workshop dec 2012
Post on 18-Jul-2015
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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)
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
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
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
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
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
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
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
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
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
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
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
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
Attachment of Security Interest(legal enforceability)
Attachment
Signed
agreementand
Value given by
secured partyand
Debtor has rights
in collateral
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
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
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)
Priority Rules
Priority
General rule:
First to:or
Purchase
Money
exception
or
Ordinary
Course
exception
or
Consumer
Goods
exceptions
orMiscellaneous
exceptions
Register or Perfect
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
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
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
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
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
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• 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
Registry Best Practices
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
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
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