II and VIII A and B(ii); ch 11 (South Korea) I (where the reasons for the preference for land are discussed); ch 14 (Vietnam) I and IV. 351 See II C above. See also ch 7 (China) IV A, where this point is made. 352 Two exceptions are the reforms in Ghana and Sierra Leone, which do include land in their reforming legislation: see Dubovec and Gullifer (n 288) ch 3 (Ghana) C 1 and ch 8 (Sierra Leone) D. 353 See, eg ch 16 (Bangladesh) V A. 354 See ch 7 (China) IV B, where the different functions of the two type of registries are identified and compared.

462 Louise Gullifer be complicated. When defining the scope of a codified secured transactions reform, therefore, security interests over land are usually excluded.355 In some countries discussed in this book, however, certain types of security interest can be created over immovable or movable property. This was the case for the mortgage in Vietnam, and has remained the case in the reformed system, so that the same rules apply to mortgages over all types of property including land.356 The same is true in Japan, where, although there is a particular type of mortgage which applies just to immovable property, many other types of security interest can be granted over immovable or movable property, include ownership-based devices.357 This pattern is also mirrored in South Korea358 and Thailand.359 Moreover, in Thailand the Business Security Act does include some immovable property as eligible collateral, namely, immovable property used in real estate businesses. Unlike many reformed systems, immovable property is expressly included in the SARFAESI Act in India, but only for the purposes of application of the enforcement provisions.360 The India chapter in this book suggests that, were there to be wholesale reform in India, it should include a separate chapter on taking security over immovable property.361 The position in common law jurisdictions, including Singapore, is that mortgages and charges can be taken over land and, if created by a company, are registrable in the company charges registry as well as in the Land Registry.362 Since security over all the assets of a company can be granted under the common law, it is not unusual for a security agreement to include land as well as movable property. The discussion in this section has shown that, while, typically, reforming legislation will exclude security interests over land completely, this is not entirely the case in Asia, and that jurisdictions which have not enacted such legislation tend to treat land as just another class of eligible collateral, albeit one that is subject to special registration, and sometimes other, rules.

B. Creation and Methods of Perfection363 As discussed in chapter 1, a distinction is made in a reformed system between the creation of a security interest (typically effected by the parties entering into a security agreement) and the perfection of that interest. Perfection makes the interest effective against third parties, usually including the insolvency officer of the debtor, while on creation it is only valid between the parties to the agreement. Some systems provide that the interest is not valid between the parties until it has ‘attached’. This reflects the fact that an interest cannot have any effect in relation to a particular asset until the grantor has rights in that asset (for example, becomes its owner).364 The only system considered in this book which takes the ‘attachment’ approach is Bangladesh, under its draft Act.365 355 See ch 10 (Philippines) III A: the scope of the Act is defined as ‘all transactions of any form that secure an obligation with movable collateral’ (emphasis added); ch 16 (Bangladesh) V A: the draft Act is again limited to ‘movable property’; ch 18 (Pakistan) IV A: ‘immovable property’ excluded; Brunei Secured Transactions Order, s 2(2) (a). See also ch 11 (South Korea) III A (i): the Act over Movable Property and Claims is, as its name suggests, limited to movable property. 356 See ch 14 II A (iii). 357 See ch 9 III A, Table 1. 358 See ch 11 I, II B (i) and IV, noting that the registration rules for security over movable property mirror those for security over immovable property. 359 See ch 13 II A and B. 360 See ch 17 II, IV C and D. 361 See ch 17 VII B. 362 See ch 19 II C (iii). 363 See ch 4 IV and V. 364 See ch 1 IV B. 365 See ch 16 V D.

Conclusion 463 There is, however, variation between the jurisdictions covered in the book in relation to the requirements needed to create a security interest, and also between the perfection requirements. Formal requirements are often imposed for the creation of a security interest.366 Usually, reforming legislation will only require that a security agreement containing certain limited information367 be made in writing, and even this is not required if the secured creditor takes possession of the collateral.368 The Philippines,369 Pakistan370 and Bangladesh (in its draft Act) require a security agreement to be in writing, and, require this even if possession is taken by the secured creditor: this seems to be to minimise the risk of disputes.371 The SARFAESI Act in India does not prescribe any particular means of creation of a security interest, and this is governed by the pre-existing general principles of law relating to contracts and the transfer of property.372 In China, a mortgage over movable tangible property under the Real Property Law is created once the contract is established.373 Some jurisdictions require particular formalities, over and above writing, for the creation of a security interest, such as a deed and/or notarisation,374 and some actually require registration.375 On the other hand, in Japan, writing is not required, so long as the security agreement is certain enough to be an enforceable contract.376 Again, under the common law, a charge can be created by agreement without writing, although a Bill of Sale created by an individual must be in writing and comply with certain formal requirements.377 Under reforming legislation, and in accordance with the modern principles,378 security interests can usually be made effective against third parties by registration, or by the taking of possession (for tangible assets)379 or, for certain types of assets, by taking control.380 This is the position under the Philippines PPSA,381 the Brunei Secured Transactions Order382 and the draft Bangladeshi Act.383 In Pakistan, a security interest can be perfected by registration384 but cannot be perfected by

366 See II C (i) (b) above; see also the discussion at ch 6 IV B on the reasons for formalities. 367 Typically, identification of the secured creditor and grantor, the secured obligation and the encumbered assets: see UNCITRAL Model Law, Art 6(3). 368 UNCITRAL Model Law, Art 6(4). 369 See ch 10 III B. 370 See the definition of ‘security agreement’ in the Pakistan Financial Institutions (Secured Transactions) Act, s 2(a) (xlvii). 371 See ch 16 V D. The UNCITRAL Model Law does not require a written agreement if possession is taken by the creditor: see Art 6(4). 372 See ch 17 II. 373 See ch 7 III B. See also the position in Taiwan, where a security interest under the Personal Property Secured Transactions Act can be created by a written agreement (Personal Property Secured Transactions Act (PPSTA), s 5) although the Act prescribes information which must be included in the agreement creating a mortgage lien: see ch 12 (Taiwan) II A. 374 See, eg ch 8 (Indonesia) II A, Table 1, which shows that all security interests in Indonesia are required to be created by deed, and most are required to be notarised. 375 See, eg the position in China in relation to pledges of intangibles, which are only created when they are registered: see ch 7 (China) III B. In South Korea, a security interest under the Act on Security over Movable Property and Claims is not created until it is registered: see ch 11 III C (ii). This is also the position under the Business Security Act in Thailand (see ch 13 II C). 376 See ch 9 IV, although note that joto-tanpo for goods is often effected by notarised deed, since this aids enforcement (IV A (i) and VI D). 377 See ch 19 (Singapore) II B (ii); ch 15 IV B (i) (b). 378 See ch 2 II. The point of requiring registration or possession is to provide publicity of the security interest. 379 See UNCITRAL Model Law, Art 18. 380 See, eg UNCITRAL Model Law, Art 25 in relation to funds credited to a bank account. 381 See ch 10 III C. 382 See s 12. 383 See ch 16 V E. 384 For interests created by companies, this is in the Companies Registry and for interests created by others, this is in the Secured Transactions Registry.

464 Louise Gullifer possession.385 Registration, and, where relevant, possession, is also the means of perfection, for the interests covered, under the relevant legislation in China,386 Thailand,387 Vietnam,388 India389 and Singapore.390 In some jurisdictions, where a creditor takes a security interest in, or an outright assignment of, a receivable, it is necessary to give notice to the debtor owing that receivable for the creditor’s interest to be effective against third parties, including that debtor. The requirement for such notice can either be in addition to a registration requirement, as in Indonesia,391 or as an alternative, as in Japan.392 Registration of an outright assignment of (as opposed to a security interest in) a receivable is not required under the common law for effectiveness against third parties.393

C. Registration394 (i) A Centralised Register The registration systems set up in the jurisdictions considered in this book vary considerably. One important practical development is for a registration system to be fully electronic, which is the position in nearly all of the jurisdictions.395 International best practice also recommends that there is a centralised register for all secured transactions of whatever type, including all types of debtor, and wherever in the jurisdiction the debtor is situated.396 While some jurisdictions do achieve this state of affairs,397 in others the registration system is more fragmented.398 An example

385 This is for local reasons, as there was a concern that agents were using constructive possession to create multiple pledges for non-corporate borrowers: see ch 18 IV C. 386 See ch 7 III C. 387 See ch 13 II C. 388 See ch 14 II B. 389 See ch 17 IV B. Pledges are not covered by the SARFAESI Act: see ch 17 III A. 390 See ch 19 II C. 391 See ch 8 III D (v). 392 See ch 9 V A and B. If the security interest or assignment is registered, notice to the account debtor is still required for it to be effective against that person. The position in South Korea is similar: see ch 11 III D (i). Both chapters discuss the difficulties that these perfection rules cause for priority disputes. For a critique of a system which introduces registration but leaves notice as an alternative method of perfection, see ch 2 IV B (ii). 393 See ch 15 IV C (iii); ch 19 III. A general assignment of book debts by a non-corporate assignor is registrable. 394 See ch 4 VI. 395 An electronic system has been set up in Indonesia, but the previous manual system still needs to be integrated with it: see ch 8 III D (iv) (b). 396 This point is reflected in question 6 of the Getting Credit index of the WBG Doing Business report: see ch 1 III C (ii); ch 12 III A. 397 See ch 10 (Philippines) III C; ch 14 (Vietnam) III; ch 17 (India) IV B and V (although, as pointed out above, the coverage of the SARFAESI Act is not entirely comprehensive). The draft Act in Bangladesh involves the setting up of a central registry with a single administrative body to manage it: see ch 16 (Bangladesh) V C and V G. 398 See II C (i) (c) and II C (ii) (a) and (b) above, which give examples of this fragmentation. See also ch 7 (China) C, which discusses the different registration systems for mortgages of tangible personal property and pledges of account receivables, as well as the fact that the registry for the latter has been used widely for other transactions as well. Japan’s registration system is optional and co-exists with other perfection methods (fictitious delivery for goods and notice to the account debtor for receivables), and also only is effective for corporate creditors (ch 9 V B). South Korea has a centralised registration system established under the Act on Security over Movable Property and Claims (see ch 11 III B) but there are many ways of taking security which do not require registration, and the Act is not as widely used as was expected (ch 11 III). Thailand also has an efficient registry set up by the Business Security Act, but, as pointed out in ch 13, titlebased devices are not included in the scheme, nor are outright transfers for receivables (ch 13 III A (i) and III B (ii)), and mortgages over certain types of assets are registrable in other registries (ch 13 II A). See also ch 13 VII for discussion of possible reform.

Conclusion 465 of a reformed system which still has a fragmented registration system is Pakistan. The Financial Institutions (Secured Transactions) Act adopts a functional approach and includes security interests granted by any type of party. However, security interests created by companies399 are still to be registered with the Companies Registrar, while those created by ‘entities’ (individuals and other unincorporated organisations) are registrable in the new Secured Transactions Registry.400 The same divide applies in the common law system in Singapore, although in relation to security interests created by non-corporate borrowers only those over tangible property are registrable, and, unlike in Pakistan, not all interests with the function of security are registrable.401 There are also countries which have reasonably modern online registrations systems, but which have not reformed their law sufficiently for those registration systems to be fully effective in accordance with the modern principles. Taiwan is one example: it has an online registration system for all the types of secured transactions covered by its Personal Property Secured Transactions Act,402 but the scope of the Act itself is limited, so that, in particular, there cannot be a security right over future assets or over all the assets of the grantor. Another example is Indonesia, which has an online centralised registration system for fiducia, but which does not apply to other security rights.403

(ii) Notice Filing v Document Filing The point of a registration system is to publicise security interests. However, as pointed out in chapter 6, there can be different views as to the most effective method of giving publicity. A notice filing system, whereby minimal information is placed on the register, and where a security interest can be registered in advance of its creation, is quick, cheap and keeps most information confidential.404 However, under such a system, a searcher needs to make further enquiries of the secured creditor to discover the details of the security interest, including whether it actually exists. In a document filing system a security interest cannot be registered until after it is created, more details are placed on the register and, in some systems, those details are checked by the registry against the actual security agreement. This, it is pointed out, provides more certainty as the registry acts as a trust provider, but there is likely to be a period of invisibility between the creation of the interest and the actual appearance of the details on the register.405 There is not a clear division between notice filing and document filing systems. Instead there is a spectrum, ranging from systems where minimal information is registered at any time with no human intervention or checking at all, to systems where significant documentation is filed and checked before if appears on the register. Of the wholly reformed systems discussed in this book, the Philippines has a ‘pure’ notice filing system, in which a notice can be registered in advance of creation of a security interest,406 it can cover any number of security interests created by the debtor in favour of the creditor407 and is registered and effective without any checking 399 These are limited to mortgages, charges and pledges, so it seems that title-based devices created by companies are not registrable. 400 See ch 18 IV D. 401 See ch 19 II C (ii) and (iii). 402 Registration still has to be done through different offices (although can be online), but searching can be done nationally and online: see ch 12 IV A (i). 403 See ch 8 II A and III B. 404 See UNCITRAL Registry Guide, Introduction D 9 (paras 55–63). 405 For further discussion of the arguments for and against these models, and of possible midway solutions, particularly using new technology, see ch 6 IV D. See also ch 11 (South Korea) IV; ch 12 (Taiwan) V E. 406 Ch 10 III D (this does not apply to non-consensual liens). 407 See Philippines PPSA, s 29.

466 Louise Gullifer unless it is so inaccurate that it is seriously misleading.408 Vietnam has a similar system,409 as does Brunei,410 and the draft Act in Bangladesh.411 However, in Pakistan, registration in the Companies Registry412 mirrors that in other common law jurisdictions, such as Singapore, in that particulars must be registered within a certain period of time (30 days) after the creation of the interest. In Pakistan, though not in Singapore,413 a copy of the security instrument must be provided to the registrar along with the particulars, which seems to indicate that the registrar will check the particulars against the instrument.414 Registration in advance of the creation of the security interest is also not possible in the Secured Transactions Registry in Pakistan. Instead, a notice (without the security document) must be filed after the interest is created.415 The two registration systems in China, which are operated by different institutions, are at almost opposite ends of the spectrum.416 In relation to mortgages over personal property, a registrant must submit detailed information and documentation to the SAMR,417 which is reviewed by the registrar before registration, while in relation to pledges of accounts receivables, only minimal information needs to be submitted online to the CRC,418 and there is no checking for inaccurate information.419 There has recently been some reform as to the information required by the SAMR,420 and there is currently a debate about how to unify the two systems, probably on the lines of a notice filing system.421 A similar debate led to reform of the system in Taiwan, where, in 2015, the rules were reformed to change the registrar’s review of the documents filed from a merit review to one of form (that is, checking that the right documents have been filed).422 In some civil law countries, other steps are taken to attempt to ensure accuracy of registered information. One possible step is, where a notary is required to execute the security document (or where one is typically used), for that notary also to register the interest. Until recently it was compulsory in Indonesia for registration of a fiducia to be done by a notary. This has now been reformed, but, in practice, most registration is still carried out by notaries.423 In Japan, judicial scriveners often carry out registrations, partly because the process is so complicated.424 Another requirement often found in civil law countries is that registration must be carried out by both creditor and debtor jointly. This is the case in Japan425 and South Korea,426 and was the case in Taiwan until the 2015 reform.427 While a joint registration does not necessarily ensure that the kind of scrutiny that would be done by a registrar, or notary, takes place, it could reduce the 408 See Philippines PPSA, s 30. 409 See ch 14 II B, where it is confirmed that the modern Vietnamese system is fully compliant with the UNCITRAL Registry Guide. 410 See ch 15 IV C (iv). 411 See ch 16 V G. 412 For security interests created by companies. 413 See ch 19 II C (v). 414 This used to be the practice in the UK, before the reforms in 2013: see ch 15 V C (iv). 415 See ch 18 IV D; see also III C (i) above. 416 See also the position in Thailand, where registration under the Civil Code requires submission of documents and checking by the registrar, while registration under the Business Security Act does not require the security agreement to be submitted and the registrar is not responsible for accuracy: see ch 13 II A and C. 417 State Administration of Market Regulation. 418 Credit Reference Centre. 419 See ch 7 III C. 420 See ch 7 III C (i). 421 See ch 7 IV B. 422 See ch 12 V E (ii) for a discussion of the debate and IV A (iii) for a description of the reform. See also ch 11 IV for a discussion of the reform debate in South Korea. 423 See ch 8 III D (i), (ii) and (iv) (b). 424 See ch 9 V B and VI A. 425 See ch 9 V B. 426 See ch 11 III B. 427 See ch 12 IV A (iii).

Conclusion 467 chance of an error, and certainly reduces any question of deliberately wrong statements by the creditor.428

(iii) Searching One of the chief benefits of a centralised online registry is that a prospective creditor can search cheaply and easily to see if there are any registered interests in the collateral in which they are interested. This enables the creditor to make a decision quickly whether to lend to the debtor.429 In a notice filing system, the creditor should then search again immediately before the loan is made (to make sure there are no intervening registrations), and then immediately after it registers, to ensure that its registration has become effective.430 The ease of searching under a registration system is therefore very important, as is the accuracy of the search. If, under a system there can be a period of time between creation of an interest and registration,431 and the priority rules are based on date of creation rather than date of registration,432 then a search cannot be relied upon. Searching is clearly easiest if done online, and the systems in many of the jurisdictions considered in this book have reformed the system to achieve this result.433 This type of infrastructure development is a critical part of the reform process and is often achieved with the help of international organisations.434 Searching in the context of general financing (as opposed to specialist asset based financing, such as the financing of aircraft) is most efficient if it can be done using the name or other indicator of the debtor, rather than having to identify the relevant collateral which, if the interest is over a generic class of assets, would be impossible.435 However, sometimes a registry will also permit registration of a serial number of a specific asset, and this can be used as an additional search criterion.436 Given the importance of searching, it should also be cheap, which is more likely if it is able to be done online.437 However, the actual level of fees charged can involve the balancing of policy issues, since revenue needs to be generated to cover the costs of running the registry.438

D. Priority Issues439 (i) The Basic Rule Under the modern principles, priority rules should be clear and predictable.440 Where there is a central registration system, priority between secured creditors can most effectively be based 428 Where a system permits notice filing in advance of creation of the security interest, it is necessary for the debtor to consent to the filing, to prevent the creditor filing when no transaction is actually likely to happen: see UNCITRAL Registry Provisions, Art 2(1). 429 See ch 10 (Philippines) III C; ch 7 (China) IV B. 430 See UNCITRAL Practice Guide, II C (ii). 431 Either because registration is a lengthy process (see ch 14 (Vietnam) III A (i)) or because registration can take place any time within a specified time period after the time of creation (see ch 19 (Singapore) VII B). 432 See IV D below. 433 See, eg ch 14 (Vietnam) III A, which describes the problems with the old system and the operation and advantages of the new. 434 See ch 5; ch 14 (Vietnam) III A (ii) (the IFC assisted in the development of the fully electronic register). 435 See ch 16 (Bangladesh) V G. 436 This is the case in the draft Act in Bangladesh, and also in Pakistan (see ch 18 IV D). 437 See ch 14 (Vietnam) III A (i). 438 See ch 5 III C. 439 See ch 4 VIII. 440 See ch 2 II. On the need for a unified system of priority rules, see also ch 14 (Vietnam) II C; ch 12 (Taiwan) V D.

