Workshop dec 2012
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1) The document outlines the key components needed for a modern legal framework for secured lending, including creation of a security interest, a priority scheme, registration and registry systems, and enforcement procedures. 2) It recommends taking a functional approach that focuses on the economic purpose of transactions rather than legal forms, and giving parties flexibility to structure agreements. 3) An effective registry system should provide notice-based registration, be unified, centralized, accurate, accessible, and follow best practices for speed, cost-effectiveness and simplicity.
Workshop dec 2012
- 1. Legal and Institutional Frameworks for Secured Lending Moscow December 2012
- 2. Antecedent Work on Reform • EBRD critique and recommendations on Codification Committee’s 2010 draft amendments to Chapter 23 of Civil Code • Identified positive changes in draft and numerous remaining deficiencies • Developed proposed amendments to draft that is now before Duma (without those amendments)
- 3. Determine Approach to Reform • Amend existing law or replace? The question needs to be considered • Start by describing the desired end state, by whatever route it is reached • At the highest abstract level, end state must fit core concepts of modern secured lending, to be addressed serially as: – Comprehensive coverage – Functional approach – Flexibility and autonomy of parties – Simplicity
- 4. Comprehensive Coverage • One set of rules for all arrangements in which an obligation (monetary or otherwise) is secured by a legal interest in movable property • All types of: – Parties – natural and juridical – Legal forms of security – Movable property
- 5. Functional Approach • Not defined by narrow rules of specific legal forms of interest in movable property • Concerned with what the transaction does, not what name we use for it • Approach does not require abolishment of legal forms, only that they be treated with one set of rules with regard to coverage of this law
- 6. Flexibility and Party Autonomy • Principally with respect to description of the obligation and property • Also with respect to other terms of agreement such as definition of terms of default • General idea is that parties should be free to frame their own agreements within broad scope of the law
- 7. Simplicity • No requirements that are not necessary to core purpose of law • Eliminate formalities, e.g. notarization of agreements • Eliminate need for paper in registration • KISS rule as guiding mantra
- 8. Legal Framework Framework must have four major components – may be in different legal sources, e.g. CC, special law, regulation • Creation of security interest • Priority scheme and requirements • Registration and registry • Enforcement Will address each in turn
- 9. Component 1 – Creation of Security Interest • Parties make security agreement • Agreement in writing – any tangible medium • Parties set own terms – no unnecessary requirements in law • Binding on parties upon conclusion of agreement – no registration required
- 10. A Security Interest May: Secure one or more obligations that may: • Be described specifically or generally • Be monetary or non-monetary • Be pre-existing, present or future; or a line of credit
- 11. Description of Collateral • Description may be specific or general; may include future collateral • Must reasonably identify collateral • “All equipment” or “all accounts receivable” is sufficient description • Purchase money exception – specific description necessary
- 12. Types of Interests Covered • Pledge • Chattel mortgage • Sale with retained title • Installment seller’s right to re-take • Finance lease • Other interest in movables that secures an obligation
- 13. Types of Movables • Equipment • Inventory and raw goods • Cash-flows (receivables & secured sales contracts) • Intangibles and documents (e.g. securities, warehouse receipts, instruments, contract rights, intellectual property, etc.) • Crops and livestock • Fixtures – movables fixed to real estate • Consumer goods • Cash & deposit accounts • Minerals and timber to be severed from land
- 14. Attachment (Effectiveness between Parties) of Security Interest Attachment relates to making the security interest enforceable between the parties Three requisites: • Security agreement signed by debtor • Secured party has given value • Debtor has rights in the collateral (not necessarily ownership) A security interest attaches to proceeds of original collateral
- 15. Attachment of Security Interest (legal enforceability) Attachment Signed Value given by Debtor has rights and and agreement secured party in collateral
- 16. Continuity of Security Interest • General Rule: Security interest continues in collateral even if sold, leased, licensed or otherwise disposed • Exceptions are laid out in Law
- 17. Component 2 – Priority Scheme • General principle – priority determined by when security interest is made transparent, e.g. by registration, possession or control • Exceptions: – Purchase money – Proceeds – Purchase in ordinary course of business
- 18. Perfection a/k/a Completion or Third Party Effectiveness • Perfection means optimization of secured creditor’s rights against third parties • Generally achieved by making security interest transparent • Requires attachment and means of perfection • Four means of perfection: – Registering notice in registry – Possession – Control – Automatic (purchase money, proceeds)
- 19. Priority Rules Priority Purchase Ordinary Consumer General rule: Miscellaneous or Money or Course or Goods or First to: exceptions exception exception exceptions Register or Perfect
- 20. Priority Is Against Following: • Buyers of collateral • Unsecured creditors • Other secured creditors • Lessors of equipment • Bankruptcy liquidator • Other interests (government and judgment liens, etc.) if politically possible to include in law
- 21. Special Priority Provisions Facilitate MSME and Agricultural Financing • Purchase money security interest has priority over security interest in a class of movables; enables business to use second financer for purchase of a specific asset • Interest in crops, growing or to be grown has priority over interests in the land • Interest in crops or livestock for costs of production has priority over a general security interest in crops or livestock
- 22. Component 3 – Registration and Registry • Secured party registers only a notice, not the security agreement • Notice includes only: – Debtor name or identification number – Secured party name and address – Description of collateral – general or specific • No formalities required – notice does not create rights; it only publicizes the interest
- 23. Purpose of Registry • To give notice of the secured creditor’s interest in the collateral • To establish the secured creditor’s priority by time of registration of the notice
- 24. Core Tenets of Registry • Notice registration • Unified as to types of movable property and types of legal interests • Centralized – geographically and structurally • Observe international best practices 24
- 25. Registry Best Practices • Accuracy – capture exactly information presented • Speed – speed of registration and searching • Accessibility – any time, from any place • Cost effectiveness – fees cover costs of operation; not general revenue source for government • Simplicity – reduce risk of error and encourage use • Limited to purposes of registration – give notice and establish priority • Rule-based decision-making – no bureaucratic discretion in registration and searching
- 26. Form of Registry • Electronic registry – web-based • Accessible to all via internet • Automated acceptance or rejection • Reliable, fully automated search process • No unnecessary formalities for registration • Uniform treatment of notices of all types • Automated fee payment system • Secure from tampering and corruption
- 27. Component 4 – Enforcement • Secured creditor has immediate right to possession of collateral • Self-help or expedited judicial action • Secured creditor may dispose of collateral in commercially reasonable manner • Distribution of proceeds in priority order • Secured creditor has fiduciary duty to debtor and other claimants, including notice