1. Case study: Philippine Secured Transactions Law
Thank you Atty. Ortile
“Reforming Asia-Pacific
Financial Infrastructure”
A 2015 APEC FMP Conference
Chester Abellera
12 November 2015

2. Outline Existing Philippine Laws on Secured Transactions
International Best Practice
General Comparison of the Current Philippine Legal Regime against International Best Practice
Current Initiatives of Philippine Government
Conclusion

3. Existing Philippine Laws on Secured Transactions

4. Existing Philippine Laws
Act 1508 (July 2, 1906) – The Chattel Mortgage Law
Act No (February 5, 1912) – The Warehouse Receipts Law
Act 2243 (February 11, 1913) – Record of Mortgages issued by public service corporations to secure bonds, and other purposes
Republic Act 386 (June 18, 1949) - Civil Code of the Philippines
Presidential Decree No (June 11, 1978) – Property Registration Decree
Republic Act 7393 (April 13, 1992) – Quedan and Rural Guarantee Corporation Act
Republic Act No (August 16, 2010) – Financial Rehabilitation and Insolvency Act (FRIA)
The 1906 Chattel Mortgage Law – defines what a Chattel Mortgage, creates a Chattel Mortgage Registry, requirements for creating the security right
The 1912 Warehouse Receipts Law – established the negotiable warehouse receipt (that represents fungible goods such as crops deposited in a warehouse) capable of being sold or mortgaged and may be reached by creditors by way of attachment
The 1913 Act 2243 – provides for recording of mortgages and/or deeds of trust (covering movable properties consisting of machineries and equipment of public service corporations such as railroad companies, sugar central companies and tramways), to secure bonds and loans from the government
Civil Code contains provisions applicable to chattel mortgage, conditions for the same, rights and obligations, etc. The Civil Code also contains the rules for concurrence and preference of credit
PD continued the chattel mortgage registry established in the Chattel Mortgage law
RA7393 institutionalized the quedan or warehouse receipt and other negotiable instruments, evidencing stored/deposited agri-aqua produce in bonded warehouses, as the more convenient collateral for obtaining credit financing.
FRIA or RA – is the recently updated insolvency law of the Philippines.
I will touch on the relevant provisions of most of these laws as they relate to the international best practice

5. Best Practice on Secured Transaction Legal Framework

6. International Best Practice
UNCITRAL Legislative Guide on Secured Transactions
The IFC Secured Transactions System and Collateral Registries Toolkit
The World Bank Principles and Guidelines for Effective Insolvency and Creditor Rights System
Jaime has discussed these by distilling them into general principles she mentioned earlier.

7. Best Practice on Secured Transaction Legal Framework*
Broadly defined scope of permissible collateral, obligations
Ease of creating security interest
Centralized publicity system
Clear, comprehensive priority rules
Effective Enforcement
The UNCITRAL Legislative Guide on Secured Transactions contains the best practices for a Secured Transaction Legal Framework.
These are some of the elements of a modern Secured Transaction (or as Jaime mentioned…principles of a modern secured transactions regime)
*UNCITRAL Legislative Guide on Secured Transactions

8. General Comparison of the Current Legal Regime against International Best Practice
This comparison is by far not comprehensive, but merely presents some of the departures of the current Philippine regime from best practice

9. 1. Broadly defined scope of permissible collateral, obligations
General Comparison
1. Broadly defined scope of permissible collateral, obligations
Best Practice
Current regime
Movable assets that could be included:
Anything that is not real property;
tangible and intangible property;
assets that do not exist (future assets*), and a changing pool of assets (inventory*).
*To cover these assets, assets must be described generally and generically.
Includes:
movable assets, exception: house and equipment may be the subject of chattel mortgage
Section 7 of Act 1508: ‘covers only the property described therein, not like or substituted property’.
Saldana vs. Phil. Guaranty (1960) – spirit of CML allows for mortgage to be extended to after-acquired property
accounts receivables may not be explicitly covered (due to decription requirement)
Since the purpose of the Chattel Mortgage law is to promote business and economic development, the prohibition against after-acquired property as objects of a chattel mortgage is not applicable to retail stores, where property is is constantly sold and substituted with new stock e.g. drugstores, grocery stores, dry goods stores, and bazaars.
There must however be express stipulation that such after-acquired properties are included in the mortgage, extending its effects, e.g, to all goods, stocks in trade, furniture, and fixtures hereafter purchased by the mortgagors.