468 Louise Gullifer on the order of registration, as opposed to the date of creation or any other rule. This is, first, because it enables a person searching to rely on the fact that, if there are no registered interests when it takes its own interest, it will have priority, and, second, so that a secured creditor can ensure priority by being the first to register. Although the rule can be justified by the fact that the later registered secured creditor has notice of an earlier registered interest, it operates without consideration of actual or constructive notice. This removes the uncertainty arising from the application of these concepts to the facts of a case (which may well have been the case under unreformed priority rules) and therefore enables priority disputes to be decided quickly and easily.441 This simple priority rule is facilitated if registration in advance of creation of an interest is permitted.442 If other methods of perfection (such as the taking of possession) are also permitted within the system, the ‘first to register’ rule has to be modified to ‘first to register or to perfect by other means’.443 This is the basic rule in the Philippines,444 Vietnam445 and the draft Act in Bangladesh,446 as well as in Pakistan, although the rule is modified to ‘first to perfect’.447 In India, the SARFAESI Act has been reformed recently to introduce a rule that a registered security interest has priority over a later registered or unregistered one.448 The basic ‘first to register or to perfect by other means’ rule also generally applies in countries which are not wholly reformed, so that means of perfection other than registration exist and are governed by separate laws from the registration system. Thus, a priority conflict in China between a creditor taking a pledge over an asset and another creditor taking a mortgage over the same asset would be resolved according to this rule,449 as would a conflict in Japan or South Korea between a creditor taking a security interest over a receivable who registered its interest and a subsequent assignee who notified the account debtor.450 However, where registration as a method of perfection co-exists with a more ‘secret’ method (such as notification of an assignee of a receivable), a potential secured creditor who searched the register could be misled, and take a security interest thinking it had priority when it did not.451 A potential secured creditor would then have to make two sets of enquiries (of the register and of the account debtor). Similarly, in China, a mortgage over inventory is registrable in a different registry from a pledge over receivables. Given that the value in inventory becomes value in receivables when the inventory is sold, a potential creditor trying to discover how much of the potential debtor’s wealth is encumbered is likely to be misled, since the link between the inventory and the receivables is not readily discoverable.452 Under the common law, however, registration is not a priority point except for interests registered in the Bills of Sale register. Instead, the basic rule is ‘first in time’, which is then subject to a 441 For example, the draft Act in Bangladesh discards the concept of constructive notice which had previously been relevant to determining priority: see ch 16 (Bangladesh) VIII. In India, despite that fact the amended SARFAESI Act provides that registration is deemed to constitute a public notice of the registered interest (s 26C(1)), the priority rule is not expressed in those terms (s 26C(2)): see ch 17 (India) IV F. 442 See ch 10 (Philippines) III D. 443 See UNCITRAL Model Law, Art 29. The rule is phrased in this way as registration can precede perfection, as it can take place in advance of the creation of the security interest. 444 See ch 10 III D. 445 See ch 14 II C. 446 See ch 16 V F. 447 See ch 18 IV E. The modification is because it is not possible to register in advance of creation of a security interest under the Pakistan system. 448 See ch 17 IV F. 449 See ch 7 III D (iii). 450 See ch 9 (Japan) V B; ch 11 (South Korea) III D (ii). 451 See ch 2 IV B (ii). 452 See ch 7 (China) III D (iv).

Conclusion 469 number of exceptions. The position is complex,453 but, at least as between registered interests, any difference in practice from a ‘first to register’ rule may not be considerable.454

(ii) Additional Rules: Treatment of Buyers In any system, the basic rule will be supplemented by additional rules to deal with security interests over particular assets, or particular types of transactions. One example is the super-priority of acquisition security interests, which is discussed above.455 Another is the treatment of a person who obtains an absolute interest in an encumbered asset, such as a buyer. Many systems, reformed or not, enable a good faith buyer of goods in the ordinary course of business to take free from any security interest over those goods: this facilitates a security interest to be granted over inventory. This rule usually applies even if the security interest is registered, since an ordinary course buyer would not be expected to check the register. For example, in Indonesia, a buyer of inventory takes free provided that it pays the market price in full.456 In a common law system, a buyer would acquire a legal interest free from any equitable interest of which it did not have notice, and registration of an equitable security interest would not constitute constructive notice.457 Furthermore, most security interests over inventory would be floating charges, with the effect that the grantor is permitted to dispose of the encumbered assets free from the floating charge.458 A similar phenomenon exists in Japan, where the Supreme Court has held that the grantor of a joto-tanpo over inventory has the right to dispose of the inventory free from the joto-tanpo.459 Japan also has a taking free rule protecting a buyer not in the ordinary course of business, providing that buyer is in good faith. A buyer will usually be in good faith even if the relevant interest is registered, since the buyer is not expected to check the register.460 In a reformed system, rather than a requirement that the buyer be in good faith, the application of the taking free rule will typically be limited to where the buyer did not have knowledge that the sale was in breach of the creditor’s security agreement.461 This is the position under the legislation in Pakistan.462 However, other reformed systems discussed in this book have slightly different rules. In Vietnam, any buyer in the ordinary course of business takes free.463 The Indian legislation is in the same terms.464 Under the Philippines PPSA, however, if the security interest has been registered before the purchase, the buyer takes subject to it, as he is will be deemed not to be in good faith.465 This provision is surprising, since, as mentioned above, ordinary course buyers are not normally expected to check the register.

453 See ch 19 (Singapore) IV and VII B. 454 Ch 15 IVC (v). A particular complexity arises in relation to priority between fixed and floating charges in Singapore (see ch 19 VII B), which would not now be the case under English law (see ch 15 IV C (v) fn 98). 455 See IV A (i) (b). 456 See ch 8 III B (iii). 457 See ch 19 (Singapore) IV. 458 See ch 15 IV D (i). 459 See ch 9 IV A (ii). 460 See ch 9 V C. It is thought possible that some transferees, eg a financial institution, might be expected to check the register. 461 See UNCITRAL Model Law, Art 34(3). 462 See ch 18 IV E. The Bangladesh draft Act is in the same terms: see s 44. 463 See ch 14 II C; Decree 163, Art 20(3). 464 Ch 17 IV F. 465 See ch 10 III D.

470 Louise Gullifer

E. Enforcement466 For a secured transactions system to operate effectively, it is essential that secured creditors can obtain the value from the collateral on default.467 From the creditor’s point of view, enforcement should be cheap468 and quick.469 However, there also needs to be protection for the debtor built into the system, as well as protection for junior creditors if the senior creditor enforces.470 This is particularly important if enforcement takes place without court involvement: the ability for creditors to do this is an important part of the modern principles.471 The protection is needed to ensure that a creditor does not enforce when it is not entitled to, that it obtains a reasonable amount of value from the asset, and that the value over and above what is needed for the creditor to reimburse itself in respect of the secured obligation is returned to the debtor or to the junior secured creditors.472 The methods of enforcement available in the countries considered in this book vary considerably, and not all chapters discuss the modes of enforcement in detail. Rather than a granular comparison, this section draws out some particular themes. The first is the involvement of the court. Court involvement can take a number of forms, including a court-supervised auction. ‘Extra-judicial enforcement’ here means enforcement without any court supervision, except on application by a party alleging breach of a duty during the enforcement process. Extra-judicial enforcement is available for all forms of enforcement in most reformed jurisdictions discussed in this book,473 although in Pakistan it is only available for certain types of security interests, because of local controversy.474 It is also available in Singapore,475 as is common in a common law system.476 More limited extra-judicial enforcement is available in other countries considered in this book. In Japan, enforcement under the Civil Code is through the court, unless the parties agree otherwise after default (or, in the case of commercial parties, before default), while joto-tanpo is enforced extra-judicially.477 The position in South Korea is similar in relation to security interests under the Civil Code and Yangdodambo.478 However, the Act on Security over Movable Property and Claims includes extensive provisions on out of court enforcement.479 Similar provisions are included in the Thai Business Security Act480 and the Taiwanese Personal Property Secured Transactions Act.481 In contrast, in Indonesia, a creditor’s ability to enforce out of court has been severely limited 466 See ch 4 IX. 467 See II C (i) (e) above. 468 To avoid the recovered value being swallowed up in costs. 469 This is particularly important in relation to movable assets, which can lose value fast: see ch 10 (Philippines) III E. 470 For a discussion of the balance between fairness and efficiency, see ch 6 V A. 471 See ch 2 II; ch 14 (Vietnam) II D. 472 See ch 2 IV B (vii), pointing out that this last aspect is not always present when title-based devices are enforced. See also IV A (i) (b) above. An obligation to return surplus value arises in all the jurisdictions considered in relation to security interests, and is also present in some jurisdictions in relation to title-based devices: see ch 9 (Japan) III A (ii) (b) (retention of title devices) and VII (joto-tanpo); ch 12 (Taiwan) II B. 473 See ch 10 (Philippines) III E; ch 14 Vietnam II D (although out-of-court enforcement is not always effective and the chapter calls for expedited judicial enforcement to be included in the legislation); ch 16 (Bangladesh) V H; ch 17 (India) IV C. 474 See ch 18 V G. 475 See ch 19 V. 476 See ch 15 IV B (ii). 477 See ch 9 VII. 478 See ch 11 II A (i) (c) and II B (iii). A pledge of rights under the Civil Code can be enforced without court involvement (ch 11 II A (ii) (c)). 479 See ch 11 III C (iv) (b). 480 See ch 13 II C. 481 See ch 12 II A and V D.

Conclusion 471 by a recent Constitutional Court decision requiring the debtor’s agreement to this type of enforcement.482 Another is the need for the enforcement process to generate a reasonable amount of value from the asset. While it is not realistic to expect such a process to obtain the highest amount of value possible, if an unreasonably low amount is generated, this damages the debtor and junior secured creditors.483 One technique, used in modern secured transactions law, is to impose an obligation of commercial reasonableness on the enforcing creditor.484 Another is that notice must be given of the intended realisation (by sale or other means of disposal) to the debtor and other interested parties, so that objection can be made and the realisation can be monitored.485 A third technique is for the collateral to be sold at public auction, which, typically, will require compliance with detailed and complex rules,486 and which may entail court supervision. Because of this, many systems provide for the alternative of a private sale, but using the first two techniques mentioned above in order to protect the debtor and other secured creditors. However, at least in some jurisdictions, creditors are wary of using private sales, at least without the agreement of the debtor, since debtors may afterwards complain that insufficient value was realised.487 Realisation of value through sale can be much facilitated by the development of secondary markets,488 which can now be greatly enhanced by the use of technology.489

F. Interaction with Insolvency Law As mentioned earlier, it is very important that a secured transactions law dovetails well with insolvency legislation, and that security interests are enforceable upon the debtor’s insolvency, which is usually when default occurs and enforcement is critical. This section will merely highlight one specific point, namely, that in some jurisdictions some unsecured creditors have priority over some or all security interests on the debtor’s insolvency. The types of unsecured creditors that typically have priority over security interests are the Government (in relation to taxes, duties etc.) and employees (including, sometimes, pension fund contributions). The priority is usually provided for by statute, but the position can be complex. This lack of clarity is commented on in the chapter on Indonesia490 and that on Vietnam.491 In common law jurisdictions, preferential creditors such as employees have priority (on the debtor’s insolvency) over assets subject to a floating charge, but not a fixed charge.492 This has caused 482 See ch 8 (Indonesia) III E (viii). 483 See the discussion in ch 8 (Indonesia) III E. 484 See UNCITRAL Model Law, Art 4. See also ch 10 (Philippines) IIIE, where the practical application of ‘commercial reasonableness’ is discussed; ch 17 (India) V (the obligation of a creditor to act commercial reasonably was confirmed by the Supreme Court). 485 See, eg ch 10 (Philippines) IIIE; ch 16 (Bangladesh) V H; ch 17 (India) IV C (notice required for a private sale). See also ch 11 (South Korea) III C (iv) (b), where consent of the debtor and other secured creditors is required for a private enforcement. 486 See ch 10 (Philippines) III E and IV, which describes the previous complex procedure for public auction and makes the point that a private sale improves the chances of a speedy realisation of value, thus avoiding the diminution of the value of movable property which comes from delay. See also the description of the procedure in ch 8 (Indonesia) III E (iii); ch 11 (South Korea) III C (iv) (a). 487 See ch 8 (Indonesia) III E (v). 488 See ch 5 III C. 489 See ch 6 V B (iii). See also ch 6 V B (ii), which discussed the use of technology more generally to help find the balance between fairness and efficiency in enforcement. 490 See ch 8 II B, where the uncertainty appears to have been caused by employee preference being determined by a court decision. 491 See ch 14 II C. 492 See ch 19 (Singapore) IV.

472 Louise Gullifer considerable jurisprudence to develop concerning the difference between a fixed and a floating charge,493 and potential difficulties were this distinction to be abolished as part of a wholesale reform based on the functional approach.494 Pakistan has avoided this problem by retaining the concept of the floating charge,495 while other reformed common law jurisdictions have specific provisions about the priority of security interests vis a vis preferential creditors. In Bangladesh, proposed amendments result in secured creditors ranking below tax and employee claims496 while in India the SARFAESI Act has been amended to give priority to secured creditors over Government claims, such as tax claims.497 Moreover, in the Philippines the Civil Code provision giving priority to Government claims over security interests was repealed by the Personal Property Security Act.498 In Brunei, unregistered security interests are not void on insolvency, which has the effect that a creditor with such an interest can enforce against the encumbered asset even if the debtor is insolvent if there are no competing proprietary claims over that asset with priority over that creditor.499

V. Conclusion As this conclusion shows, this book has two main interconnected themes. The first is to reflect on the process of secured transactions law reform, from the reasons and attitudes to reform, to the method of actual reform and the other developments, both legal and otherwise, which need to surround a successful reform. These reflections have been informed by the experience of reform in Asia, and by discussion of more general themes affecting reform. The second is the analysis and evaluation of secured transactions law in a number of Asian countries, contained in the countryspecific chapters and in this conclusion. The prism through which this analysis and evaluation has been effected is the modern principles of secured transactions law, as identified and discussed in chapter 2.500 This section will sum up these evaluations in general terms, so as to give a picture, although necessarily incomplete and only at one point in time, of secured transactions law in the thirteen Asian countries considered in this book. The modern principles are taken as a general benchmark. The countries will be taken in the order of the chapters in the book, rather than in any thematic order. China passed the Real Property Law in 2007 but this is only a partial reform, since many types of secured transactions are not covered by its rules. The result is that the system is fragmented, with three main types of security interest that can be taken over personal property (mortgage, floating charge and pledge) with different rules of perfection, and priority rules.501 Title-based

493 See ch 19 (Singapore) II C (iv). 494 See ch 15 V D. 495 See ch 18 IV E and I. See also III A (i) (b) above. This approach of the Pakistan law is currently under review: see ch 18 V. 496 Ch 16 VII. 497 Ch 17 IV F and VII A (ii). See also ch 17 VIII in relation to the interaction between enforcement of security interests and insolvency law. 498 See ch 10 III E. 499 See ch 15 V E. 500 Ch 2 II. 501 Ch 7 III C and D. However, the application of the rules seems to be ‘first to register or perfect’, and this is likely to be reflected in the new Civil Code: see ch 7 IV A.

Conclusion 473 devices are not yet included, although some partial reform is likely to come in the contract law section of the new Civil Code.502 Most types of personal property (including future property) can be taken as collateral, but since the numerus clausus principle still applies, it is not clear whether this applies to new types of property.503 There are two main registration systems, one of which is more functional than the other, but the chapter argues strongly for a unified and fully electronic system.504 Indonesia also does not have a unified system, although the fiducia can be used to take nonpossessory security over most types of personal property, including future property. Title-based devices, such as leases and other retention of title devices, are not included in the system, and their enforcement is significantly less effective than that for security devices. One particular feature of Indonesian law is that extensive formalities are required to create a security interest.505 There is an electronic registration system for fiducia, but it still needs improvement, including the integration of interests previously registered in the manual system and more effective and efficient public access.506 The enforcement system of fiducia poses significant challenges, that can have the effect that secured creditors are no better off than those with unsecured claims.507 Despite not having had much reform at all, secured financing of SMEs in Japan has not been a great problem, because of the availability of Government guarantees, low interest rates and SME friendly policies.508 The secured transactions legal system is fragmented and complicated, with no unified registration system. Difficulties exist in the current registration system, such as an onerous identification requirement.509 A non-statutory title-transfer device is widely used in practice, as the Civil Code does not provide for non-possessory security interest over movables. Security can be taken over future assets in some situations, but this is somewhat limited due to the need for identification and the restriction on over-collateralisation. Devices based on retention of title are not registrable, but there is an obligation on the creditor to return any surplus to the debtor if the seller repossesses the goods after terminating the contract for non-payment, bringing it into line with other security devices including the non-statutory title transfer device. There has been recent reform of the legal rules on assignment of receivables, including the introduction of an override of anti-assignment clauses, and further reform is contemplated in the future.510 The Philippines have recently enacted a Personal Property Security Act based on the UNCITRAL Model Law, and so its law is compliant with all the modern principles. Solid public and private collaboration enabled the swift passage of the law. The main challenge in the Philippines now is the operationalisation of the registry, and the drafting of the registry rules, as well as capacity building to enable the people of the Philippines to reap the economic benefits from the introduction of the new legislation. Given the continued momentum of collaboration between the Government and private sector, all these challenges are likely to be addressed promptly.511 South Korea still has a fragmented system, with pledges governed by the Civil Code, a nonstatutory title-transfer device and a fairly recent Act, inspired by the UNCITRAL Legislative Guide, creating a generic security interest over personal property, although title-based devices are not

502 Ch

7 IV A. 7 III A (iv). 504 Ch 7 IV B. 505 Ch 8 II A, Table 1 and III D (i)–(iii). 506 Ch 8 III B and C. 507 Ch 8 III E. 508 Ch 9 II. 509 Ch 9 VI. 510 Ch 9 IX. 511 See ch 10 V. 503 Ch

474 Louise Gullifer included. Under the Act, future property can be used as collateral (although receivables need to be identified) and there is a registration system, although this differs from the modern principles in that registration is required for creation of the security interest.512 Extra-judicial enforcement is permitted under the Act. The chapter calls for reform, especially a move towards notice filing, to which there is very considerable opposition in South Korea, but notes that the Government guarantee scheme makes it reasonably easy for SMEs to obtain unsecured financing.513 The chapter on Taiwan points out that its system does not rank highly in the WBG’s Getting Credit index, and this indicates that it does not comply with the modern principles to a large extent. Although there is a statute, the Personal Property Secured Transactions Act, the law remains fragmented. One serious defect is that it is not possible to take security over future property, nor over property generically described.514 Part of proposed reform in Taiwan is the introduction of an all asset security interest similar to the floating charge or enterprise mortgage.515 The lack of a unified regime means that the priority rules are unclear, and the registration system, though improved by recent reforms, is still not unified and the effect of registration is unclear.516 There have been a number of reform proposals, but none amount to the wholesale overhaul of the PPSTA which is suggested in the chapter. Thailand has introduced the Business Security Act, based on the modern principles. For example, it permits future property to be used as collateral, includes provisions for extra-judicial enforcement, and introduces a modern registration system, though not a notice filing system since registration is necessary for the creation of a security interest. However, although the Act does not explicitly say so, it appears to apply largely to business credit and does not follow a functional approach, in that title-retention devices and outright transfers of receivables are not included within the Act.517 Proposals for reform to fully align the Thai system with the modern principles are included in the chapter.518 The reform process in Vietnam was started in the 1990s, and, after many stages of piecemeal reform, has resulted in a system which largely complies with the modern principles. The current system permits all forms of personal property, including future property and assets generically described, to be used as collateral. The priority rule is ‘first to register or perfect’, and extrajudicial enforcement is possible.519 It has an excellent online centralised registration system.520 Unfortunately, the law is still rather fragmented. The Civil Code 2015 retains various different types of security devices, each with a separate set of rules, rather than a single concept of a security interest.521 Different decrees then give implementation guidance. This problem could be solved by the enactment of a secured transaction statute, as in other reformed jurisdictions, covering all the elements of secured transactions law.522 This would not only eliminate fragmentation, but also has the advantage that it can be amended more easily to take account of commercial or other changes, while the Civil Code is only be revised every ten years. Brunei, which previously had a traditional common law system, now has a reformed system, that was entirely modelled on the New Zealand Personal Property Act, and therefore conforms

