Published 17 September 2018, The Daily Tribune

Do you know that deposit accounts and intellectual property rights may now be used as collateral in securing loan obligations?

At present, banks and other financial institutions prefer traditional collateral such as realty and other immovable property making it difficult for small entrepreneurs to obtain loans.

To boost access to credit, especially of micro, small, and medium enterprises (“MSMEs”), farmers and fisherfolk, Republic Act No. 11057 (“R.A. 11057”), otherwise known as the Personal Property Security Act, was signed into law last 17 August 2018. It strengthened the secured transactions legal framework in the Philippines and provided for the creation, perfection, determination of priority, and enforcement of security interests in personal property. R.A. 11057 also pursued the design, establishment, and operation of a unified, centralized, online notice-based national collateral registry that will be lodged in Land Registration Authority (“LRA”) to reduce the risks involved in accepting movable collaterals.

Under R.A. 11057, movable collaterals now include, among others: deposit accounts, accounts receivable, negotiable instruments, security certificate or electronic securities, inventory, equipment, consumer goods, livestock and other agricultural products, vehicles, and even intellectual property rights.

Before, a future property cannot be pledged or mortgaged since a party cannot legally pledge or mortgage property he does not own. Under the present law, the security agreement can now provide for the creation of security interest in a future property, subject however to the creation of security interest when the borrower acquires rights in it or the power to encumber it.

Essentially, R.A. 10157 covers all transactions of any form that secure an obligation with movable collateral, except interests in aircrafts which will be subject to Republic Act No. 9497, or the “Civil Aviation Authority Act of 2008”, and interests in ships subject to Presidential Decree No. 1521, or the “Ship Mortgage Decree of 1978”.

Prior to R.A 11057, pledge or mortgage of a movable collateral would differ in formalities as to creation, perfection/registration, and enforcement. In pledge, delivery of the thing pledged is necessary for its validity while in mortgage, delivery is not necessary. In pledge, the agreement must be in a public instrument containing the description of the thing pledged and the date thereof to bind third persons; in 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. Also, a set of priority rules had been provided for to determine the priority of interests and liens in the same collateral. More importantly,  the long-standing distinction between a pledge and chattel mortgage on the right of the lender to recover deficiency has been removed. Under the old law, the mortgagor is liable to the mortgagee if the proceeds of the foreclosure sale are not enough to satisfy the loan. Conversely, the foreclosure of the pledge completely extinguishes the loan obligation and any stipulation allowing the pledgee to recover any deficiency is null and void. Under the new law, the secured creditor, whether a mortgagee or pledgee, shall account to the grantor for any surplus, and, unless otherwise agreed, the debtor is liable for any deficiency.

In view of the foregoing, it bears stressing that the following laws, decrees, and issuances and portions thereof which are inconsistent with the provisions of R.A. 11057, had been repealed, amended, and modified accordingly:

  • Sections 1 to 6 The Chattel Mortgage Law;
  • Articles 2085-2123, 2127, 2140-2141, 2243, and 2246-2247 of the Civil Code of the Philippines;
  • Section 13 of the Financing Company Act of 1998;
  • Sections 10, 114-116 of the Property Registration Decree; and
  • Section 5(e) of the Land Transportation and Traffic Code.

Note, however, that notwithstanding the entry into force of R.A. 11057, the implementation thereof shall be conditioned upon the Registry in the LRA being established and operational. The implementing rules and regulations for the effective implementation of the statute will still be promulgated by the Department of Finance (“DOF”) in coordination with the Department of Justice (“DOJ”) within six (6) months from its passage. Additional articles will be written on this new law once the implementing regulations are in place.

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