Movable properties, including intangible properties such as receivables and intellectual property rights, can now be more easily used as collateral for loans under Philippine law with the enactment of Republic Act No. 11057 or the Personal Property Security Act (PPSA).
Under old laws, banks and other lenders preferred traditional collateral such as land, buildings, and other immovable property because the established system of registration of title as well as the properties’ size and immovable nature made it much easier to enforce the security. Movable collateral were perceived to be more risky than immovable collateral. This made it difficult for small businesses to obtain loans because often, they have no immovable property among their assets.
The PPSA aims to overcome that perception by mandating the Land Registration Authority to create a centralized Registry where notice of security interests and liens in personal property may be registered (Chapter 5). The PPSA also creates a uniform set of rules that will apply to security interests and liens in personal property, with the expectation that such uniform rules will minimize the ostensible risks for banks and other lenders accepting movable properties as collateral.
Under the PPSA, registrable collateral now include deposit accounts, receivables, checks/negotiable instruments, shares of stock, store inventory, equipment, livestock, motor vehicles, and intellectual property rights, among others. However, the PPSA does not cover aircraft and ships, which are covered by separate laws. Aircraft can be used as collateral under the Civil Aviation Authority Act of 2008, while ships can be used as collateral under the Ship Mortgage Decree of 1978.
The PPSA also makes it possible to use future property as collateral, provided that the security interest is not created until and unless the borrower acquires rights in it or the power to encumber it (Section 5 b). Previously under old laws, a borrower cannot pledge or mortgage property that he does not own.
Prior to RA 11057, pledge or chattel mortgage of a movable collateral would differ in formalities as to creation, perfection/registration and enforcement. For example, in a pledge, delivery of the thing pledged is necessary for its validity while in chattel mortgage, delivery is not necessary. In pledge, the agreement must be in a public instrument containing description of the thing pledged and the date thereof to bind third persons; in chattel mortgage, registration where the property is situated is necessary to bind third persons.
Now, rules on formalities as to creation, perfection/registration and enforcement have been simplified and harmonized. A signed written contract is enough to create a security interest. Perfection of such security interest may be by registration of a notice with the registry, possession of the collateral by the secured creditor or control of investment property and deposit account.
Moreover, the PPSA creates a single set of rules that will govern the perfection and enforceability of security interests in movable property. The parties to loan agreements only need to observe the following formalities (Section 12):
Written security agreement signed by the parties
A description of the collateral, whether specific or general, that reasonably identifies the same
Perfection of the security interest by registration of a notice with the electronic registry and either possession of the object (if the collateral is tangible property) or control of the account (if the collateral is investment property or deposit account)
Previously under old laws, the parties had to observe different sets of formalities depending on whether they are entering into a pledge or chattel mortgage.
Other features of the PPSA include the following:
- It creates a single set of rules that will determine priority of enforcement of security in case there are several creditors (Chapter 4).
- It uniformly provides that in case of enforcement of the security, the secured creditor will account for the surplus amount; meanwhile, in case of deficiency, the debtor continues to be liable for such deficiency (Section 52 b). Old laws provided for differing rules, which caused a lot of confusion.
- In case of enforcement of the security, under the PPSA the secured creditor may take possession of the property without need of judicial process (Section 47) and proceed to dispose the collateral in a public or private sale upon notice to the debtor (Section 49). Under old laws, foreclosure may only be done before a notary public (pledge), public officer, or court (chattel mortgage), and foreclosure sales were required to be done publicly.
However, notwithstanding the entry into force of the PPSA, it also provides that it cannot be implemented until and unless the Registry to be established by the Land Registration Authority becomes operational. Furthermore, the Department of Finance in coordination with the Department of Justice still needs to issue implementing rules and regulations. Since both pre-requisites have yet to be complied with, the prolonged transition period has created confusion among borrowers, lenders, and legal practitioners alike.
The information provided here is for information purposes only, and is not intended to constitute legal advice. Legal advice should be obtained from qualified legal counsel for all specific situations.