512 Ch

11 III C (ii). 11 IV. 12 II A. 515 Ch 12 V B and F. 516 Ch 12 V E (iii). 517 Ch 13 II C and III. 518 Ch 13 VI. 519 Ch 14 II A. 520 Ch 14 III A (ii). 521 Ch 14 II A (iv). 522 That is, those discussed in IV B, C, D and E above. 513 Ch 514 Ch

Conclusion 475 to the modern principles. It does include a few idiosyncracies which are also included in the New Zealand Act.523 The current legal regime in Bangladesh is a typical common law regime, including security devices provided for in many different statutes, as well as the common law pledge and the hypothecation. The chapter concentrates on the draft Act and Rules, which are modelled largely on the Ontario and Saskatchewan PPSAs, although the UNCITRAL Model Law also influenced a number of aspects. As might be expected, the draft Act and Rules largely comply with the modern principles, with very few deviations.524 The chapter points out that the draft legislation is ‘properly integrated and aligned with the relevant domestic framework, thereby eliminating a number of uncertainties’525 that currently exist in the relevant law. The chapter concludes that the draft Act, if enacted, ‘will not only institutionalise an international best practice compliant legal regime but will also become a model for legal reforms in the region and beyond’.526 The reform of secured transactions law in India has proceeded in a rather piecemeal fashion, with the original SARFAESI Act having limited application in terms of creditors and transactions (title-based devices were not included) and also only dealing with creation, registration and enforcement. The registration system was not fully operational until 2011, and amendments in 2016 extended its reach in all the aspects mentioned. Although in form it does not look like legislation modelled on the PPSAs or the UNCITRAL Model Law, many of the modern principles are in fact enshrined in the system, as pointed out in the chapter.527 Full compliance could either be by further piecemeal reform,528 or wholesale reform, which could enable the law to cover all types of property without dispute (including intellectual property) and would obviate the need to rely on general property law for the few aspects that are not covered in the SARFAESI Act and the Factoring Regulation Act. The Financial Institutions (Secured Transactions) Act (ST Act) in Pakistan was inspired by the UNCITRAL Legislative Guide, and, therefore, generally complies with the modern principles. There are, however, some variations as a result of local constraints. First, it does not cover security interests in favour of suppliers. Second, security interests created by companies are registrable under the Companies Act regime and not the ST Act. Third, pledges of goods where the secured creditor takes possession must still be perfected by registration. Fourth, registration in advance of creation is not permitted. Fifth, outright assignment of receivables are included but are not registrable. Sixth, anti-assignment clauses are not overridden. Seventh, the distinction between fixed and floating charges is maintained (and the relevant priority rules codified). Eighth, extra-judicial enforcement is not permitted for certain types of secured transactions. The collateral registry for non-companies under the ST Act is operational. A number of reforms to the ST Act are proposed in the chapter,529 and a number of the suggested reforms are expected to be addressed as part of the amendments to the ST Act which are under consideration by the legislature. Singapore has a common law system which largely works well in practice, although it is fragmented and is described in the chapter as somewhat untidy. As with common law systems generally,530 it complies with many of the modern principles. For example, all personal property is available as collateral, including generically described property and future property. Creation

523 See

ch 15 V E. 16 VI. 525 Ch 16 VIII. 526 Ch 16 VIII. 527 Ch 17 V. 528 See ch 17 VII A. 529 Ch 18 V. 530 See ch 15. 524 Ch

476 Louise Gullifer of security interests is, generally, informal and easy, although the position for security interests created by non-corporate borrowers over tangible property is more complex.531 There is a general principle of freedom of contract, and extra-judicial enforcement is straightforward. The registration system, for security interests created by companies, is fully online, with only a notice (of particulars) required to be filed, although registration in advance of creation is not possible. Certain interests are not registrable: those created by retention of title, and outright assignment of receivables.532 There is no override of anti-assignment clauses. The chapter makes the case for reform, specifically for the amendment of particularly outdated rules such as those set out in the Bills of Sale Acts, and more generally, argues that wholesale reform of secured transactions law should be considered, for coherence and strategic reasons. However, large-scale reform looks unlikely to happen unless there is a mindset shift, for the reasons identified in the chapter, including that ‘the law of secured transactions works well enough to enable Singapore to achieve relative economic success despite the untidiness of the law’.533 This overview has shown that there is considerable variation between Asian countries in how far their law complies with the modern principles, and its utility and effectiveness in creating economic benefit for the relevant country. As might be expected, developed economies can prosper even with a fragmented or even dysfunctional law, although at least in the case of Japan and South Korea this seems to be due in part to other Government measures to bolster SME financing. The greatest benefit of secured transactions law reform appears to be in countries with less developed economies (such as the Philippines and Vietnam) and, in these countries, it is essential that not only the law is reformed, but that the infrastructure and capacity is developed as well to attain the benefit from the new law.

531 Ch 532 Ch 533 Ch

19 II B (ii). 19 III. 19 VIII.

INDEX Introductory Note: References such as ‘178–79’ indicate (not necessarily continuous) discussion of a topic across a range of pages. Wherever possible in the case of topics with many references, these have either been divided into sub-topics or only the most significant discussions of the topic are listed. Because the entire work is about ‘capitalism’, the use of this term (and certain others which occur constantly throughout the book) as an entry point has been minimised. Information will be found under the corresponding detailed topics. For information on legislation and cases, please refer to the relevant specialised tables. ABL (Asset Based Lending) 173, 187, 192–96 absolute assignment of receivables 321, 378, 386, 392, 395, 460 absolute interests 331, 407, 409, 417, 469 absolute ownership 5, 452 absolute transfers 178 access to credit 10–12, 26–27, 44–45, 69–70, 377, 380, 426–27, 429 lack of 377, 426, 429 to finance 69–85, 87–88, 91, 94, 101, 198–200, 211–12, 292 to information 306, 341 online 308, 311 public 160–61, 473 accessories 179, 224, 430 account debtors 14, 183–88, 190–91, 385, 401–2, 407–8, 464, 468 account receivables 14, 125–26, 130–34, 136–39, 199, 202, 464, 466 accounts 14, 52–54, 58–60, 130–31, 325, 356–57, 410, 455 bank 76–78, 81, 83–84, 154, 185–86, 349–53, 390–91, 412 deposit 143, 205, 299–301, 388, 391–92 acquisition 80–81, 189, 221, 226, 275, 367, 453, 455 financiers 38, 277, 286, 454 financing 29, 95, 274, 319, 423, 453–54 security interests 258, 469 security rights 81, 390, 395, 453–54 actual delivery 182, 216, 219, 221, 360 actual knowledge 81, 356, 391, 418 actual possession 42, 189, 384 ADB (Asian Development Bank) 88, 297, 423 adjustments 26, 30, 32, 34, 39–40, 46, 49–50, 232 administrative disputes 131–32 Africa 268, 346, 456 AFSA (Australian Financial Security Authority) 66–67

after-acquired property/assets 57, 60, 78–79, 238, 275, 388, 390, 416–17 agencies 92, 123, 201, 293, 305 government 235, 243, 247, 254, 258, 260–61, 412, 419 agents 168, 177, 226, 379, 384, 388, 464 agreements control 77–78, 81–82, 348, 350, 390–91 fiducia 110, 158–59 hire-purchase 274, 279, 325, 453 inter-creditor 37–38 leasing 103, 273, 454 licence 58, 121 loan 166, 195, 297, 404, 408 on possession 216, 219, 221 priority 323, 330, 408 purchase 329, 373, 407, 422 security see security agreements subordination 54, 301, 307 title retention 103, 390, 454 agriculture 263, 340–41, 343, 378, 447 aircraft 78, 127, 130, 134–35, 142, 147–48, 176, 179 anti-assignment clauses 45, 184–87, 327, 385, 433, 460, 473, 475–76 APEC (Asia Pacific Economic Cooperation) 87, 89–90, 96, 199, 428 Business Advisory Council 199–200 FIDN (Financial Infrastructure Development Network) 87, 96, 199–200, 428 applicable law 83–84, 108, 110, 271, 275, 361–62, 370, 375 ASEAN (Association of South East Asian Nations) 87, 89, 96, 292, 423, 428 Asia Pacific Economic Cooperation see APEC Asian Development Bank see ADB Asset Based Lending see ABL asset classes 14, 95, 336, 426, 447, 461 asset reconstruction 366–67, 373 funds 357, 366–67

478 Index asset-based lenders 74, 80 asset-based lending 264, 294 asset-based ownership registries 264, 289 assets after-acquired 238, 242, 275 charged 328, 401, 404, 408–9, 416 circulating 14, 321, 328, 334, 429–30, 460 debtors 40, 57, 112, 146, 407, 417, 461 encumbered see encumbered assets financial 13, 357, 359, 367, 372, 442, 444 grantors 43, 77, 190 hypothecated 361, 384 immovable see immovables intangible 76, 84, 113, 292, 299, 349, 363, 368 movable see movables non-performing 364, 367, 374 pool of 112, 158, 430–31, 461 relevant 42, 147, 164, 336, 410, 417, 439 secured 145, 147–48, 150–53, 162–63, 357, 361, 364–65, 367–69 tangible 28, 76, 81, 84, 122, 176, 317, 321 assignees 183–86, 188, 225, 229–30, 385, 391, 402, 408 first-in-time 185–86, 408 official 403, 407 assignment 432, 450, 454, 457–58, 460, 464, 473, 475–76 absolute 321, 378, 386, 392, 395, 460 Bangladesh 345, 351 Brunei Darussalam 318, 325, 327 China 138 civil law countries/jurisdictions 103 of claims for return 216, 219 general 318, 403, 407, 418, 464 India 363–64, 367–68, 371–72, 374 Indonesia 147 Japan 182–88, 190 notification of 184, 187 Pakistan 383, 385–87, 391–92 period of 182, 190 registration of 43, 190, 418, 432, 454, 458 Singapore 401–3, 408, 416, 418 South Korea 216–17, 219, 221, 229 Taiwan 239 Thailand 274 transplantation 41, 43–45 UNCITRAL Model Law 74 validity of 182–83 assignors 45, 183–88, 190–91, 318, 327, 371, 385, 401–2 assistance 41, 69, 160, 163–65, 168–69, 264, 283, 292 financial 89, 198, 363 technical 10, 88, 293, 297 Association of South East Asian Nations see ASEAN attachment 16, 74, 184–86, 224, 349–50, 354–55, 387, 389 orders 368–69, 373 auction offices 164–66, 168

auctions 121, 163, 165–66, 192, 216, 227–28, 312, 470 enforcement 163–66 public 163–65, 207, 209, 211, 239, 242, 269, 471 Australia 1, 51–52, 61–62, 65–68, 411, 414, 423, 447–48 Australian Financial Security Authority see AFSA authentication 114–15 authenticity 135, 137, 232 automatic crystallisation clauses 408, 415–16 autonomy legal 277 private 104–5, 119–20, 438 bad debts 304, 380 bailees 344–45, 360, 390 bailment of goods 345, 360 Bangladesh 15–19, 339–56, 446, 448–49, 452–54, 456–64, 466–68, 470–72 assignment 345, 351 Bank 339, 342–43, 347, 349, 356 banks 342–44 and financial institutions 343, 345, 354 borrowers 343 charges 339, 345, 348, 355 claims 349–50, 354 collateral 339, 341, 343–46, 348–49, 352–54, 356 contract(s) 344–45, 354 courts 346, 351, 353–56 creditors 343, 354, 356 debtors 339, 345, 348, 351 economy 343, 353 encumbered assets 350 enforcement 340, 354–55 financial institutions 339, 342–43, 345, 354 GDP 341, 343 goods 344–45, 349–50 immovables 344–45, 350–51 inventory 350 lenders 343 loans 343, 348 mortgages 345, 351 movables 340, 344–48, 352–55 obligations 345, 349, 351, 356 perfection 340, 348–55 pledges 344–45, 348 possession 340, 345, 350, 353–54 priority 339–40, 345, 349–52, 354 property 344–45, 354 receivables 351–52 reform 339–40, 355 registration 339, 348–51, 355 sales 345 secured creditors 354 secured transactions framework 339–55 security agreements 349, 351–52, 354 security rights 344, 351 SMEs 343

Index 479 third parties 339, 350, 352–53 title 350–51 transactions 348, 351, 353 transfer 345 bank deposits 256, 420, 438 bank lenders 39, 44–45, 461 bank loans 131, 239, 354, 380, 420, 444 bankers 194, 200, 306–7, 345 banking sector 292–94, 308–10, 312 system 127–28, 130 bankruptcy 55, 269, 271–72, 302–3, 340, 344, 354, 403 laws 57, 236–37, 241–42, 255, 311 proceedings 301, 303 banks 11, 426, 435, 444, 449, 455 Bangladesh 342–44 Brunei Darussalam 332 central 92–93, 136–37, 143, 199, 201, 210, 443, 449 China 126–27, 129, 131, 133, 136, 140, 143 commercial 214, 267, 284, 293, 309, 342 developed jurisdictions 53 European 8, 28, 70, 268, 446 India 357, 359–63, 365–67, 370–75 Indonesia 145–46, 161, 167 Japan 174–75, 194–95 non-scheduled 342, 379 Pakistan 380–81, 391–92 Philippines 207, 209 scheduled 342, 379 Singapore 412, 419–20 South Korea 214 state-owned 127, 145, 342, 380 Taiwan 237, 240–41 Thailand 275–76, 283, 287 transplantation 37, 44 UNCITRAL Model Law 84 Vietnam 296, 300, 304, 306–7, 309, 311 benchmarks 2, 9, 13, 418, 427 general 20, 425, 472 best practice 2, 91, 93, 199, 208, 296–97, 445, 449 international 89–90, 292–94, 296–99, 301–2, 305, 308, 310–11, 355 bills of lading 226, 400 bills of sale 317–18, 401–3, 406–8, 410–15, 417–19, 421, 457, 459 bona fide third parties 138, 257 book debts 318, 400, 403–4, 407, 412, 418, 461, 464 borrower defaults 37, 209, 240 borrowers 5, 7, 10–11, 426, 450–51, 456 Bangladesh 343 business 37, 415 China 132 consumer 415 India 359–61, 363–65, 367, 370, 373 Indonesia 147–48, 166

non-corporate 464–65, 476 Philippines 205, 207–12 Singapore 414, 416–17 South Korea 221 Taiwan 240–41, 245 Thailand 267 transplantation 38–39, 45 UNCITRAL Model Law 71 Vietnam 292, 294–96, 300, 312 breach of contract 45, 131, 186 Brunei Darussalam 15–19, 315–37, 423, 452, 454, 456–57, 459–60, 472 assignment 318, 325, 327 banks 332 charges 317, 321–22, 324–26, 328, 334–35 claims 321, 335 collateral 318, 322, 333–34 contract(s) 323, 327, 336 courts 317, 321–22, 332–34 creditors 319, 321, 325–26, 334 debtors 319, 322, 324–25, 329, 334 encumbered assets 323, 325–26, 328 enforcement 318, 322–23, 325, 334 floating charges 320–21, 325, 328, 334–37 goods 328–29, 331 grantors 320–21, 324, 326, 328–33, 335 inventory 330, 335 legislation 336, 448, 458 lenders 319 modern principles 316, 319–23, 327 mortgages 317, 324–25 obligations 318, 324–25, 329, 334 ownership 329 perfection 318–19, 324 personal property 335 pledges 317, 324 possession 322, 324 priority 318–19, 321, 326, 329–36 property 320–21, 324, 329, 332, 335 receivables 318, 321, 323, 325, 327, 330, 335 reform 318–20, 328, 334, 336–37 registration 318–20, 324–26, 329–30 sales 317, 322, 325, 334 secured creditors 317, 319, 321–22, 325–26, 328, 330, 333–34 security agreements 317, 328, 332, 334, 336 SMEs 327 third parties 327, 331, 336 title 317–18, 325, 329, 336 transactions 318–20, 323, 325 transfer 335 buildings 14, 97, 127–28, 142, 147–48, 153, 309, 398 business community 10, 35, 310, 312, 340, 419, 421 business credit 26–27, 32, 38, 192, 267–68, 280–82, 474 business operations 216, 267, 343, 360 buyers 80, 82–83, 189, 240, 391, 406–7, 454–55, 469

480 Index Canada 51–53, 57, 61–62, 64, 67–68, 411, 414, 447–48 British Columbia 59–60, 63 Ontario 20, 51–57, 59–61, 63, 65–66, 339, 423, 446 Saskatchewan 20, 52, 59–60, 63, 339, 347, 423, 446 capacity building 32, 93–96, 292–94, 308–10, 312, 443–45, 448, 450–51 capital 84, 97, 192–93, 294, 343, 382, 420 adequacy 198, 357 markets 132, 143, 267, 292 case law 106–7, 173, 175, 177–78, 215, 323–24, 436, 445 central banks 92–93, 136–37, 143, 199, 201, 210, 443, 449 Central Registry 359, 364, 368–70, 372–73, 442, 444, 458, 464 certificates 82, 156, 188, 226 registration 188, 229–30, 306 charge instruments 326, 404–5 charged assets 328, 401, 404, 408–9, 416 chargees 108, 328, 401, 404, 410, 416 equitable 404, 410 floating 408–9 prior 416–17 subsequent 408, 410 charges 426, 452–53, 459, 461–63, 465 Bangladesh 339, 345, 348, 355 Brunei Darussalam 317, 321–22, 324–26, 328, 334–35 civil law countries/jurisdictions 109 company 398, 401, 403, 405, 411–13, 415, 418–19, 421 developed jurisdictions 65 equitable 400–401, 408 fixed see fixed charges floating see floating charges India 360, 362–63 Pakistan 377, 384, 386, 389–90, 392, 395 Philippines 209 prior 355, 416 registered 378, 412 registrable 326, 329, 403, 405–6, 412–13, 415, 422 registration 362, 400, 403, 407, 412–13 Singapore 399–401, 403–9, 412–13, 415–17 Taiwan 237, 255 Thailand 283, 289 UNCITRAL Model Law 75 chattel mortgages 109–10, 112, 197, 199, 201–6, 410, 413, 415 chattel paper 57, 63, 336, 339, 352–53, 447–48 chattels 14, 73, 128, 248, 318, 400–403, 408, 418–19 personal 318, 401 China 17–19, 121–44, 435, 453–54, 456, 458–59, 463–64, 466–68 assignment 138 banks 126–27, 129, 131, 133, 136, 140, 143 borrowers 132

collateral 125–30, 132–36, 139–44 contract(s) 131–33, 137, 141 courts 129, 132 creditors 126, 129–30, 132, 134–41, 143 debtors 127–30, 132, 134–40, 142–43 financial institutions 125, 130 floating charges 125, 128–30, 133, 139, 141 goods 131 immovables 127–28, 134–35, 137, 141–42, 144 inventory 126, 128–30, 134–40 loans 126–30, 134 mortgages 127–30, 132–35, 137–43 movables 127–28, 132, 135, 139, 141 obligations 141, 144 ownership 135, 142 perfection 131, 134–35, 141, 143–44 personal property 125–30, 133–36, 138–44 pledges 125, 127–34, 136–41, 143 possession 128–29, 134, 139, 141–43 priority 125–26, 129, 138–39, 141, 143–44 property 127, 129–30, 133, 139, 141, 143–44 receivables 130–31, 139–40 reform 125–27, 130, 132–35, 140–42, 144 registration 127, 133–39, 141–44 sales 140 SAMR (State Administration of Market Regulation) 129, 134–36, 142–43, 466 secured creditors 141 security rights 143 SMEs 125–28, 130, 133–34, 144 third parties 126, 129, 134, 139, 141–42 title 142 transactions 126, 133–36, 138, 141 transfer 131 circulating assets 14, 321, 328, 334, 429–30, 460 civil law countries/jurisdictions 2–3, 9, 99–124, 254–55, 278–80, 430–31, 438, 466 see also indiviudal jurisdictions assignment 103 charges 109 collateral 108, 111–12, 121–22 courts 120–21 creditors 104–5, 110–12, 119–20, 123–24 debtors 103–5, 110, 112, 114–15, 119–20, 124 encumbered assets 112, 122 enforcement 104–5, 119–24 immovables 110 inventory 111–12 lenders 104 modern principles 102, 105, 107, 113–14, 116, 119–20, 123 mortgages 106, 110 movables 103, 110 obligations 110 ownership 110 perfection 113–14, 116, 123