10. 1. Broadly defined scope of permissible collateral, obligations
General Comparison
1. Broadly defined scope of permissible collateral, obligations
Best Practice
Current regime
Existing and Future obligations
absolute ownership of asset required
- limits application to future property (property not yet owned)
Only valid and existing obligations may be secured by a chattel mortgage (Affidavit of good faith)
Absolute ownership of the personal property by the mortgagor is required under the Civil Code. (this is to authorize the foreclosure sale later if needed)
This excludes future property, because a person cannot mortgage what he does not yet own.
On types of obligations covered.
The second averment in the Affidavit of good faith (requires that obligation is a just and valid obligations) means that only obligations existing at the time of consitituting the mortgage may be the covered. This, excludes future debts, or after-incurred obligations.
Note: This condition limits the increase or an extension of the chattel mortgage obligation to the execution of new chattel mortgage.
Exception: mortgage over after-acquired property as substitution/renewal of goods on hand as in the case of retail store.

11. Examples of Movables Aircraft Bank accounts Animals, crops and timber
 Equipment / Machinery
 Intellectual Property
 Inventory
 Leases
Promissory Notes, and Chattel Paper
 Receivables (credit rights under contracts and invoices)
 Shares of stock in a corporation
 Ships / Vessels
 Motor vehicles
Movable property - anything not characterized as real property (Civil Code Provision:
Aircraft
Requires registration of mortgage deed with Air Transportation Office (ATO)
Requires submission of Affidavit of Good Faith with ATO
Bank accounts
Created by executing a document that such (loan) amount is subject to a charge, with notice to depository bank
Foreign Currency Deposits could be used as collateral in a loan (RA 6426)
Certificates of Time Deposit (CTD) could also be used as security for loans
CTDs subject of security shall be surrendered to the lending bank
Animals, crops and timber
Should be specifically described in the chattel mortgage registry
Equipment / Machinery
Intellectual Property
No specific legal provision, uncommon to create a mortgage on IPR
To constitute/create a pledge, instrument proving the right must be delivered to creditor
Inventory
Generally, security will only cover the assets specifically described and not like or substituted property thereafter acquired by the mortgagor (Section 7 of the Chattel Mortgage Law – Act No. 1508)
Future property/ assets (not included by virtue of Article 2085 (2), Civil Code: absolute ownership of the thing by the debtor/mortgagor is required)
After-acquired properties, in renewal of, or in substitution for goods on hand – as in stores open to the public (Northern Motors vs. Coquia, 66 SCRA 415)
Leases
intangible property, not very common to create mortgage on a lease
Promissory Notes, and Chattel Paper
Intangible property
Receivables (credit rights under contracts and invoices)
Security is created through assignment of receivables (owner of credit as assignor; assigns or transfers a credit to an assignee, without need of debtor’s consent, and assignee acquires power to enforce the credit;
Requires the assignment to appear in a public instrument to be binding against third persons.
Shares of stock in a corporation
Ships / Vessels
Additional registration of mortgage deed with the office of the Philippine Coast Guard
Motor vehicles
Additional registration of mortgage deed with the Land Transportation Office (LTO) if private vehicle, with the Land Transportation Franchising and Regulatory Board (LTFRB) if public vehicle.
NOTE: while technically, these may be the subject of a chattel mortgage, it will be good to determine whether these assets are being used as such. Why or why not?

12. General Comparison (continued)
2. Ease of creating security interest
Best Practice
Current regime
A security agreement is any written agreement signed by the debtor, and identifying the collateral and the secured obligation should be sufficient.
minimal formal requirements for creating security interests; no special terminology, forms, or notarization required
the security agreement may include warranties and covenants, events of defaults, remedies.
Security over future assets or changing pool of assets may be created by agreement without need for any further acts.
a security, accessory contract where personal property is mortgaged for the performance of an obligation or payment of a debt
Section 5 of CML:
A form must be used for registration of a chattel mortgage, which requires disclosure of:
Terms of the agreement
Specific Form of the obligation
Amount of the obligation
Interest rate.
Form must be signed and sworn by mortgagor and two witnesses before a notary.
*Creating security interest with formal requirements will entail costs (stamp duties, and other fees).

13. General Comparison (continued)
3. Centralized publicity system: Movable Collateral Registry
Best Practice
Current regime
Two basic functions of an efficient centralized registration system:
Notifies 3rd parties of existence of the security interest; and
Establishes priority status of a security interest based on the date of registration
Registration does not create or transfer property rights; Purely an administrative function; thus, will not necessitate registry officials to determine authenticity, accuracy or validity of the information provided in the registration document
Requires minimal registration information:
Debtor’s identity
Creditor’s identity
General or specific description of the collateral
Use an electronic system with broad access that will enable fast registration and info retrieval
Philippine Chattel Mortgage Registry is embedded in the country’s Torrens system of registry.
As such, chattel mortgage registration is done in the provincial Register of Deeds offices level -168 ROD offices.
CML also requires double registration in cases where debtor and secured assets are located in different locations.
LRA is enhancing their system and moving towards web-based registry.
Publicity System (Registration)
Registration of Mortgage Deed with Register of Deeds (perfection) (Sections 4 and 5, Chattel Mortgage Law – Act No 1508)
Execution and submission of Affidavit of Good Faith (notarized) (Section 5, Chattel Mortgage Law – Act No 1508)
Register of Deeds certifies to date, hour, minute when mortgage was received (Section 115, Property Registration Decree-PD 1529; and Section 198 of Administrative Code)
Chattel Mortgage Registry operated by the Land Registration Authority (LRA)
LRA enhancing registry and moving towards web-based registry
Information recorded: names of borrower/mortgagor and lender/mortgagee; sum/performance guaranteed; date of instrument; name of notary; note that the property and mortgage terms and conditions are mentioned in detail in the instrument filed. (Section 115, Property Registration Decree-PD 1529; and Section 198 of Administrative Code)