Index 481 personal property 108, 111 pledges 109–10, 112 possession 110, 113 priority 117 property 110, 115 receivables 103 reform 102–8, 118, 122–23 registration 113, 116–19, 123 sales 122 secured creditors 110–12, 114, 116 security agreements 103, 110, 113–15, 117, 121 security rights 101, 104, 109–10, 113–14, 116, 119, 122–23 third parties 104, 113, 116–17 title 103–4 transactions 104–5, 107–8, 114–19 transfer 112, 121 claimants 357–58, 367, 369–70, 375, 429 competing 5, 10, 80, 214, 348, 393 claims 439, 443, 454, 456–57, 460, 462–64, 470 Bangladesh 349–50, 354 Brunei Darussalam 321, 335 developed jurisdictions 56, 66 employee 242, 394, 472 India 358, 368–70, 373, 375 Indonesia 153, 156, 158, 163–64, 166–67, 170 insurance 149, 151, 153, 167, 460 Japan 178, 186–87 Pakistan 394 Philippines 205 preferential 80, 383, 394 secured 39–40, 221, 223–25, 228, 230, 311 Singapore 399, 406 South Korea 214, 216–25, 227–29, 231 Taiwan 241 tax 242, 472 Thailand 265, 267–68, 278, 282, 287 transfer 153, 265, 268, 287, 460 transplantation 32–33, 37, 43–44, 46 UNCITRAL Model Law 76, 82 classes 104, 141, 258, 384, 453, 455, 459, 461–62 asset 14, 95, 336, 426, 447, 461 codification 109–10, 123, 126–27, 140, 144, 323–24, 430, 436 collateral 10–13, 15–16, 426, 429–30, 433–34, 451, 457–61, 473–75 Bangladesh 339, 341, 343–46, 348–49, 352–54, 356 Brunei Darussalam 318, 322, 333–34 China 125–30, 132–36, 139–44 civil law countries/jurisdictions 108, 111–12, 121–22 descriptions 27, 37, 41–42, 66, 238, 244, 299, 307–8 developed jurisdictions 54–60 eligible 10, 125, 128, 130, 133, 141, 144, 462 India 371 intangible 59, 132, 298 Japan 173–76, 179–82, 188–95 management industry 293, 309, 312

movable see movable collateral original 53, 225, 353, 388 Pakistan 380, 383–84, 387–89, 391–93, 395 permissible 295, 299, 457 Philippines 197, 199, 204–12 realisation 121, 304 registries 10–12, 15, 70, 93, 97, 242, 292, 380–81 for secured lending 130, 133, 144 Singapore 407, 410–11, 416, 418, 420, 422–23 South Korea 214, 217, 219–25, 227–31 Taiwan 236–40, 242, 244–48, 251–58, 260 tangible 59, 205, 349 Thailand 264, 266–67, 270, 273–75, 284, 287–88 transplantation 26, 29, 37, 39–43, 45 UNCITRAL Model Law 70, 74, 79–80, 82 value 39–40, 43, 139, 190, 192, 218, 228, 298 Vietnam 292–304, 307–9, 311 collateralisation 173, 209–10, 219, 384 see also over-collateralisation commercial banks 214, 267, 284, 293, 309, 342 commercial practices 207, 334, 404 commercial reasonableness 121, 207, 316, 333, 471 commercial transactions 5, 89, 348, 418 common law 3, 254–55, 313–37, 345–47, 382–83, 441–42, 452–53, 461–64 see also individual jurisdictions English 17, 384, 391, 397, 414 principles 327, 331, 345, 349, 394, 398 system 3, 319, 323, 326, 329–30, 439, 469–70, 475 company charges 398, 401, 403, 405, 411–13, 415, 418–19, 421 competent authorities 235, 237, 239, 248, 251–53, 255, 258–59, 261 competing claimants 5, 10, 80, 214, 348, 393 competing interests 143, 301, 327, 383, 410 competing security interests 81, 350, 390, 408, 418 competition 63, 66, 72, 81, 184–86, 270–71, 278, 437–39 complexity 114, 116, 118, 320, 426–27, 429, 434–36, 442–44 and fragmentation 7, 170, 429, 434 compliance 3, 9, 239–40, 273–74, 278–79, 289, 432, 474–75 compulsory execution 181, 221 conditional obligations 215, 224 conditional sales 136, 141, 143–44, 238, 240, 363–64, 368, 455 conditional sellers 108, 111 conflict-of-laws rules 71, 74, 83, 348, 394 conflicts 116–17, 119, 124–25, 137, 141–42, 261, 348–50, 353 doctrinal 278–79, 286, 289 potential 117, 252, 254, 259 priority 38, 42, 125–26, 139–41, 144, 301, 383, 389 confusion 94, 111, 126, 139, 141, 158, 261, 299 consensual security devices 452, 457

482 Index consensual security interests 89, 324 consent 148–49, 203, 218, 225–26, 228, 382, 385, 401 consistency 104, 109, 111, 122, 171, 286, 439 constitutionality 169, 382, 392–93, 395 constructive knowledge 416, 418 constructive possession 384, 400, 464 consultations 32, 92, 190, 198, 347, 352, 385, 413 consumer borrowers 415 consumer credit 5, 26, 267, 343 consumer goods 299, 348–49, 407 consumers 5, 37, 44, 73, 103, 270, 324, 456–57 protection 62, 73, 269, 279, 419 contract(s) 5, 433, 439, 450, 454, 460, 463, 473 Bangladesh 344–45, 354 breach of 45, 131, 186 Brunei Darussalam 323, 327, 336 China 131–33, 137, 141 developed jurisdictions 54 freedom of contract 29, 323, 327, 371–72, 433, 439, 450, 460 India 358, 360, 363–64, 371–72, 374 Indonesia 147, 149, 163 Japan 178–79, 181–84, 186–87, 190–91 mortgage 135, 138, 239 Pakistan 385, 392 Philippines 202–4 Singapore 401, 406, 410, 416 smart 89, 105, 119, 121, 123 South Korea 213, 217 supply 45, 178, 401 Taiwan 240, 244, 250 transplantation 29, 45 UNCITRAL Model Law 73, 76 Vietnam 297, 299, 302 contractors 248–49 contractual rights 147, 152, 154, 402 control 143, 154, 206, 256–57, 339–40, 351–53, 388, 390 agreements 77–78, 81–82, 348, 350, 390–91 perfection by 300, 348, 351–53 coordination 48, 52, 55, 59, 61, 93–94, 106, 304 cost effectiveness 307, 343 costs 37–38, 40–41, 66, 69–72, 76–77, 94, 116–18, 231–33 lower 37, 49, 145, 270 reasonable 72, 83, 437 transaction 10–11, 56, 66, 102, 114, 134–35, 142, 445 court enforcement 192, 242, 304, 363, 383, 392–93, 433, 438 courts 438, 451, 470 Bangladesh 346, 351, 353–56 Brunei Darussalam 317, 321–22, 332–34 China 129, 132 developed jurisdictions 53, 57–58, 60 India 346, 357, 359–61, 367, 375 Indonesia 157, 163–66, 169–70 Japan 178–79, 181, 183, 186, 191–92

Pakistan 382–85, 392–93 Philippines 207, 210–12 Singapore 398, 401–2, 404, 406–7, 410, 413 South Korea 217, 220–21, 226, 228, 230 Taiwan 254–55, 260 Thailand 269, 271–72 UNCITRAL Model Law 82–83 Vietnam 295, 304 creation of security interests 29, 74–75, 133, 296–97, 359, 365, 370, 387 credit access to 10–12, 26–27, 44–45, 69–70, 377, 380, 426–27, 429 business 26–27, 32, 38, 192, 267–68, 280–82, 474 consumer 5, 26, 267, 343 information 9, 199, 236, 241, 248, 260, 380 systems 199, 236 information index 9, 236, 241, 260 infrastructure 15, 89, 93, 96, 199–200, 449 risks 37, 127, 197, 299, 309, 311–12, 450 supplier 386, 447, 455 creditors 4–6, 8–9, 430–31, 434–35, 443–44, 452–56, 463–68, 470–73 Bangladesh 343, 354, 356 Brunei Darussalam 319, 321, 325–26, 334 China 126, 129–30, 132, 134–41, 143 civil law countries/jurisdictions 104–5, 110–12, 119–20, 123–24 India 361, 363, 367 Indonesia 145–47, 149–51, 155–57, 159, 161–65, 169 interests 119, 124, 177, 325, 453, 464 Japan 176–79, 181, 183–84, 188–90, 192, 195 ownership-based 268, 277, 284, 287, 289 Pakistan 383–84, 386, 389–90, 395 Philippines 198–99, 205–8 rights 11, 13, 121, 269, 281, 383 secured see secured creditors Singapore 398–401, 403–6, 409–10, 415–18, 422 South Korea 215, 217, 219–21, 224, 229–30 Taiwan 237, 239–40, 245, 247–48, 250–53, 255–57 Thailand 265, 268–71, 274–75, 278, 281–82, 289 transplantation 29, 32, 37–38, 41, 43, 45 UNCITRAL Model Law 70, 72, 74, 76–77, 83 unsecured see unsecured creditors Vietnam 295–96, 298, 300–302, 306, 311 creditworthiness 112, 132, 180, 429 crystallisation 191, 194, 237, 254, 363, 408, 416 automatic 408, 415–16 culture, legal 1–2, 8, 17, 19, 21, 46, 438–39, 446–47 customers 14, 16, 186, 190, 379, 386–87, 390–91, 393–95 damages 42, 131, 164, 223, 227, 245, 349, 356 DBD (Department of Business Development) 93, 283–85, 287–88 debenture holders 335, 409

Index 483 debt 156, 217, 239–40, 242, 270–71, 357–58, 399–401, 404 bad 304, 380 book 318, 400, 403–4, 407, 412, 418, 461, 464 preferential 335, 409 secured 14, 156, 162, 244, 278, 303, 453 securities 84, 352, 363 debtor defaults 37, 39, 53, 55–56, 239–40, 242, 248, 251 debtors 4–6, 14–15, 431, 434–35, 439, 452–56, 464–67, 470–73 account 14, 183–88, 190–91, 385, 401–2, 407–8, 464, 468 assets 40, 57, 112, 146, 407, 417, 461 Bangladesh 339, 345, 348, 351 Brunei Darussalam 319, 322, 324–25, 329, 334 China 127–30, 132, 134–40, 142–43 civil law countries/jurisdictions 103–5, 110, 112, 114–15, 119–20, 124 defaulting 205, 368 dishonest 129, 139 India 360, 367–68, 371 Indonesia 149, 151–52, 159–60, 162–63, 165–66, 169–70 insolvency 39, 398–99, 406, 461, 471 interests 119, 217, 438 Japan 176, 178, 183–84, 192 judgment 163, 304 location 59–60, 135 non-corporate 324, 439, 457 Pakistan 383, 386–87, 390, 394 Philippines 199 properties 265, 275, 399, 405 of receivables 272–73, 276, 280–82 Singapore 398–400, 402, 405, 407–11, 416, 422 South Korea 214–17, 219–22, 224–25, 228–30 Taiwan 239, 242, 245, 247–48, 250–56, 259 Thailand 265, 269–76, 279–82, 284, 286–88 UNCITRAL Model Law 70–72, 74–78, 83, 85 Vietnam 295–96, 301–2, 304 default remedies 45, 108, 110 default rights 74, 351 defaulted loans 357, 365, 373 defaulting debtors 205, 368 defaults 37, 39, 53, 55–56, 209–10, 239–40, 242, 248 delivery 81, 177, 181, 187, 189, 215–16, 218–19, 224 actual 182, 216, 219, 221, 360 fictitious 177, 181–82, 187, 189, 191, 432, 464 methods 181, 216, 221 of possession 268, 276, 282, 358, 363, 384 service 67, 89 deposit account 143, 205, 299–301, 388, 391–92 depository institutions 350, 353, 390 deposits 44, 218, 224, 230, 299–300, 358, 360, 366 bank 256, 420, 438 detentions, statutory 127, 136, 138–39, 141, 143 developed economies 85, 89, 106, 198, 294, 426, 476

developed jurisdictions 2, 51–67 see also individual jurisdictions banks 53 charges 65 claims 56, 66 collateral 54–60 contract(s) 54 courts 53, 57–58, 60 debtors 53–60 financial institutions 57 goods 57, 59 inventory 53–54 loans 53, 57 perfection 55–56, 59 personal property 57–59 possession 54–55 priority 54, 56, 60–61, 66 property 57–59 reform 51, 59, 63–64 registration 51, 53, 56, 65–66 sales 53, 57–58 security agreements 57 third parties 55, 60 title 57 transfer 54, 57–58 development economic 18, 88, 90–91, 93, 97, 125–26, 133, 200 infrastructure 311, 467 partners 87, 89–91 of secondary markets 21, 48, 471 of SMEs 141, 294 technological 437, 448 deviations 13, 33, 46, 49, 339, 348, 352, 378 devices 104, 264, 317–18, 322, 438–39, 443–44, 452–55, 473 ownership-based 268, 273–75, 277–83, 289, 462 quasi-security 398–99, 406, 409, 417 security see security devices title retention 406, 447 digital signatures 115 digital technologies 105, 114–15, 117–18, 121 diligence, due 205, 211, 222, 309, 339 disclosure 135, 138–39, 142 dishonest debtors 129, 139 disposition 39–40, 83, 125, 207–8, 210, 303, 328, 461 of collateral 40, 311, 341 proceeds of 83, 461 disputes 60–61, 117, 131, 210, 255, 259, 349, 354 administrative 131–32 priority 138, 301, 331–32, 464, 468 resolution 102, 354, 424 doctrinal conflicts 278–79, 286, 289 document registries 104, 118 Doing Business Survey 235–36, 238–39, 241, 243–47, 249, 255–56, 258–61 rankings 208, 264, 273, 285, 289, 427–28 dual registration 94, 370, 432, 442

484 Index due diligence 205, 211, 222, 309, 339 duties 191, 222, 224–25, 325, 333–34, 349, 351–52, 393 equitable 322, 334 and rights 349, 351, 393, 441 stamp 366–67, 372, 377, 382, 386, 392, 395 EBRD (European Bank for Reconstruction and Development) 8, 28, 70–71, 268, 346, 446 economic benefits 8, 11, 48, 426, 428–29, 473 economic development 18, 88, 90–91, 93, 97, 125–26, 133, 200 economic growth 15, 18, 88, 91, 96, 101, 341–42, 426 ecosystems 95, 121, 294 financial 212 education 32, 48, 170, 203, 284, 337, 340, 450–51 effective enforcement 96, 105, 119, 124, 273, 275, 312, 319 effective publicity 8, 432 effectiveness 39, 102, 121, 123–24, 188, 276–78, 295, 299–300 cost 307, 343 of enforcement 121, 124 registration 232, 248–49, 257–58 of security rights 104, 113, 116 third party 16, 41–42, 69–70, 74, 76–78, 80, 104, 113–14 efficiency 105, 111, 114, 117–19, 121, 126, 128, 470–71 efficient enforcement 70–71, 355 electronic filing systems 130–31, 137 electronic registration 3, 126, 326–27 systems 134–36, 142, 146, 150, 473 electronic signatures 75, 114–15 electronic warehouse receipts 377–78, 395 eligible collateral 10, 125, 128, 130, 133, 141, 144, 462 elites, legal 26–27, 33–35, 41, 46, 107, 437 emerging markets 70, 90, 95 employee claims 242, 394, 472 encumbered assets 15, 429, 434, 461, 463, 469, 472 Bangladesh 350 Brunei Darussalam 323, 325–26, 328 civil law countries/jurisdictions 112, 122 India 365 Indonesia 157–58, 163, 167 Pakistan 383 Philippines 203 South Korea 214–16 transplantation 42 UNCITRAL Model Law 74–76, 79–83 encumbered movable property 206, 461 encumbrances 129, 135, 137, 140, 142, 206, 217, 272 enforcement 6, 10–11, 13, 433–34, 439, 441–42, 452–55, 470–71 auctions 163–66 Brunei Darussalam 318, 322–23, 325, 334 civil law countries/jurisdictions 104–5, 119–24 court 192, 242, 304, 363, 383, 392–93, 433, 438 effective 96, 105, 119, 124, 273, 275, 312, 319

effectiveness of 121, 124 efficient 70–71, 355 extrajudicial 119–21, 322, 359, 361, 370–71, 433, 470, 474–76 fiducia 155, 165, 168 India 357, 359, 361, 364–66, 368, 373, 375 Indonesia 145–46, 150–52, 154–56, 158–59, 161–70 Japan 175, 178, 181, 191–92, 194–96 judicial 178, 191–92, 273, 284, 366, 434, 470 mechanisms 82, 105, 124, 303, 365 methods 151, 218, 227, 230, 295, 325, 470 out-of-court 121, 312, 395, 470 Pakistan 383–84, 392–93 Philippines 206 powers 169, 359, 361 and priority 6, 20, 69, 73–74, 83–84, 318, 434, 441 private 221–22, 227–28, 471 processes 164, 221, 266, 273, 275, 284, 346, 470–71 rights 162, 170, 354, 390, 454 rules 246, 250, 256, 261, 325, 351 South Korea 214, 216–18, 221–24, 227–28, 230 Taiwan 242, 251, 256, 258–59 Thailand 265, 276 transplantation 40, 45 UNCITRAL Model Law 69, 71, 73–74, 82–84 Vietnam 295, 302–4, 312 engagement 97, 428, 449 stakeholder 67–68 English law 73, 315, 317, 321, 334–35, 339, 384, 397–98 enterprise mortgages 176, 179–80, 268, 430, 456, 474 entities, incorporated 271, 377, 382–83, 386 entrenched interests 25, 27, 36, 43–44, 46 entrepreneurs 88, 197, 311 women 343, 380 equipment 126–30, 146, 149, 151–52, 294, 296, 302, 455 and inventory 129–30, 134–35, 137–38, 435 mobile 79, 106, 355, 429 equitable chargees 404, 410 equitable charges 400–401, 408 equitable duty 322, 334 equitable interests 316, 320, 330, 332–33, 408, 469 earlier 331, 408–9 equitable mortgages 322, 366, 459 equitable principles 320, 322, 385, 387, 391, 408 equitable security interests 325, 469 equity 155, 258, 316, 321, 332, 349, 360, 384 error 53, 61, 79–80, 117, 141, 349, 351, 389 European Bank for Reconstruction and Development see EBRD execution 212, 350, 355, 370, 389–91, 401 compulsory 181, 221 expedited proceedings 82, 120, 304, 312, 433 expenses 38, 41–42, 56, 91, 221, 223, 244, 334 expertise 33–34, 39, 41, 68, 309, 427, 445 local 65, 68 valuation 95, 283

Index 485 experts 9, 33–35, 199–200, 217, 230, 261, 347 international 91, 94 legal 35, 41 valuation 95, 448 exports 291, 339, 341, 372, 378 extrajudicial enforcement 119–21, 322, 359, 361, 370–71, 433, 470, 474–76 extra-judicial powers 359, 366 extra-judicial remedies 351, 378 factoring 141, 143–44, 267, 273, 277, 280, 287, 289 factory mortgages 176, 179–80 fairness 119, 124, 470–71 families 26, 73, 104, 198, 210 farmers 129, 201, 211, 231, 435, 449 fees 66, 94, 161–62, 183, 206, 222, 394, 406 flat 161–62 notary 161–62 registration 161–62, 188, 247, 307 fictitious delivery 177, 181–82, 187, 189, 191, 432, 464 FIDN (Financial Infrastructure Development Network) 87, 96, 199–200, 428 fiducia 92, 145–71, 430, 454 agreements 110, 158–59 certificates 158, 160, 165, 169 enforcement 155, 165, 168 grantees 152, 157–60, 162–69 grantors 151–53, 156–64, 166–69 registration 152, 155, 157, 159–60 filing 77, 117, 251–52, 257, 299–301, 418–19, 421–22, 467 notice see notice filing systems 300, 305, 412, 418, 422, 461, 465–67, 474 electronic 130–31, 137 finance access to 69–85, 87–88, 91, 94, 101, 198–200, 211–12, 292 movables 293, 297, 299, 308–9, 312 financial assets 13, 357, 359, 367, 372, 442, 444 financial assistance 89, 198, 363 financial ecosystem 212 financial inclusion 90–91, 94, 97, 197–200, 208, 292, 377, 379–80 financial infrastructure 136, 292, 295, 310, 380, 394 Financial Infrastructure Development Network see FIDN financial institutions 444, 447, 449, 456, 460, 465, 469, 475 Bangladesh 339, 342–43, 345, 354 China 125, 130 developed jurisdictions 57 formal 198, 292 India 357, 359–63, 366–67, 370–73, 375 Indonesia 159 international 69–70, 90, 340 Japan 174–75, 185, 189–90, 194–96 Pakistan 377, 379, 385–86, 390, 392–93, 441–42, 463

Philippines 198–99, 209 progress and challenges 94–97 regulated 435, 455–56 Singapore 420 Taiwan 254 Thailand 266, 271 Vietnam 292, 294, 306, 308 financial lessors 95, 455 financial markets 136, 141, 143, 298, 341, 367 financial regulators 90, 304, 419 financial resources 92, 211, 283 financial sector 88, 97, 292–93, 426, 437 reforms 92, 357 financial services 95, 292, 309, 379, 394, 447 financial stability 15, 39, 87, 175 Financial Supervisory Commission see FSC financial transactions 223, 349 financiers 155, 327, 329, 398, 407, 416–17, 439, 455 PMSI 329–30 receivables 325, 330 financing 4–5, 145–46, 150, 173–75, 380, 447, 455, 457 environment 173–75 financial statement 309, 451 fixture 302, 311 inventory 54, 309, 451 movables 310–12 practice 125, 264, 280, 448 receivables 186, 296, 322, 353, 386, 392, 395, 407 secured 4, 285, 310–11, 426, 460, 473 SMEs 193, 380, 420, 476 statements 17, 53, 55–56, 60, 136, 140, 351, 389 supplier 385, 387 supply chain 309, 451 transactions 5, 265–66, 273, 276, 278, 281–82, 285, 417 unsecured 380, 474 first to file rule 37, 305, 319, 329 first to register rule 37–38, 41–42, 267, 281, 370, 468–69, 472, 474 FIs see financial institutions fixed charges 73, 255, 363, 389, 391, 401, 403–4, 408 fixture financing 302, 311 flat fees 161–62 flexibility 67, 74, 107, 123, 146, 224, 320, 322 floating chargees 408–9 floating charges 429–30, 435, 442, 469, 471–72, 474–75 Brunei Darussalam 320–21, 325, 328, 334–37 China 125, 128–30, 133, 139, 141 India 360–63 Pakistan 384, 389, 391, 394 Singapore 401, 403–5, 408–9, 415–16, 421, 469 Taiwan 235, 237, 243–44, 251, 254–56, 259–61 floating liens 13, 253–55, 258–60 floating obligations 224, 255 foreclosure 207–10, 212, 303–4 foreign lenders 285, 456

486 Index formal requirements 114, 170, 198, 203–4, 324, 431–32, 437, 463 formalism 103, 109–11, 113, 122–23, 439 formalities 113–15, 119, 121, 123, 145–47, 158–60, 322, 431–32 onerous 438–39 fragmentation 7, 73, 109–10, 170, 319–20, 429, 434–36, 444 and complexity 7, 170, 429, 434 frameworks 13, 20, 87, 97, 127, 146, 197, 251 existing legal 129, 140–41, 391 institutional 87, 95, 293 legal 89–90, 94–96, 111–12, 126–28, 140–41, 143, 258–59, 311–12 regulatory 152, 155, 161, 292–94, 380 fraud 38, 47, 95, 134, 139–40, 210–11, 299, 303 free assignability of receivables 29, 327, 371, 457 freedom of contract 29, 323, 327, 371–72, 433, 439, 450, 460 FSC (Financial Supervisory Commission) 235, 237, 244, 246–47, 249–50, 252–53, 260–61 functional approach 273–78, 280–82, 284–87, 289, 334–35, 436, 452, 454 functional equivalents 109, 242, 256, 259, 339, 348 functional models 111, 123 fund units, transferable 130, 134 funding 51–52, 66, 175, 416, 420–21, 424, 428, 448 funds 37, 62–63, 131, 185, 209–11, 240–41, 327–28, 415–17 payment of 76–78, 81, 83–84, 388, 392 GDP 18, 125, 198, 213, 263, 341, 377–78, 397 Bangladesh 341, 343 growth 18, 291, 342, 378 Pakistan 380 general law 5, 322, 359, 364, 367, 369, 372, 374 general principles 25, 121, 248, 251, 258, 298, 358, 360 good faith 80, 82–83, 121, 203, 212, 275, 333–34, 469 goods 13–15, 433, 453, 455–56, 459, 463–64, 469, 473 Bangladesh 344–45, 349–50 Brunei Darussalam 328–29, 331 China 131 developed jurisdictions 57, 59 household 190, 197, 348 hypothecation of 360–61 India 360–61, 372, 375 Japan 173, 176–82, 187–89, 191–92, 195–96 pledges of 181, 187, 360, 393, 456, 475 and receivables 176–77, 180, 188, 196 Singapore 399–401, 406–7, 410–12, 416, 422 Taiwan 240 Thailand 267 UNCITRAL Model Law 76, 81, 84 Vietnam 294

government agencies 235, 243, 247, 254, 258, 260–61, 412, 419 grantees 157–58, 163–64 fiducia 152, 157–60, 162–69 grantors 15–16, 429–31, 433, 456–57, 459, 462–63, 465, 469 assets 43, 77, 190 Brunei Darussalam 320–21, 324, 326, 328–33, 335 fiducia 151–53, 156–64, 166–69 India 370 Indonesia 153–55, 157 insolvency 16, 43, 336 Japan 177–78, 181–82, 184–89, 191–92, 194 Philippines 203–4 Singapore 400–402 South Korea 224–25, 227–29, 231–32 Taiwan 251, 253–56 Thailand 266–67, 270–71, 273 transplantation 28, 37–38, 42–43 UNCITRAL Model Law 73–80, 82–84 gross negligence 184, 333, 355 growth 71, 97, 198, 201, 341–42, 363, 373, 378 economic 15, 18, 88, 91, 96, 101, 341–42, 426 GDP 18, 291, 342, 378 rates 18, 198, 291, 378 guarantees 76, 126–27, 137, 174, 193, 283, 289, 298–99 personal 175, 343 public guarantee system 174–75 hak tanggungan 147–48, 151, 162, 170 harmonisation 49, 52, 56, 61, 63, 116, 268, 346 international 31, 49, 108, 123 processes 36, 49 hire-purchase 265, 270–71, 273–75, 279, 363–64, 373 agreements 274, 279, 325, 453 businesses 273, 275, 279, 281 transactions 269, 364, 373, 454 hire-purchasers 269–70, 274, 279, 281 hirers 318, 407, 410, 421, 439 hire-sellers 269–70, 274, 279 holders 192, 205, 336, 383, 390, 410, 453 debenture 335, 409 lien 206, 239–40, 244 security 165–66, 168 household goods 190, 197, 348 human intervention 115, 307, 465 hypothec 13–14, 147–48, 170 hypothecated assets 361, 384 hypothecation 343, 345, 348, 358, 360–63, 371, 383–84, 386 of goods 360–61 hypothecators 345, 362 identification 20–21, 75, 112, 115, 188, 190–91, 461, 463 criteria 173, 182, 191 of receivables 183, 190

Index 487 identifiers 79, 351, 389 idiosyncrasies 315, 336, 421, 446–49, 475 IFC (International Financial Corporation) 151, 292–94, 297–98, 300, 303, 306–9, 427–28, 450–51 III (International Insolvency Institute) 105, 108, 127, 130, 173, 175, 448–74, 476 immovables 14, 461–62 Bangladesh 344–45, 350–51 China 127–28, 134–35, 137, 141–42, 144 civil law countries/jurisdictions 110 Indonesia 147, 151 Japan 174, 176, 179–80, 192, 195 Philippines 197, 204, 207 South Korea 213–14, 230–32 Taiwan 245 Thailand 265–67 impediments 21, 27, 33, 36, 39–40, 47, 237, 339 imperfections 105, 116, 439 incentives 25, 34, 48, 67, 175, 185, 427, 437 inclusion 274, 276, 323, 325, 339–40, 438–39, 457–58, 460 financial 90–91, 94, 97, 197–200, 208, 292, 377, 379–80 incorporated entities 271, 377, 382–83, 386 incorporation 26, 29, 53, 60, 117, 119, 121, 280 independence 150, 340, 344, 346, 378 India 16–19, 355, 357–75, 444, 453–57, 460–64, 468, 470–72 assignment 363–64, 367–68, 371–72, 374 banks 357, 359–63, 365–67, 370–75 borrowers 359–61, 363–65, 367, 370, 373 Central Registry 359, 364, 368–70, 372–73, 442, 444, 458, 464 charges 360, 362–63 claims 358, 368–70, 373, 375 collateral 371 contract(s) 358, 360, 363–64, 371–72, 374 courts 346, 357, 359–61, 367, 375 creditors 361, 363, 367 debtors 360, 367–68, 371 encumbered assets 365 enforcement 357, 359, 361, 364–66, 368, 373, 375 financial institutions 357, 359–63, 366–67, 370–73, 375 floating charges 360–63 goods 360–61, 372, 375 grantors 370 immovables 358–59, 362, 365–66, 374 inventory 365 lenders 360–64, 372–73 loans 360, 362–66, 371, 373–75 modern principles 370–72 mortgages 358–59, 362, 366 movables 358, 360–63, 368, 371 NBFCs (non-banking financial companies) 362, 366 obligations 357, 364, 371, 374

perfection 358–59, 364, 367 personal property 364, 371 pledges 358, 360 possession 358, 360–61, 363, 365 priority 357, 367–70 property 358–59, 363–65, 367, 369–71, 373–74 receivables 360, 371–72 reform 357, 367, 369, 372–74 registration 358, 363–64, 366, 368–70, 372–73 sales 359, 361, 364–65, 367–68, 371 secured creditors 361–65, 367–71, 373–75 secured transactions law 357–75 security rights 358, 363, 367 third parties 370, 375 title 360–61, 363–64, 374 transactions 358, 360, 363, 371, 375 transfer 358–59, 364–65, 368, 370, 374 indirect possession 129, 134 Indonesia 17–20, 92–93, 145–71, 432–33, 453–54, 459, 463–66, 469–71 assignment 147 banks 145–46, 161, 167 borrowers 147–48, 166 claims 153, 156, 158, 163–64, 166–67, 170 collateral 154–55, 170 contract(s) 147, 149, 163 courts 157, 163–66, 169–70 creditors 145–47, 149–51, 155–57, 159, 161–65, 169 debtors 149, 151–52, 159–60, 162–63, 165–66, 169–70 encumbered assets 157–58, 163, 167 enforcement 145–46, 150–52, 154–56, 158–59, 161–70 financial institutions 159 grantors 153–55, 157 immovables 147, 151 inventory 149–50, 152–53 law 147–48, 150–51, 157, 162, 473 lenders 145, 147, 153–55, 160–61, 166, 170 loans 146 modern principles 145, 170 mortgages 147–48, 151–53, 170 movables 145–47, 150–51, 170 obligations 149, 154, 156, 160–61 ownership 152, 157, 162, 166, 168 perfection 145, 147–49, 151, 153, 158–59, 161 pledges 146–47, 149–50, 152, 154, 165, 170 possession 150–51, 154, 162–63, 165, 167–68 priority 145–46, 149, 157 property 151–53 receivables 148–49, 151–54, 156, 161, 167 reform 145–71 registration 145–49, 152, 156, 158–62 sales 145, 151, 153, 155, 164, 167 secured creditors 145–50, 154, 157, 163–64, 167, 170 security agreements 147, 152, 159 security rights 145–51, 157, 160, 162, 170–71

488 Index SMEs 145–46, 170 State Auction Office 163, 165–66 third parties 145, 147, 159, 161, 166 title 149–53, 161, 163, 166 transactions 151, 156–57, 167 transfer 150–51, 153, 155 informal lenders 197, 205, 209–10, 212 information 9–12, 79, 118–19, 134–35, 137, 140, 159–60, 465–66 access to 306, 341 accuracy 252, 257 credit see credit information disclosure 135, 138–39, 142 limited 118, 305, 307, 463 minimal 326, 465–66 registered 118, 160, 466 registration 137, 244, 307 relevant 118–19, 160 infrastructure 2, 131, 311–12, 342, 445, 476 credit 15, 89, 93, 96, 199–200, 449 development 311, 467 financial 136, 292, 295, 310, 380, 394 reform 2, 443 insolvency 39–40, 146–47, 150, 318, 334, 336–37, 368, 374–75 administrators 76, 84, 302 debtors 39, 398–99, 406, 461, 471 grantors 16, 43, 336 law 26–27, 32, 39–40, 70, 73, 334–35, 337, 471–72 legislation 102, 122, 436, 442, 471 officers 300, 327, 336, 448, 462 proceedings 26, 29, 39–40, 80, 322, 370, 375, 394 instalment sales 178, 201–2, 453 instalments 201–2, 269, 281, 302, 406, 408, 447 institutional reforms 1, 93, 292 institutions 10, 15, 93, 102, 104, 114, 456, 466 depository 350, 353, 390 financial see financial institutions international 426–27 legacy 113, 123 legal 106, 108, 123 multilateral 88–89, 94 insurance 95, 153, 161, 174 claims 149, 151, 153, 167, 460 policies 345, 353, 400, 403, 415 intangible assets 76, 84, 113, 292, 299, 349, 363, 368 intangible collateral 59, 132, 298 intangible personal property 125, 140, 400 intangible property 14, 130, 133–35, 137, 142, 147, 288, 400–401 rights 133, 364, 371, 374 intangibles 13, 57, 147, 324, 351, 435, 463 intellectual property (IP) 76, 79–80, 84, 155, 176, 179–80, 223, 353 rights 130, 134, 258, 349–50, 388, 390, 400–401, 403 intentions 75, 181, 183, 185, 273–74, 352–53, 400, 404 inter-creditor agreements 37–38

interest groups 35, 323, 437–38, 455 interest rates 48, 71–72, 80, 175, 239, 270, 343, 380 interests absolute 331, 407, 409, 417, 469 competing 143, 301, 327, 383, 410 creditors 119, 124, 177, 325, 453, 464 debtors 119, 217, 438 entrenched 25, 27, 36, 43–44, 46 equitable see equitable interests international 79, 106, 108–9, 355, 403, 429 legal 328, 331–33, 408–10, 469 legitimate 44, 228 in movable property 358, 383, 386 non-consensual 452, 457 non-possessory 305, 317, 411 possessory 317, 411 prior 352, 356, 394, 417, 432 proprietary 4–5, 324, 434, 452 public 35, 142 quasi-security 349, 385, 398, 410 registered 16, 306, 326, 329, 443, 467–69 vested 91, 94, 449 international best practice 89–90, 292–94, 296–99, 301–2, 305, 308, 310–11, 355 international experts 91, 94 International Financial Corporation see IFC international financial institutions 69–70, 90, 340 international harmonisation 31, 49, 108, 123 International Insolvency Institute see III international institutions 426–27 international instruments 4, 70–72, 102, 107–8, 117, 120, 268, 283 international interests 79, 106, 108–9, 355, 403, 429 international models 102, 122, 386, 389–92, 394, 441, 446 international organisations 15, 36, 235, 243, 293, 427–28, 445, 449–50 international principles 102–5, 107, 114, 118, 122–23, 268 international standards 103, 105, 243, 263–89, 372, 378, 386, 390 transplantation of 276–77 Internet of Things (IoT) 119, 123 intervention 250, 287, 357, 359–61, 375, 383, 392–93 court 82, 145, 361, 384 governmental 193 human 115, 307, 465 judicial 119, 145, 207, 303 public notaries 114–15 invalidity 186, 325, 336 inventory 14, 426, 430–31, 435, 454, 459–60, 468–69 Bangladesh 350 Brunei Darussalam 330, 335 China 126, 128–30, 134–40 civil law countries/jurisdictions 111–12 developed jurisdictions 53–54 encumbered 153, 302 and equipment 129–30, 134–35, 137–38, 435

Index 489 financing 54, 309, 451 India 365 Indonesia 149–50, 152–53 Japan 173–74, 180–82, 189, 191–94 Pakistan 384 Singapore 400 South Korea 219 Thailand 266–67 UNCITRAL Model Law 75, 79 Vietnam 294, 296, 301–2, 311 investment property 57, 205, 350 investments 96–97, 131, 342 IP see intellectual property issuers 76, 78, 82–84, 348, 350 ius perseguendi 112, 461 Japan 17–20, 42–46, 173–96, 250, 430–32, 453–54, 458–64, 468–70 assignment 182–88, 190 banks 174–75, 194–95 borrowers 174–75, 194–95 claims 178, 186–87 collateral 173–76, 179–82, 188–95 contract(s) 178–79, 181–84, 186–87, 190–91 courts 178–79, 181, 183, 186, 191–92 creditors 176–79, 181, 183–84, 188–90, 192, 195 debtors 176, 178, 183–84, 192 enforcement 175, 178, 181, 191–92, 194–96 financial institutions 174–75, 185, 189–90, 194–96 goods 173, 176–82, 187–89, 191–92, 195–96 grantors 177–78, 181–82, 184–89, 191–92, 194 immovables 174, 176, 179–80, 192, 195 inventory 173–74, 180–82, 189, 191–94 law 31–32, 180–81, 186 lenders 175 loans 174, 179, 190, 192–93 modern principles 186–87, 193 mortgages 176, 179–80, 195 movables 180, 182 obligations 177–79, 181, 185, 192 ownership 176–78, 181–82 perfection 173, 176, 187–89, 191, 195 pledges 176, 179–82, 184, 187 possession 177, 181, 188, 192 priority 173, 176–77, 184–85, 187–88 property 191, 195 receivables 173–74, 176–77, 180, 182–88, 190–93, 196 reform 179, 184, 196 registration 176–80, 187–90, 194–95 sales 177–78, 193 secured creditors 177 security agreements 180–82, 188–91 security rights 180 SMEs 174–75 third parties 177–78, 181, 184, 188–89, 192 transactions 178, 192 transfer 177, 189

job creation 88, 91, 101, 294 joto-tanpo 176–78, 180–82, 187, 189, 191–92, 194, 430, 469–70 judges 34, 64, 131, 143, 284, 310, 335, 451 judgment debtors 163, 304 judicial enforcement 178, 191–92, 273, 284, 366, 434, 470 judicial intervention 119, 145, 207, 303 judicial scriveners 188, 190, 194–95, 466 junior security interests 270, 431, 439 junior security rights 270–71, 279, 281–82 juristic persons 267–68, 280 justice 92–93, 196, 251, 260, 284, 293, 305, 309 natural 357 knowledge 79–80, 184, 309, 356, 389, 391, 409, 418 actual 81, 356, 391, 418 constructive 416, 418 Korea see South Korea lading, bills of 226, 400 land 14, 145–48, 153, 199, 209, 350, 430, 461–62 and buildings 97, 142, 147–48, 153, 398 Land Registration Authority (LRA) 92, 199, 201, 205 land-use rights 127–28, 142 Laos 2, 88, 90, 93, 96, 423 law reform see reform law reform processes 21, 29, 33, 35–36, 46, 49, 423 law schools 96–97, 451 lawyers 9, 64, 157, 161, 200, 277–78, 284, 451 leasing 273, 277, 305, 385 agreements 103, 273, 454 businesses 267–68, 271, 273, 275, 279 legacy institutions 113, 123 legal autonomy 277 legal concepts 33–34, 90, 109, 286–88, 437 legal culture 1–2, 8, 17, 19, 21, 46, 438–39, 446–47 legal effects 115, 141–42, 184–85, 188, 238, 240, 251–53, 257 of registration 137, 142, 248–49 legal elites 26–27, 33–35, 41, 46, 107, 437 legal experts 35, 41 legal frameworks 89–90, 94–96, 111–12, 126–28, 140–41, 143, 258–59, 311–12 legal institutions 106, 108, 123 legal interests 328, 331–33, 408–10, 469 legal mortgages 328, 408, 410 legal ownership 329, 331 legal reforms see reform legal regimes 26, 35–36, 38–41, 49, 109–10, 344, 354–55, 475 pre-reform 377, 381–82 unified 108–9 legal relationships 152, 156, 214, 219 legal rights 9, 48, 90, 96, 208, 249, 260 index 9–10, 48, 235–36, 238, 241, 249, 286, 289 legal solutions 101–2, 107, 122