14. General Comparison (continued)
4. Clear, comprehensive priority rules
Best Practice
Current regime
Priority rules only apply for perfected security arrangements, perfecting a security agreement is effected by
filing a notice in the secured transaction registry, or
taking possession or control of the collateral (pledge)
Priority rules establish the order competing claims will be satisfied, following the basic rule of “first in time, first in priority.”
Clear and precise priority rules provides high degree of certainty the legal risks associated with granting a secured credit.
Non-consensual (forced) liens in the collateral by virtue of statue or judicial process (tax lien, judgment lien, statutory lien, or insolvency administrators) should be subject to the same “first in, first in priority” rule.
Civil Code gives preference for duties, taxes, and fees to state, giving absolute priority over other claims, even if registered.
Problem: no requirement for government to make its claims transparent.
Secured creditors with claims to a specific movable property will be satisfied on a pro rated basis, or treated in pari passu. (i.e. settlement is in proportion to creditors claims.)
Priority Rules
Specially preferred credits - claims or liens on specific movable property (Article 2241, Civil Code)
Listing of preferred claims and liens, which are given first priority on specific property (Article 2246, Civil Code)
Taxes, duties, and fees due to the State take precedence over all (Article 2247, Civil Code)
Other specially preferred credits shall be satisfied pro rata (Article 2247, Civil Code)

15. General Comparison (continued)
5. Effective Enforcement
Best Practice
Current regime
Speedy, effective, and inexpensive enforcement mechanism
Rights and remedies upon default of both the debtor and creditor must be clear (including seizure and sale of collateral outside the judicial process)
For cases requiring judicial intervention, expedited summary legal proceedings should limit judicial determination of:
Existence of agreement creating/granting the security interest; and
Event of default.
Reasonable safeguards should be in place to:
protect against misbehaving creditors; and
obtain commercially fair value for the private sale of collateral.
Extrajudicial enforcement, by selling property 30 days from the time of default at a public auction.
If debtor refuses to yield possession, creditor can maintain an action to recover possession, Replevin, then foreclosure through sale at public auction
Debtor could delay action for extended periods, making it difficult to recover assets while they still have value.
Mode of disposition of collateral after default is through sale by public auction, which often results in less than full value being paid for the assets.
- private sales are prohibited - pactum commisorium

16. Current Initiatives of Philippine Government
IFC is working together in partnership with the Department of Finance and the Land Registration Authority on this reform
In 2012, a Technical Working Group comprised of a diverse group of stakeholders (BAP, SEC, BSP, SME Groups etc.) was established and they came up with a framework document that provided recommendations on how to pursue a best practice secured transactions reform
LRA adopted these recommendations as it enhanced its registry and move towards a web-based registry
The Framework Document outlines the movable collateral reform agenda in order to establish a modern, efficient movable collateral system in the Philippines.

17. A True Comprehensive Secured Transactions Reform Entails the Following:
It is more than the establishment of an electronic, consolidated and central registry – This is just among the other elements that need to be in place…
Legal and institutional framework to facilitate the use of movable property as collateral for both business and consumer credit
A shift in mind set among key stakeholders (government/legislators/judicial, financial institutions, MSMEs…)
There may be a wrong notion that a secured transactions reform is just a matter of establishing a centralized registry . A centralized registry is just among the other elements that need to be in place for a true comprehensive secured transactions reform. Among others…a n electronic registry should provide full public accessibility of information. It should be simple, accurate, efficient and timely.
The legal and institutional framework should provide for :
Broad scope of movable assets that may be used as collateral
Clear rules on priority of claims for secured creditor
Effective enforcement of security of rights over movables upon default
Non-possessory security rights without requiring specific description of the movable collateral
Finally, it entails a shift in mindset among all key stakeholders
A sustained buy in among all key stakeholders – the sustained political will from the government and legislators, increased confidence among financial institutions to accept movables as collateral and as a parallel effort financial education on responsible borrowing targeted to MSMEs/consumers

18. Thank you