490 Index legal systems 17, 29–30, 103–8, 111, 113, 277–78, 422–23, 451–52 legal title 239–41, 248 legal traditions 102–5, 108–9, 113, 116, 121, 123–24, 441, 446 legal transplants 21, 25–49, 102, 105, 107–8, 126, 128, 276 legislative powers 365, 382, 455 legislative processes 47, 232, 390, 393 Legislative Yuan 244–45 legitimate interests 44, 228 lenders 5, 10–12, 426, 434–35, 437–38, 444, 449–51, 455–56 asset-based 74, 80 Bangladesh 343 bank 39, 44–45, 461 Brunei Darussalam 319 civil law countries/jurisdictions 104 foreign 285, 456 Indonesia 145, 147, 153–55, 160–61, 166, 170 informal 197, 205, 209–10, 212 Japan 175 non-bank 36, 449 Pakistan 377, 384–86, 392 Philippines 197, 205, 207–12 secured 38, 296, 300, 302, 369, 372–73 Singapore 415, 420 Taiwan 237, 240–41, 261 Thailand 266–67, 270, 274, 285, 287–89 transplantation 37–39, 44 UNCITRAL Model Law 71–72 Vietnam 292–93, 296–97, 299, 301, 310, 312 lending 10–11, 132, 143, 145–46, 210, 292–93, 369, 371 asset-based 264, 294 movables 293, 308, 312 practices 126, 134, 140, 143, 174–75, 193, 255 products 96, 294, 311 secured 126–28, 130, 132–33, 135–37, 142, 144, 196, 297 lessees 83, 151, 179, 202, 348, 351, 391, 407 lessors 108, 111, 151, 179, 202–3, 407, 410, 453–54 financial 95, 455 licence agreements 58, 121 licences 57–59, 83, 122, 363–64, 371 fishing 57–58 statutory 57–58 lien holders 206, 239–40, 244 liens 176, 202, 206, 344–45, 386, 390, 399, 421 floating 13, 253–55, 258–60 mortgage 239, 258, 463 non-consensual 205–6, 302, 458, 465 statutory 176, 178, 180, 302, 383 limited information 118, 305, 307, 463 loan agreements 166, 195, 297, 404, 408 loans 11, 13, 451, 455, 467 Bangladesh 343, 348 bank 131, 239, 354, 380, 420, 444

China 126–30, 134 defaulted 357, 365, 373 Indonesia 146 Japan 174, 179, 190, 192–93 non-performing 145, 198, 291–92, 304, 311, 366, 377, 380 Pakistan 388 Philippines 198–99 progress and challenges 90–91, 97 secured 37, 94, 147, 237, 283, 294, 373, 390 short-term 192–93 Singapore 399, 407–8, 420 SME 175, 381 South Korea 214, 221 Taiwan 237, 245, 255 Thailand 263, 270, 274–75, 288 transplantation 37, 39 Vietnam 294, 296, 309 local stakeholders 445, 449 location 43, 60–61, 84, 239, 241, 246–47, 349, 353 debtors 59–60, 135 of title 318, 324, 329 LRA see Land Registration Authority machinery 94, 149, 151–52, 193, 202, 238, 266, 321 Malaysia 2, 19–20, 88–89, 92–93, 397, 423 market conditions 38, 446–47 market participants 26, 336, 447 market positions, entrenched 36, 44, 46 market prices 153, 162–63, 228, 469 markets 26–27, 95–96, 111–12, 116, 436–39, 443, 448, 450–51 capital 132, 143, 267, 292 emerging 70, 90, 95 financial 136, 141, 143, 298, 341, 367 relevant 38, 82, 448 robust 26, 40, 155 secondary 21, 39–40, 48, 95–96, 122–24, 193, 195, 450–51 merit review 247, 466 merits 151, 180, 257, 440, 458 micro, small and medium sized enterprises see MSMEs micro-businesses 308, 377, 395, 426, 437 minimal information 326, 465–66 mobile equipment 79, 106, 355, 429 models 103, 116–18, 315–16, 335–37, 346–47, 414, 440–41, 445–48 functional 111, 123 PPSA 339, 348, 350, 352–53, 414, 418, 422 registry 104, 114, 116–19 modern principles 2–3, 8–9, 19–20, 421–25, 438–40, 450–52, 457–61, 472–76 Brunei Darussalam 316, 319–23, 327 civil law countries/jurisdictions 102, 105, 107, 113–14, 116, 119–20, 123 India 370–72 Indonesia 145, 170

Index 491 international 102, 105, 107 Japan 186–87, 193 Singapore 399, 414, 416–17, 421–24 Thailand 264, 277–78, 284–85, 289 transplantation 30–50 Vietnam 305 modernisation 49, 69–70, 73, 102, 105, 107, 122–23, 423–24 Monetary Authority of Singapore 412, 420 money 57, 66, 81, 156, 218, 220, 328–29, 371 monitoring 51, 124, 193, 195, 311, 451 mortgage contracts 135, 138, 239 mortgage liens 239, 258, 463 mortgagees 133–35, 138, 140, 203, 302, 359, 366, 410 mortgages 13–14, 435, 452, 456, 459, 462–66, 468, 472 Bangladesh 345, 351 Brunei Darussalam 317, 324–25 chattel 109–10, 112, 197, 199, 201–6, 410, 413, 415 China 127–30, 132–35, 137–43 civil law countries/jurisdictions 106, 110 enterprise 176, 179–80, 268, 430, 456, 474 equitable 322, 366, 459 factory 176, 179–80 India 358–59, 362, 366 Japan 176, 179–80, 195 legal 328, 408, 410 non-possessory 126, 128–29, 134–35, 141 Pakistan 384, 386, 388, 392–93 of personal property 238, 245, 253 Philippines 203–4, 207 registered 138–39, 143, 285 Singapore 399–401 South Korea 213, 217, 223, 226, 231 Taiwan 245, 248–49, 256 Thailand 264–67, 270, 273–74, 288 transplantation 45 Vietnam 297–99, 302, 309 mortgagors 133–35, 138, 203–4, 207, 270, 359, 366, 392 motor vehicles 146, 152, 226, 348, 364, 370, 389–90, 392 movable assets see movables movable collateral 39, 95, 97, 209–10, 212, 237, 300, 305–7 see also movables law 236–37, 241–42, 244, 247, 250, 252–55, 257, 259–61 movable property see movables movables 10, 14, 441, 443, 451, 460–63, 471, 473 Bangladesh 340, 344–48, 352–55 China 127–28, 132, 135, 139, 141 civil law countries/jurisdictions 103, 110 encumbered 206, 461 finance 293, 297, 299, 308–9, 312 financing 310–12 Japan 180, 182 lending 293, 308, 312 Pakistan 377–78, 380, 383–84, 386–87, 389, 393, 395

Philippines 198, 201–2, 204–7, 210, 212 pledges 41, 214–19, 222, 360 Singapore 399 South Korea 214–16, 218–27, 229–32 Taiwan 238, 248, 261 Thailand 266–68, 274, 276–77, 281 transplantation 36, 39–41, 43–44, 48 UNCITRAL Model Law 73, 83 Vietnam 293, 295–97, 301, 305, 307–9, 312 MSMEs (micro, small and medium sized enterprises) 95–97, 198–200, 211, 292, 308–10, 426–27, 430, 451 multilateral institutions 88–89, 94 multiple security devices 73, 77 Myanmar 88, 93, 96, 423 National Conference of Commissioners on Uniform State Laws see NCCUSL National Financial Inclusion Strategy (NFIS) 377, 380 National Registration Agency for Secured Transactions see NRAST natural justice 357 natural persons 5, 26, 37, 44–45, 377, 382, 391, 394 NBFCs (non-banking financial companies) 362, 366 NCCUSL (National Conference of Commissioners on Uniform State Laws) 51–52, 61, 63–65, 68 negative pledges 408–9, 415–16 negligence 189, 221 gross 184, 333, 355 negotiable instruments 76, 78, 81, 83, 229, 382, 387–88, 392 nemo dat quod non habet 58, 278, 280, 326, 331–33, 408, 410 Netherlands 146, 150, 279 New Zealand 15, 20, 29, 237, 250–51, 334–37, 447–48, 458 legislation 327, 336 NFIS (National Financial Inclusion Strategy) 377, 380 non-assignment clauses 184, 401 non-bank lenders 36, 449 non-banking financial companies (NBFCs) 362, 366 non-consensual interests 452, 457 non-consensual liens 205–6, 302, 458, 465 non-corporate borrowers 464–65, 476 non-corporate debtors 324, 439, 457 non-intermediated securities 77–78, 82–83, 229, 349–51 non-payment 97, 398–99, 453, 473 non-performing loans (NPLs) 145, 198, 291–92, 304, 311, 366, 377, 380 non-possessory interests 305, 317, 411 non-possessory mortgages 126, 128–29, 134–35, 141 non-possessory pledges 109–11, 121, 150, 296, 435, 452

492 Index non-possessory securities 47, 146, 150, 238, 242, 399–400, 402, 473 non-possessory security devices 266, 377, 430 non-possessory security interests 192, 194, 297, 301, 317, 360, 453, 457 non-possessory security rights 277, 288–89 non-registration 156, 325, 388, 403, 406, 422 non-scheduled banks 342, 379 notary fees 161–62 notice filing 17, 42, 465 systems 47, 118, 351, 370 notice of security interests 299–300, 370 NPLs see non-performing loans NRAST (National Registration Agency for Secured Transactions) 92–93, 293, 297, 300–301, 305–6, 308–10 OAS (Organisation of American States) 8, 70, 72, 116 obligational law 179, 183–84 obligations 4, 439, 453, 455, 460, 462, 470–71, 473 Bangladesh 345, 349, 351, 356 Brunei Darussalam 318, 324–25, 329, 334 China 141, 144 civil law countries/jurisdictions 110 conditional 215, 224 floating 224, 255 India 357, 364, 371, 374 Indonesia 149, 154, 156, 160–61 Japan 177–79, 181, 185, 192 Pakistan 384, 386–87 Philippines 199, 201–4 secure 177, 383, 455 secured see secured obligations Singapore 401, 404, 410–11 South Korea 214–15, 219, 224, 230 Taiwan 237, 239–40, 242, 245, 248, 250, 255, 259 Thailand 265, 268, 271–72, 278, 287 transplantation 29, 41, 43 UNCITRAL Model Law 73–75, 77, 83 underlying 132–33, 135, 156 Vietnam 295–96, 298–99, 304–5, 312 obligees see creditors obligors 42, 45, 148, 161, 220, 225, 254, 348–53 onerous formalities 438–39 online access 308, 311 on-line registration 136, 142, 160–61, 246–47, 308 systems 136, 142, 160–61, 246–47, 250, 252–53, 257, 307–8 uniform 126, 142, 144, 293, 308 online registries 21, 170, 209, 307, 437, 467 Ontario 20, 51–57, 59–61, 63, 65–66, 339, 423, 446 PPSA 52–53, 57, 60, 67, 350 operationalisation 208, 381, 448–49, 473 order of priority 143, 206, 216, 218, 221, 227, 229, 301–2 order of registration 56, 227, 229, 301, 468 Organisation of American States see OAS

organisations international 15, 36, 235, 243, 293, 427–28, 445, 449–50 regional 8, 89, 102 unincorporated 417, 465 original collateral 53, 225, 353, 388 out-of-court enforcement 121, 312, 395, 470 over-collateralisation 173, 189–90, 429, 431, 473 owners 153, 221–22, 269–71, 273–75, 281, 406–7, 410, 454–55 CCC 271, 275 original 150, 219 ownership 4, 438–39, 449, 453–55 absolute 5, 452 Brunei Darussalam 329 China 135, 142 civil law countries/jurisdictions 110 Indonesia 152, 157, 162, 166, 168 legal 329, 331 Philippines 204 retention 176, 178, 269–71, 274–75, 279, 281–82, 284, 438 for security purposes 110, 265, 268, 274, 285 Singapore 399, 407, 410 South Korea 217, 221, 224, 228 Thailand 265, 268–71, 273–75, 278–81, 284–85 transfer of 129, 177–78, 182, 194, 265, 279, 353 transplantation 45 Vietnam 302 ownership-based creditors 268, 277, 284, 287, 289 ownership-based devices 268, 273–75, 277–83, 289, 462 ownership-based transactions 268–70, 278–79, 281, 289 Pakistan 15–19, 377–95, 446–47, 452, 454–57, 459–60, 462–63, 465–70 assignment 383, 385–87, 391–92 banks 380–81, 391–92 borrowers 377, 384, 388–89, 394–95 charges 377, 384, 386, 389–90, 392, 395 claims 394 collateral 380, 383–84, 387–89, 391–93, 395 contract(s) 385, 392 courts 382–85, 392–93 creditors 383–84, 386, 389–90, 395 debtors 383, 386–87, 390, 394 encumbered assets 383 enforcement 383–84, 392–93 financial institutions 377, 379, 385–86, 390, 392–93, 441–42, 463 floating charges 384, 389, 391, 394 GDP 380 goods 384–85 immovables 383, 386–87, 392–93 inventory 384

Index 493 legislation 454, 457, 460, 469 lenders 377, 384–86, 392 loans 388 mortgages 384, 386, 388, 392–93 movables 377–78, 380, 383–84, 386–87, 389, 393, 395 National Financial Inclusion Strategy (NFIS) 377, 380 obligations 384, 386–87 perfection 378, 384, 388, 390–92, 394–95 pledges 378, 384, 387–88, 392 possession 383–84, 387–88, 392–93 priority 383–84, 386, 388–91, 394 property 382, 385, 387 receivables 378, 383–88, 391–92, 395 reform 377, 381, 392 registration 378, 382–85, 387–92, 395 sales 384–86, 391 SBP (State Bank of Pakistan) 379–81, 385, 450 secured creditors 383–85, 387–95 security agreements 387, 389, 391, 393 SMEs 377–78, 380–81, 395 Secured Transaction Registry 388–89, 391, 394–95 third parties 384, 387–88, 390–91 title 384–85, 393 transactions 379, 383, 386, 391 transfer 381, 387 partial reform 3, 5–7, 435–36, 440, 443–44, 455–56, 459, 472–73 partnerships 89, 144, 199, 293, 356, 395 party autonomy 43, 74, 115, 323 payment 76–77, 131, 178–79, 185–86, 229–30, 240, 384–86, 406–7 of funds 76–78, 81, 83–84, 388, 392 rights to 77–78, 81, 131, 185, 351 secure 268–69, 274 security for 345, 360, 384 perfection 16, 20, 438, 441, 460, 462, 464, 468 automatic 131, 299 Bangladesh 340, 348–55 Brunei Darussalam 318–19, 324 China 131, 134–35, 141, 143–44 civil law countries/jurisdictions 113–14, 116, 123 by control 300, 348, 351–53 developed jurisdictions 55–56, 59 India 358–59, 364, 367 Indonesia 145, 147–49, 151, 153, 158–59, 161 Japan 173, 176, 187–89, 191, 195 methods 81–82, 187–88, 191, 298–300, 388, 390, 464, 468 Pakistan 378, 384, 388, 390–92, 394–95 Philippines 205–6 by registration 188, 351, 395 requirements 41, 77, 165, 170, 189, 303, 403, 463 Singapore 402 Taiwan 237 transplantation 28, 36, 39, 41–42, 44 UNCITRAL Model Law 70–71, 73, 76–79, 81–84 Vietnam 299–300, 311

performance 73, 76–77, 118–19, 126–27, 129, 133–35, 141, 298 secure 271, 278, 287, 299 permissible collateral 295, 299, 457 personal chattels 318, 401 personal guarantees 175, 343 personal property 429, 435, 458, 466, 472–75 categories of 127, 129, 144, 435 collateral 38–39 intangible 125, 140, 400 mortgages of 238, 245, 253 scope 128, 238, 248, 251, 253 securities 51–67, 247, 250, 256, 261 tangible 126, 130, 134–35, 464 Philippines 15–19, 92–93, 197–212, 428, 456–57, 459–60, 462–65, 470–73 banks 207, 209 borrowers 205, 207–12 charges 209 claims 205 collateral 197, 199, 204–12 contract(s) 202–4 courts 207, 210–12 creditors 198–99, 205–8 debtors 199 encumbered assets 203 enforcement 206 financial institutions 198–99, 209 grantors 203–4 immovables 197, 204, 207 Land Registration Authority (LRA) 92, 199, 201, 205 legislation 17, 458 lenders 197, 205, 207–12 loans 198–99 mortgages 203–4, 207 movables 198, 201–2, 204–7, 210, 212 obligations 199, 201–4 ownership 204 perfection 205–6 personal property 197, 201–3, 207, 209, 211–12 pledges 202, 206 possession 199, 202, 206 PPSA 460, 463, 465–66, 469 priority 205–6, 211 property 204–7 receivables 208 reform 197, 199–200, 208, 211 registration 205–6 sales 201–2, 207–8, 210 secured creditors 203, 205–8 security agreements 203–4, 206 security rights 202–3 Technical Working Group (TWG) 201, 206, 208, 210–11 third parties 205 transactions 202, 210–12 transfer 206

494 Index physical possession 177, 214–15, 221, 400–401 piecemeal reform 372, 377, 386, 450, 474–75 pledgees 133–34, 138–39, 181, 215–18, 264, 345, 400, 402 pledgers 215–18 pledges 13, 443, 452–53, 459–60, 463–66, 468, 472–73 of account receivables 136–39, 464 Bangladesh 344–45, 348 Brunei Darussalam 317, 324 China 125, 127–34, 136–41, 143 of goods 181, 187, 360, 393, 456, 475 India 358, 360 Indonesia 146–47, 149–50, 152, 154, 165, 170 Japan 176, 179–82, 184, 187 movables 41, 214–19, 222, 360 non-possessory 109–11, 121, 150, 296, 435, 452 Pakistan 378, 384, 387–88, 392 Philippines 202, 206 possessory 106, 128, 177, 296, 383, 435, 443 of rights 214–15, 217–18, 470 Singapore 399–400, 402, 410 South Korea 213, 215–18, 223, 227, 229 Taiwan 239, 241, 258 Thailand 264–65, 268, 270, 273, 282 transplantation 41, 45 Vietnam 295–99 pledgors 132, 134, 138, 270, 345, 400 PMSI see purchase money security interests policies 20, 175, 184, 257, 279, 286, 337, 343 political environment 47, 92, 382, 385 politicians 90–91 pool of assets 112, 158, 430–31, 461 possession 16, 434, 454, 463–64, 468, 475 actual 42, 189, 384 agreements on 216, 219, 221 Bangladesh 340, 345, 350, 353–54 Brunei Darussalam 322, 324 China 128–29, 134, 139, 141–43 civil law countries/jurisdictions 110, 113 constructive 384, 400, 464 delivery of 268, 276, 282, 358, 363, 384 developed jurisdictions 54–55 India 358, 360–61, 363, 365 indirect 129, 134 Indonesia 150–51, 154, 162–63, 165, 167–68 Japan 177, 181, 188, 192 Pakistan 383–84, 387–88, 392–93 Philippines 199, 202, 206 physical 177, 214–15, 221, 400–401 Singapore 399–400, 402, 410–11 South Korea 215–16, 219–22, 227 Taiwan 239–41, 256 taking 205–6, 251–52, 257, 357, 361, 365, 367, 434 Thailand 264–66, 268, 276, 282, 284, 289 transfer of 78, 110, 113, 268, 399, 402 transplantation 28 in trust 238, 240–41, 249

UNCITRAL Model Law 70, 74–78, 81–83 Vietnam 300–301, 305 possessory pledges 106, 128, 177, 296, 383, 435, 443 possessory securities 146, 150, 154, 360, 371, 399, 402, 453 powers 62, 74–75, 169, 348–49, 359, 366–67, 382, 389 enforcement 169, 359, 361 extra-judicial 359, 366 legislative 365, 382, 455 regulatory 44, 135 PPS see personal property, securities practice, financing 125, 264, 280, 448 practitioners 32, 34, 47, 64, 74, 141, 143–44, 196 predictability 72, 74, 114, 118, 143, 297, 301 preferential claims 80, 383, 394 preferential debts 335, 409 preferential rights 147, 265, 268, 274 prices 133, 162–63, 177, 201–2, 270, 274, 365, 407 market 153, 162–63, 228, 469 purchase 269, 385–86, 434 prior interests 352, 356, 394, 417, 432 prioritisation 198, 200, 378 priority 429, 432–33, 441–42, 444, 452–54, 457, 467–69, 471–72 agreements 323, 330, 408 Bangladesh 339–40, 345, 349–52, 354 Brunei Darussalam 318–19, 321, 326, 329–36 China 125–26, 129, 138–39, 141, 143–44 conflicts 38, 42, 125–26, 139–41, 144, 301, 383, 389 disputes 138, 301, 331–32, 464, 468 and enforcement 6, 20, 69, 73–74, 83–84, 318, 434, 441 India 357, 367–70 Indonesia 145–46, 149, 157 Japan 173, 176–77, 184–85, 187–88 order of 143, 206, 216, 218, 221, 227, 229, 301–2 Pakistan 383–84, 386, 388–91, 394 Philippines 205–6, 211 position 37, 80, 301–2, 331, 408, 415, 432, 443 rights 146–47, 149–51, 156, 158, 161 rules 301–2, 325–26, 328–32, 350–52, 370, 390–92, 416–18, 467–68 special 301, 329, 350, 390, 441, 454 Singapore 398, 404, 408–11, 415–18 South Korea 214, 216, 218, 221–22, 227–30 super 81, 277, 302, 319, 329–30, 370 Taiwan 237, 244, 248, 250–52, 256–58 Thailand 265, 271–73, 275–76, 278, 280 UNCITRAL Model Law 70–71, 73–74, 77–78, 80–84 Vietnam 294–95, 300–305, 311 private autonomy 104–5, 119–20, 438 private enforcement 221–22, 227–28, 471 private stakeholders 200, 449 procedural requirements 45, 142, 228 proceedings 27, 39–40, 221, 230, 355, 368 expedited 82, 120, 304, 312, 433 insolvency 26, 29, 39–40, 80, 322, 370, 375, 394

Index 495 processes enforcement 164, 221, 266, 273, 275, 284, 346, 470–71 legislative 47, 232, 390, 393 reform 2–3, 21, 87, 90, 92, 105–7, 425, 449–50 registration 79, 159–60, 232, 306, 405 streamlining 67, 122, 411 profit a prendre 57–58 profits 54, 57, 216–17, 219, 224, 253 property 14, 454–55, 462–63, 473–75 after-acquired 57, 60, 78–79, 238, 275, 388, 390, 416–17 Bangladesh 344–45, 354 Brunei Darussalam 320–21, 324, 329, 332, 335 China 127, 129–30, 133, 139, 141, 143–44 debtors 265, 275, 399, 405 definition 359, 363 encumbered 267, 271, 273 immovable see immovables India 358–59, 363–65, 367, 369–71, 373–74 intellectual see intellectual property (IP) Japan 191, 195 law 73, 141, 237, 243, 245, 250, 252, 254 Pakistan 382, 385, 387 personal see personal property Philippines 204–7 real 125–30, 132–40, 209, 225, 248, 292, 301, 459 rights 74, 76, 130, 133–34, 260, 358–59, 368, 401–2 intangible 133, 364, 371, 374 Singapore 399–401, 403–6, 411, 413 South Korea 214, 221–22, 224–25, 231–32 Taiwan 239–41, 244, 246–48, 251, 253, 255–56, 258 tangible 14, 59, 133–34, 276, 364, 418, 459, 465 Thailand 265–71, 273–75, 278–79, 285–86, 288 transfer of 358–59, 374, 382, 463 proprietary interests 4–5, 324, 434, 452 public access 160–61, 473 public auctions 163–65, 207, 209, 211, 239, 242, 269, 471 public guarantee system 174–75 public interest 35, 142 public notaries, intervention 114–15 public policy 58, 190–91, 361, 382 publicity 117–18, 252, 256–57, 259, 305, 453, 455, 463 effective 8, 432 publicity-providing functions 116–18 purchase, agreements 329, 373, 407, 422 purchase money security interests 37, 54, 95, 237, 258, 302, 329–30, 335, 350, 412, 416–17, 421–22 purchase prices 269, 385–86, 434 purchasers 153, 155, 202, 241, 331, 391, 409, 416–17 subsequent good faith 269, 275 quasi-security arrangements 398–99, 407, 410, 418 quasi-security devices 398–99, 406, 409, 417 quasi-security interests 349, 385, 398, 410 quasi-security rights 73, 147

rankings 10, 48, 236–37, 239, 242, 250, 260, 427–28 Doing Business 208, 264, 273, 285, 289, 427–28 real estate 14, 126–27, 145–46, 170, 267, 292–94, 309, 311–12 real property 125–30, 132–40, 209, 225, 248, 292, 301, 459 realisation 278, 304, 384, 450, 471 of collateral 121, 304 reasonable costs 72, 83, 437 reasonableness 121, 124 commercial 121, 207, 316, 333, 471 receivables 4, 7, 14–15, 430–33, 457–61, 464, 468, 473–76 account 14, 125–26, 130–34, 136–39, 199, 202, 464, 466 assignment see assignment Bangladesh 351–52 Brunei Darussalam 318, 321, 323, 325, 327, 330, 335 China 130–31, 139–40 civil law countries/jurisdictions 103 debtors of 272–73, 276, 280–82 financiers 325, 330 financing 186, 296, 322, 353, 386, 392, 395, 407 free assignability 29, 327, 371, 457 and goods 176–77, 180, 188, 196 India 360, 371–72 Indonesia 148–49, 151–54, 156, 161, 167 Japan 173–74, 176–77, 180, 182–88, 190–93, 196 Pakistan 378, 383–88, 391–92, 395 Philippines 208 Singapore 401, 407, 416 South Korea 213–15, 219, 222–25, 229–32 Taiwan 253–54 Thailand 268, 271–74, 276–85, 289 trade 194, 266, 276, 460 transfers of 4, 271–74, 276–82, 284–85, 289, 335, 457–58, 474 UNCITRAL Model Law 70, 74, 78, 84 Vietnam 296, 301 receivers 57, 269, 282, 288, 322, 351, 354, 409–10 recovery 39, 65, 122, 225, 366, 373–75, 386, 392 redemption 265, 269–70, 274, 279 reform 1–3, 5–13, 20–21, 425–30, 436–52, 456, 460–62, 466 agendas 20, 419, 427–28 attitudes to 425, 451, 472 Bangladesh 339–40, 355 Brunei Darussalam 318–20, 328, 334, 336–37 China 125–27, 130, 132–35, 140–42, 144 civil law countries/jurisdictions 102–8, 118, 122–23 drivers for 425, 429, 434 incremental 107, 109, 122, 288 India 357, 367, 369, 372–74 Indonesia 145–71 infrastructure 2, 443 institutional 1, 93, 292 Japan 179, 184, 196

496 Index limited 2–3, 5, 411 methods 425, 440, 451 Pakistan 377, 381, 392 partial 3, 5–7, 435–36, 440, 443–44, 455–56, 459, 472–73 Philippines 197, 199–200, 208, 211 piecemeal 372, 377, 386, 450, 474–75 processes 2–3, 21, 87, 90, 92, 105–7, 425, 449–50 Singapore 398–99, 411, 413–14, 416, 419–24 Taiwan 235, 237–38, 241–48, 250, 255, 258–61 Thailand 273, 277–78, 282–89, 442 and transplantation 26, 31–37, 46, 48–49 and UNCITRAL Model Law 71 Vietnam 292–93, 295, 297–99, 301, 306–10, 312 reformed jurisdictions 330, 337, 461, 470, 474 reformed law 2–3, 5, 7, 15, 335–36, 437–38, 445–46, 449 reformed systems 15–16, 325–26, 328–31, 443–44, 448–52, 462, 465, 469 regional organisations 8, 89, 102 registered charges 378, 412 registered information 118, 160, 466 registered interests 16, 306, 326, 329, 443, 467–69 registered mortgages 138–39, 143, 285 registered security interests 16, 206, 468 registrable charges 326, 329, 403, 405–6, 412–13, 415, 422 registrants 66, 118, 145, 201, 244, 246–47, 306 registrars 79–80, 114, 116–18, 190, 194, 265, 267, 466 registration 11, 16–17, 76, 432, 441, 453–54, 456–58, 463–69, 474–76 applications 157–59, 307 applications for 226, 231–32 of assignments 43, 190, 418, 432, 454, 458 Bangladesh 339, 348–51, 355 Brunei Darussalam 318–20, 324–26, 329–30 certificates 188, 229–30, 306 of charges 362, 400, 403, 407, 412–13 China 127, 133–39, 141–44 civil law countries/jurisdictions 113, 116–19, 123 dates 305, 326, 358, 408, 467 developed jurisdictions 51, 53, 56, 65–66 dual 94, 370, 432, 442 effect 138, 226, 229, 232, 369, 474 effectiveness 232, 248–49, 257–58 electronic 3, 126, 134–36, 142, 146, 150, 326–27, 473 fee incomes 246, 448 fees 161–62, 188, 247, 307 fiducia 152, 155, 157, 159–60 India 358, 363–64, 366, 368–70, 372–73 Indonesia 145–49, 152, 156, 158–62 information 137, 244, 307 Japan 176–80, 187–90, 194–95 legal effects 137, 142, 248–49 on-line registration systems 136, 142, 160–61, 246–47, 250, 252–53, 257, 307–8

order of 56, 227, 229, 301, 468 Pakistan 378, 382–85, 387–92, 395 perfection by 188, 351, 395 Philippines 205–6 practices 135, 137, 252 processes 79, 159–60, 232, 306, 405 requirements 276, 278, 281–82, 368, 370, 373, 432, 435 dual 432, 442 of secured transactions 261, 293, 300, 305–6 of security interests 134–35, 138, 142, 146, 375, 386, 442, 456 of security rights 37, 43, 232, 267–68, 349, 359 Singapore 402–6, 408–9, 413–18, 421 South Korea 214, 222–23, 225–27, 229–32 Taiwan 238, 242, 244–49, 252, 257–58 Thailand 265, 268, 272–73, 276, 278, 280–83, 289 time of 78, 81, 139, 143, 272, 389–90, 416, 418 transplantation 27–28, 36, 41–42, 46 UNCITRAL Model Law 70–71, 76–82, 84 registries collateral 10–12, 15, 70, 93, 97, 242, 292, 380–81 document 104, 118 online 21, 170, 209, 307, 437, 467 secured transactions 97, 241, 252, 302, 377, 388, 463, 465 registry models 104, 114, 116–19 regulated financial institutions 435, 455–56 regulators 62, 143, 153, 198, 208–9, 212, 339 financial 90, 304, 419 regulatory frameworks 152, 155, 161, 292–94, 380 regulatory powers 44, 135 relationships, legal 152, 156, 214, 219 remedies default 45, 108, 110 extra-judicial 351, 378 remittances 339, 341 repayment 70, 167, 174, 179–80, 241, 318, 354, 363 repossession 55, 151–52, 168–69, 240–41, 304, 352–53, 361, 410 research projects 32, 238, 244, 247–51, 254, 256, 259–61 Reserve Bank of India 364, 366–67, 372, 375, 455 resources 1, 15, 63, 170, 199, 283 financial 92, 211, 283 retention of ownership 176, 178, 269–71, 274–75, 279, 281–82, 284, 438 rights of 110, 176 of title 74, 77, 299, 325, 385, 390, 392, 438–39 clauses 406, 417, 434 devices 302, 325, 329, 454, 470, 473–74 sales 73, 317, 322, 325, 422, 434 terms 325, 453–55

Index 497 revenue 66, 367–68, 467 rights contractual 147, 152, 154, 402 creditor 11, 13, 121, 269, 281, 383 and duties 349, 351, 393, 441 enforcement 162, 170, 354, 390, 454 intellectual property (IP) 130, 134, 258, 349–50, 388, 390, 400–401, 403 legal see legal rights to payment 77–78, 81, 131, 185, 351 pledges of 214–15, 217–18, 470 preferential 147, 265, 268, 274 priority 146–47, 149–51, 156, 158, 161 property 74, 76, 130, 133–34, 260, 358–59, 368, 401–2 quasi-security 73, 147 of retention 110, 176 risk exposure 102, 112 risk premiums 71, 74 risks 54, 56, 58, 79, 95–96, 115, 270–71, 335–36 credit 37, 127, 197, 299, 309, 311–12, 450 sales 5, 453–55, 460, 463, 469, 471 Bangladesh 345 Brunei Darussalam 317, 322, 325, 334 China 140 civil law countries/jurisdictions 122 conditional 136, 141, 143–44, 238, 240, 363–64, 368, 455 developed jurisdictions 53, 57–58 India 359, 361, 364–65, 367–68, 371 Indonesia 145, 151, 153, 155, 164, 167 instalment 178, 201–2, 453 Japan 177–78, 193 Pakistan 384–86, 391 Philippines 201–2, 207–8, 210 retention of title 73, 317, 322, 325, 422, 434 Singapore 398–99, 401–3, 406–8, 410, 413–14, 417–18, 422 South Korea 217, 227–28 Taiwan 239–40 Thailand 265, 269, 274, 276, 279 transplantation 40 UNCITRAL Model Law 80 Vietnam 301, 303–4, 311 SAMR (State Administration of Market Regulation) 129, 134–36, 142–43, 466 Saskatchewan 20, 52, 59–60, 63, 339, 347, 423, 446 SBP (State Bank of Pakistan) 379–81, 385, 450 scheduled banks 342, 379 scriveners, judicial 188, 190, 194–95, 466 searchers 42, 53, 66, 118, 160, 351, 465 searching 79, 135–36, 140, 142, 285, 305–6, 465, 467 secondary markets 21, 39–40, 48, 95–96, 122–24, 193, 195, 450–51 development 21, 48, 471

secure payment 268–69, 274 secure performance 271, 278, 287, 299 secured assets 145, 147–48, 150–53, 162–63, 357, 361, 364–65, 367–69 secured claims 39–40, 221, 223–25, 228, 230, 311 secured creditors 16, 429–31, 454–56, 460–61, 463, 465, 467–68, 470–73 Bangladesh 354 Brunei Darussalam 317, 319, 321–22, 325–26, 328, 330, 333–34 China 141 civil law countries/jurisdictions 110–12, 114, 116 India 361–65, 367–71, 373–75 Indonesia 145–50, 154, 157, 163–64, 167, 170 Japan 177 Pakistan 383–85, 387–95 Philippines 203, 205–8 Singapore 409, 417 South Korea 214–17, 224–25, 227–30 Taiwan 239–42, 244–45, 248–49, 251–53, 255–57 Thailand 266–67, 271, 273–75, 282, 284 transplantation 40, 42–45 UNCITRAL Model Law 72, 74–76, 78–85 Vietnam 294, 301–4, 311 secured obligations 75, 83, 158, 161–62, 176–78, 215–16, 303–4, 393 secured transactions see Introductory Note and detailed entries securities non-intermediated 77–78, 82–83, 229, 349–51 securitisation 12, 137, 267, 280, 357, 359, 367, 373 security agreements 462–63, 465–66, 469 Bangladesh 349, 351–52, 354 Brunei Darussalam 317, 328, 332, 334, 336 civil law countries/jurisdictions 103, 110, 113–15, 117, 121 developed jurisdictions 57 Indonesia 147, 152, 159 Pakistan 387, 389, 391, 393 Philippines 203–4, 206 Singapore 410 South Korea 219–20, 222–26, 231 Taiwan 248 Thailand 266–67 transplantation 43 UNCITRAL Model Law 71, 74–75, 81–82 valid 16, 74, 104, 114, 354 Vietnam 295–97, 308 security devices 6–7, 73–74, 279, 298–300, 371, 452–53, 455, 473–75 multiple 73, 77 non-possessory 266, 377, 430 security interests see security rights security providers 147, 150, 152, 154, 157, 163, 166 security purposes 73, 110, 188, 265, 268, 274, 279, 284–85 ownership for 110, 265, 268, 274, 285

498 Index security rights 6, 15, 432, 457, 465 acquisition 81, 390, 395, 453–54 China 143 civil law countries/jurisdictions 101, 104, 109–10, 113–14, 116, 119, 122–23 creation 6, 38, 70, 148, 214, 229, 276, 358 definition 111, 281 effectiveness 104, 113, 116 enforcement 122, 267, 363, 371 in immovable properties 214, 231–32 India 358, 363, 367 Indonesia 145–51, 157, 160, 162, 170–71 Japan 180 junior 270–71, 279, 281–82 in movable properties 224, 229, 231, 268, 281 non-possessory 277, 288–89 notice of 38, 300 perfection 299–300, 358 Philippines 202–3 in receivables 224, 229–30, 276, 279, 282 registration 37, 43, 232, 267–68, 349, 359 South Korea 213–16, 218, 222–27, 229–32 Taiwan 248, 251–54, 256, 258 Thailand 264, 266–68, 270–71, 273, 275–78, 280–81, 289 transplantation 34, 36–41, 43 UNCITRAL Model Law 69–71, 73, 77 Vietnam 300–301 security transfers 43, 82, 177, 271, 280 sellers 178, 240–41, 269, 399, 406–7, 410, 453–55, 457 conditional 108, 111 unpaid 345, 390, 395 serial numbers 79, 189, 348, 351, 389, 467 service delivery 67, 89 services 66–67, 94–95, 263, 292–93, 308–9, 341–42, 344–45, 374–75 financial 95, 292, 309, 379, 394, 447 set-off 81, 187, 345, 391 shares 84, 149, 154, 170, 360–61, 400 ships 127, 148, 176, 179, 202, 246, 400, 403 see also vessels Sierra Leone 456, 461 signatures 75, 157–58, 204, 252 electronic/digital 75, 114–15 Singapore 17–20, 397–424, 427–28, 453, 455–57, 461–67, 469–72, 475–76 assignment 401–3, 408, 416, 418 banks 412, 419–20 borrowers 414, 416–17 charges 399–401, 403–9, 412–13, 415–17 claims 399, 406 collateral 407, 410–11, 416, 418, 420, 422–23 contract(s) 401, 406, 410, 416 courts 398, 401–2, 404, 406–7, 410, 413 creditors 398–401, 403–6, 409–10, 415–18, 422 debtors 398–400, 402, 405, 407–11, 416, 422

enforcement 398, 410, 413, 417 financial institutions 420 floating charges 401, 403–5, 408–9, 415–16, 421, 469 goods 399–401, 406–7, 410–12, 416, 422 grantors 400–402 inventory 400 lenders 415, 420 loans 399, 407–8, 420 modern principles 399, 414, 416–17, 421–24 Monetary Authority 412, 420 mortgages 399–401 movables 399 obligations 401, 404, 410–11 ownership 399, 407, 410 perfection 402 personal property 398–400, 403, 411, 413, 420 pledges 399–400, 402, 410 possession 399–400, 402, 410–11 priority 398, 404, 408–11, 415–18 property 399–401, 403–6, 411, 413 receivables 401, 407, 416 reform 398–99, 411, 413–14, 416, 419–24 registration 402–6, 408–9, 413–18, 421 SAL (Singapore Academy of Law) 411–12 sales 398–99, 401–3, 406–8, 410, 413–14, 417–18, 422 secured creditors 409, 417 secured transactions law 397–424 security agreements 410 SMEs 419–21, 424 third parties 402, 418 title 399, 407, 409–10, 422 transactions 405, 407, 411, 417–19, 422 transfer 398, 402, 409 Singapore Academy of Law (SAL) 411–12 small and medium enterprises see SMEs small businesses 37, 69–70, 197, 282, 288, 292, 426, 459 see also SMEs smart contracts 89, 105, 119, 121, 123 SMEs 11–12, 14, 437, 459, 473–74 Bangladesh 343 Brunei Darussalam 327 China 125–28, 130, 133–34, 144 development 141, 294 financing 193, 380, 420, 476 Indonesia 145–46, 170 Japan 174–75, 380 Pakistan 377–78, 380–81, 395 Singapore 419–21, 424 South Korea 230–31 Taiwan 238, 243, 249, 260–61 Thailand 263–64, 283–84, 287 transplantation 44 Vietnam 292–94, 309

Index 499 social welfare 26–27, 34, 49, 286 solutions 105–8, 118, 120, 123–24, 280–83, 287, 289, 415 digital-technology 115, 118 legal 101–2, 107, 122 simple 119, 124, 209 technological 105, 114, 117–18, 121 transformative 102, 122 South Korea 15–19, 213–33, 430, 453–54, 460–66, 468, 470–71, 473–74 assignment 216–17, 219, 221, 229 banks 214 borrowers 221 claims 214, 216–25, 227–29, 231 collateral 214, 217, 219–25, 227–31 contract(s) 213, 217 courts 217, 220–21, 226, 228, 230 creditors 215, 217, 219–21, 224, 229–30 debtors 214–17, 219–22, 224–25, 228–30 encumbered assets 214–16 enforcement 214, 216–18, 221–24, 227–28, 230 grantors 224–25, 227–29, 231–32 immovables 213–14, 230–32 inventory 219 legislators 222, 232 loans 214, 221 mortgages 213, 217, 223, 226, 231 movables 214–16, 218–27, 229–32 obligations 214–15, 219, 224, 230 ownership 217, 221, 224, 228 pledges 213, 215–18, 223, 227, 229 possession 215–16, 219–22, 227 priority 214, 216, 218, 221–22, 227–30 property 214, 221–22, 224–25, 231–32 receivables 213–15, 219, 222–25, 229–32 reform 214–15, 222, 230–33, 235 registration 214, 222–23, 225–27, 229–32 sales 217, 227–28 secured creditors 214–17, 224–25, 227–30 security agreements 219–20, 222–26, 231 security rights 213–16, 218, 222–27, 229–32 SMEs 230–31 third parties 215–17, 221–22, 225, 227, 229, 231 title 223 transfer 214–15, 217–23, 225, 227, 231 special laws 109, 176–77, 179, 192, 280–82 special priority rules 301, 329, 350, 390, 441, 454 special rules 54, 132, 141, 144, 301–2, 329, 349, 454 specificity 43, 111, 152, 429–31 stability 90–91, 97, 132, 141, 222 financial 15, 39, 87, 175 macroeconomic 311 regional 89 stakeholders 67, 198–200, 228–29, 283, 287–89, 347–48, 421–22, 448–50 engagement 67–68 key 95, 199, 293

local 445, 449 private 200, 449 relevant 92, 199, 208, 356 stamp duties 366–67, 372, 377, 382, 386, 392, 395 standards 8, 34, 67, 261, 264, 289, 307, 427 global 379, 381 international 103, 105, 243, 263–89, 372, 378, 386, 390 State Administration of Market Regulation see SAMR State Auction Office 163, 165–66 State Bank of Pakistan see SBP State Bank of Vietnam 296, 304, 309 state-owned banks 127, 145, 342, 380 state-owned land-use rights 127, 142 statistics 11, 93, 130, 136, 166, 214, 309 statutory detentions 127, 136, 138–39, 141, 143 statutory liens 176, 178, 180, 302, 383 strength of legal rights index 9–10, 48, 235–36, 238, 241, 249, 286, 289 subordination, agreements 54, 301, 307 subrogation 177–78 subsidiaries 129, 342, 366 super priority 81, 277, 302, 319, 329–30, 370 supplier credit 386, 447, 455 supplier financing 385, 387 suppliers 133, 318, 375, 377, 386, 401, 455–56, 475 supply chain financing 309, 451 supply contracts 45, 178, 401 surplus value 45, 325, 431, 439, 453–55 surveyors 243, 246, 249, 260 Taiwan 17–20, 235–61, 428, 453, 455–56, 459–60, 463, 465–67 assignment 239 banks 237, 240–41 borrowers 240–41, 245 charges 237, 255 claims 241 collateral 236–40, 242, 244–48, 251–58, 260 contract(s) 240, 244, 250 courts 254–55, 260 creditors 237, 239–40, 245, 247–48, 250–53, 255–57 debtors 239, 242, 245, 247–48, 250–56, 259 enforcement 242, 251, 256, 258–59 financial institutions 254 floating charges 235, 237, 243–44, 251, 254–56, 259–61 FSC (Financial Supervisory Commission) 235, 237, 244, 246–47, 249–50, 252–53, 260–61 goods 240 grantors 251, 253–56 immovables 245 Legislative Yuan 244–45 lenders 237, 240–41, 261 loans 237, 245, 255 mortgages 245, 248–49, 256 movables 238, 248, 261

500 Index obligations 237, 239–40, 242, 245, 248, 250, 255, 259 perfection 237 personal property 235–36, 238–41, 244, 246–48, 250–54, 256–60 pledges 239, 241, 258 possession 239–41, 256 priority 237, 244, 248, 250–52, 256–58 property 239–41, 244, 246–48, 251, 253, 255–56, 258 receivables 253–54 reform 235, 237–38, 241–48, 250, 255, 258–61 registration 238, 242, 244–49, 252, 257–58 sales 239–40 secured creditors 239–42, 244–45, 248–49, 251–53, 255–57 secured transactions 235–61 security agreements 248 security rights 248, 251–54, 256, 258 SMEs 238, 243, 249, 260–61 third parties 242, 245, 253, 257–58 title 240, 248, 259–60 transactions 240, 249 transfer 253 tangible assets 28, 76, 81, 84, 122, 176, 317, 321 tangible collateral 59, 205, 349 tangible personal property 126, 130, 134–35, 464 tangible property 14, 59, 133–34, 276, 364, 418, 459, 465 technical assistance 10, 88, 293, 297 technological solutions 105, 114, 117–18, 121 technology 31, 89, 118, 121–24, 133, 155, 208, 471 digital 105, 114–15, 117–18, 121 terminology 2, 13, 15–16, 199, 237, 335, 337, 348 Thai Bankers’ Association (TBA) 275, 277–78, 450 Thailand 17–19, 263–89, 438–40, 444–46, 449–51, 453, 455–56, 462–64 assignment 274 banks 275–76, 283, 287 borrowers 267 charges 283, 289 claims 265, 267–68, 278, 282, 287 collateral 264, 266–67, 270, 273–75, 284, 287–88 courts 269, 271–72 creditors 265, 268–71, 274–75, 278, 281–82, 289 DBD (Department of Business Development) 93, 283–85, 287–88 debtors 265, 269–76, 279–82, 284, 286–88 enforcement 265, 276 financial institutions 266, 271 goods 267 grantors 266–67, 270–71, 273 immovables 265–67 inventory 266–67 lenders 266–67, 270, 274, 285, 287–89 loans 263, 270, 274–75, 288 modern principles 264, 277–78, 284–85, 289 mortgages 264–67, 270, 273–74, 288

movables 266–68, 274, 276–77, 281 obligations 265, 268, 271–72, 278, 287 ownership 265, 268–71, 273–75, 278–81, 284–85 pledges 264–65, 268, 270, 273, 282 possession 264–66, 268, 276, 282, 284, 289 priority 265, 271–73, 275–76, 278, 280 property 265–71, 273–75, 278–79, 285–86, 288 receivables 268, 271–74, 276–85, 289 reform 273, 277–78, 282–89, 442 registration 265, 268, 272–73, 276, 278, 280–83, 289 sales 265, 269, 274, 276, 279 secured creditors 266–67, 271, 273–75, 282, 284 security agreements 266–67 security rights 264, 266–68, 270–71, 273, 275–78, 280–81, 289 SMEs 263–64, 283–84, 287 TBA (Thai Bankers’ Association) 275, 277–78, 450 third parties 265–66, 276, 278, 281–82 title 267 transactions 265, 267–68, 271, 278, 282 transfer 265–66, 271–74, 276, 278–82, 289 third parties 5–6, 16, 432, 453, 458, 462–64 Bangladesh 339, 350, 352–53 bona fide 138, 257 Brunei Darussalam 327, 331, 336 China 126, 129, 134, 139, 141–42 civil law countries/jurisdictions 104, 113, 116–17 developed jurisdictions 55, 60 India 370, 375 Indonesia 145, 147, 159, 161, 166 Pakistan 384, 387–88, 390–91 Philippines 205 Singapore 402, 418 South Korea 215–17, 221–22, 225, 227, 229, 231 Taiwan 242, 245, 253, 257–58 Thailand 265–66, 276, 278, 281–82 transplantation 36 UNCITRAL Model Law 74, 76–77, 79–81, 84–85 Vietnam 295–96, 299–300, 305, 307 third party effectiveness 16, 41–42, 69–70, 74, 76–78, 80, 104, 113–14 titel eksekutorial 163–65, 168–69 title 3–4, 438–39, 444, 461, 473, 476 Bangladesh 350–51 Brunei Darussalam 317–18, 325, 329, 336 China 142 civil law countries/jurisdictions 103–4 deeds 358, 366 developed jurisdictions 57 documents 57, 136–37, 239, 350–51, 360–61, 387–88, 392, 395 Indonesia 149–53, 161, 163, 166 location of 318, 324, 329 Pakistan 384–85, 393 retention of see retention, of title Singapore 399, 407, 409–10, 422 South Korea 223

Index 501 Taiwan 240, 248, 259–60 Thailand 267 transplantation 34, 41, 44–45 UNCITRAL Model Law 73–74, 77 Vietnam 296, 299 trade names 223, 226, 457 trade receivables 194, 266, 276, 460 trademarks 58, 155, 374, 401 traditions 34, 103, 105, 123, 436, 439 legal 102–5, 108–9, 113, 116, 121, 123–24, 441, 446 training 48, 284, 309–11, 450–51 transaction costs 10–11, 56, 66, 102, 114, 134–35, 142, 445 transactions see also Introductory Note commercial 5, 89, 348, 418 financial 223, 349 financing 5, 265–66, 273, 276, 278, 281–82, 285, 417 hire-purchase 269, 364, 373, 454 ownership-based 268–70, 278–79, 281, 289 transfer 4, 430, 447, 452, 457, 464 absolute 178 actual 150, 161, 181 Bangladesh 345 Brunei Darussalam 335 China 131 civil law countries/jurisdictions 112, 121 of claims 153, 265, 268, 287, 460 developed jurisdictions 54, 57–58 India 358–59, 364–65, 368, 370, 374 Indonesia 150–51, 153, 155 Japan 177, 189 of ownership 129, 177–78, 182, 194, 265, 279, 353 Pakistan 381, 387 Philippines 206 of possession 78, 110, 113, 268, 399, 402 of property 358–59, 374, 382, 463 of receivables 4, 271–74, 276–82, 284–85, 289, 335, 457–58, 474 security 43, 82, 177, 271, 280 Singapore 398, 402, 409 South Korea 214–15, 217–23, 225, 227, 231 Taiwan 253 Thailand 265–66, 271–74, 276, 278–82, 289 of title 41, 43, 126, 132, 150–53, 406, 409, 430 transplantation 42 UNCITRAL Model Law 78, 80–81 Vietnam 302, 304 transferable fund units 130, 134 transferees 42, 81, 206, 272–73, 278, 282, 328, 391 transferors 42, 177, 229, 272–73, 278, 331, 358 transformative solutions 102, 122 transitional provisions 5–6, 61, 89, 94, 353–54, 394, 441 transparency 49, 71, 76, 272, 275, 281–82, 284, 421–22 transplantation 25–50, 276–77, 286, 289 assignment 41, 43–45 banks 37, 44

borrowers 38–39, 45 claims 32–33, 37, 43–44, 46 collateral 26, 29, 37, 39–43, 45 contract(s) 29, 45 creditors 29, 32, 37–38, 41, 43, 45 debtors 29, 37, 39–41, 44–45 encumbered assets 42 enforcement 40, 45 grantors 28, 37–38, 42–43 of international standards 276–77 inventory 37, 42 lenders 37–39, 44 loans 37, 39 mortgages 45 movables 36, 39–41, 43–44, 48 obligations 29, 41, 43 ownership 45 perfection 28, 36, 39, 41–42, 44 personal property 25, 29, 39 pledges 41, 45 possession 28 priority 29, 41–42, 46 processes 34, 46, 49 property 34, 38, 43, 45 receivables 29, 37, 42, 45 and reform 26, 31–37, 46, 48–49 registration 27–28, 36, 41–42, 46 sales 40 secured creditors 40, 42–45 security agreements 43 security rights 34, 36–41, 43 SMEs 44 successful 26, 29, 34 third parties 36 title 34, 41, 44–45 transactions 47 transfer 42 trust 150, 205, 210, 232, 238, 240–41, 249, 332–33 possession in 238, 240–41, 249 trustees 55, 240–41, 267, 300, 362 trustors 240–41 UNCITRAL Legislative Guide on Secured Transactions 247–48, 261, 298, 385–87, 446–47, 450, 452–53, 460 UNCITRAL Model Law assignment 74 banks 84 borrowers 71 charges 75 claims 76, 82 collateral 70, 74, 79–80, 82 contract(s) 73, 76 courts 82–83 creditors 70, 72, 74, 76–77, 83 debtors 70–72, 74–78, 83, 85 encumbered assets 74–76, 79–83

502 Index enforcement 69, 71, 73–74, 82–84 floating charges 73 goods 76, 81, 84 grantors 73–80, 82–84 immovables 84 inventory 75, 79 lenders 71–72 movables 73, 83 obligations 73–75, 77, 83 perfection 70–71, 73, 76–79, 81–84 possession 70, 74–78, 81–83 priority 70–71, 73–74, 77–78, 80–84 property 73 receivables 70, 74, 78, 84 and reform 71 registration 70–71, 76–82, 84 sales 80 secured creditors 72, 74–76, 78–85 security agreements 71, 74–75, 81–82 security rights 69–71, 73, 77 third parties 74, 76–77, 79–81, 84–85 title 73–74, 77 transactions 71–73, 77, 79 transfer 78, 80–81 UNCITRAL Registry Guide 300, 308, 465–66 uniform on-line registration systems 126, 142, 144, 293, 308 unincorporated businesses 5, 317–18, 321, 401, 407 unincorporated organisations 417, 465 unitary approach 35, 108, 111, 299, 418, 442, 453 United Kingdom 121, 235, 326–27, 397–98, 411–12, 415–16, 421, 423 United States 35–36, 40, 46–47, 51–52, 61–64, 67–68, 235, 446–48 NCCUSL (National Conference of Commissioners on Uniform State Laws) 51–52, 61, 63–65, 68 universities 284, 309, 451 unpaid sellers 345, 390, 395 unperfected security interest 55, 60 unregistered security interests 336, 448, 472 unsecured creditors 55, 147, 334, 336, 367–68, 375, 388–89, 471

Vietnam 15–19, 87–89, 92–93, 291–312, 448–54, 456, 459–62, 466–71 banks 296, 300, 304, 306–7, 309, 311 borrowers 292, 294–96, 300, 312 collateral 292–304, 307–9, 311 contract(s) 297, 299, 302 courts 295, 304 creditors 295–96, 298, 300–302, 306, 311 debtors 295–96, 301–2, 304 enforcement 295, 302–4, 312 financial institutions 292, 294, 306, 308 goods 294 inventory 294, 296, 301–2, 311 lenders 292–93, 296–97, 299, 301, 310, 312 loans 294, 296, 309 modern principles 305 mortgages 297–99, 302, 309 movables 293, 295–97, 301, 305, 307–9, 312 NRAST (National Registration Agency for Secured Transactions) 92–93, 293, 297, 300–301, 305–6, 308–10 obligations 295–96, 298–99, 304–5, 312 ownership 302 perfection 299–300, 311 personal property 292, 294, 296 pledges 295–99 possession 300–301, 305 priority 294–95, 300–305, 311 property 295, 298–99 receivables 296, 301 reform 292–93, 295, 297–99, 301, 306–10, 312 registration 295, 301–2, 305–8 sales 301, 303–4, 311 secured creditors 294, 301–4, 311 secured transactions reform 291–311 security agreements 295–97, 308 security rights 300–301 SMEs 292–94, 309 third parties 295–96, 299–300, 305, 307 title 296, 299 transactions 292, 294, 299–300, 302, 306, 311 transfer 302, 304

valid security agreements 16, 74, 104, 114, 354 validity 114, 117, 133–34, 181, 183–85, 203, 207, 384–85 of assignment 182–83 valuation 40–41, 48, 155, 230, 275, 365 expertise 95, 283 experts 95, 448 value 155–58, 178–79, 227–28, 274–75, 321–23, 391–92, 431, 470–71 of collateral 39–40, 43, 139, 190, 192, 218, 228, 298 vessels 130, 134, 142, 147, 151, 265–66, 386 see also ships vested interests 91, 94, 449

warehouse receipts 136, 147, 149, 377, 426 electronic 377–78, 395 WBG see World Bank Group welfare, social 26–27, 34, 49, 286 women entrepreneurs 343, 380 World Bank 8–9, 48, 235–36, 239, 274, 378, 419, 449–50 World Bank Group (WBG) 15, 28, 87–89, 292, 339, 347, 427–28, 464 World Trade Organization (WTO) 126, 128 Yangdodambo 214–15, 218, 222–23, 227, 430, 432, 470