Personal Property Security Act May 2021 Batch PDF

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REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS ATTY. JOHNSON A. ONGPERSONAL PROPERTY SECURITY ACT Far Eastern University - MakatiPersonal Property Security Act R. (11057)Approved: August 17, 2018Policy of the State To promote economic activity a. by increasing access to least cost credit, particular...

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REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS PERSONAL PROPERTY SECURITY ACT

Personal Property Security Act R.A. (11057) Approved: August 17, 2018 Policy of the State To promote economic activity a. by increasing access to least cost credit, particularly for micro, small, and medium enterprises (MSMEs), b. by establishing a unified and modern legal framework for securing obligations with personal property. (Sec 2) Effectivity of the law This Act shall take effect fifteen (15) days after publication in at least two (2) newspapers of general circulation. (Sec 67) The implementing rules of PPSA was published on November 18, 2019 and become effective on December 3, 2019. Transitional Period Means the period from the date of effectivity of this Act (February 9, 2019) until the date when the Registry has been established and operational. Implementation of R.A 11057 The implementation of R.A. 11057 shall be conditioned upon the a. Establishment of electronic Registry being established and operational which provide electronic means for registration and searching of notices which are administered by the LRA. (Sec 26) b. Promulgation of the necessary Implementing rules and regulations. (The implementing rules was published on November 18, 2019 and it become effective on December 3, 2018 Interpretation If there is conflict between a provision of this Act and a provision of any other law, this Act shall govern unless the other law specifically cites or amends the conflicting provisions of this law. (Sec. 61) Repealing Clause R.A. 11057 repealed, amended, or modified the following: (a) Sections 1 to 16 of The Chattel Mortgage Law (Act No. 1508) (b) Law on pledge under (Articles 2085-2123, 2127, 2140-2141, 2241, 2243, and 2246-2247 of the New Civil Code (R.A. 386) (c) Sec 13 of Financing Company Act of 1998 (R.A. 5980 as amended by R.A.8556) (d) Sec. 114-116 of Property Registration Decree. (P.D. 1529) and Sec 10 insofar as the provision thereof is inconsistent with this Act. (e) Section 5(e) of the "Land Transportation and Traffic Code" (R.A. 4136) Scope of PPSA

ATTY. JOHNSON A.H. ONG Far Eastern University - Makati

This apply to all transactions of any form that secure an obligation with movable collateral Exception: a. Interests in aircrafts which are subject to the "Civil Aviation Authority Act of 2008" (R.A. 9497) b. Interests in ships subject to Ship Mortgage Decree of 1978" (P.D. 1521) Definition of Terms for purpose of PPSA a. Commodity contract – a commodity futures contract, an option on a commodity futures contract, a commodity option, or another contract if the contract or option is: (1) Traded on or subject to the rules of a board of trade that has been designated as a contract market for such a contract; or (2) Traded on a foreign commodity board of trade, exchange, or market, and is carried on the books of a commodity intermediary for a commodity customer; b. Grantor a. The person who grants a security interest in collateral to secure its own obligation or that of another person; b. A buyer or other transferee of a collateral that acquires its right subject to a security interest; c. A transferor in an outright transfer of an accounts receivable; or d. A lessee of goods; e. Non-inter mediated securities – securities other than securities credited to a securities account and rights in securities resulting from the credit of securities to a securities account; c. Notice – a statement of information that is registered in the Registry relating to a security interest or lien. The term includes an initial notice., amendment notice, and termination notice; d. Registry – the centralized and nationwide electronic registry established in the Land Registration Authority (LRA) where notice of a security interest and a lien in personal property may be registered; e. Secured creditor – a person that has a security interest. For the purposes of registration and priority only, it includes a buyer of account receivable and a lessor of goods under an operating lease for not less than one (1) year. Framework of PPSA 1. CREATION OF SECURITY INTEREST (Sec 5-10) 2. PERFECTION OF SECURITY INTEREST (Sec 11-16 3. PRIORITY OF SECURITY INTEREST (Sec 17-25) 4. REGISTRATION – REGISTRY (Sec 26-44) 5. ENFORCEMENT OF SECURITY INTEREST SECURED CREDITOR’S RIGHTS (Sec 45 – 59) CREATION OF SECURITY INTEREST

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(ATTY. JOHNSON A.H. ONG – MAY 2021) Definition of Security interest A property right in collateral that secures payment or other performance of an obligation, regardless of whether the parties have denominated it as a security interest, and regardless of the type of asset, the status of the grantor or secured creditor, or the nature of the secured obligation This include: a. The right of a buyer of accounts receivable and b. A lessor under an operating lease for not less than one (1) year. Creation of a Security Interest (a) A security interest shall be created by a security agreement, (b) A security agreement may provide for the creation of a security interest in a future property, but the security interest in that property is created only when the grantor acquires rights in it or the power to encumber it. (Sec. 5) Formality of creation and perfection of Security interest a. There must be a written security agreement signed by the parties. (sec 6)  It may consist of one or more writings that, taken together, establish the intent of the parties to create a security interest. (Section 6) The word writing includes electronic records. (Sec 3(k).  It shall provide for the language to be used in agreements and notices. 1. The grantor shall be given the option to have the agreement and notices in Filipino. b. Sufficient description of the collateral whether specific or general 1. A description of collateral shall be considered sufficient, whether it is specific or general, if it reasonably identifies the collateral. A description such as "all personal property", "all equipment", "all inventory", or "all personal property within a generic category" of the grantor shall be sufficient. (Sec 7) c. Perfection of the security interest by 1. registration of a notice with the electronic registry and 2. Either (1) Possession of the object - if the collateral is tangible assets (2) control of the account - if the collateral is investment property or deposit account Definition of Investment property means any property right arising from an investment. The term shall include but will not be limited to property in securities and commodity contracts. Definition of Deposit account Consists of deposits in deposit-taking institutions.

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Right to Proceeds and Commingled Funds and Money (a) A security interest in personal property shall extend to its identifiable or traceable proceeds. (b) Where proceeds in the form of funds credited to a deposit account or money are commingled with other funds or money: a. The security interest shall extend to the commingled money or funds, notwithstanding that the proceeds have ceased to be identifiable to the extent they remain traceable: b. The security interest in the commingled funds or money shall be limited to the amount of the proceeds immediately before they were commingled: and c. If at any time after the commingling, the balance credited to the deposit account or the amount of the commingled money is less than the amount of the proceeds immediately before they were commingled, the security interest against the commingled funds or money shall be limited to the lowest amount of the commingled funds or money between the time when the proceeds were commingled and the time the security interest in the proceeds is claimed. (Sec 8) Continuity of Security Interest A security interest shall continue in collateral notwithstanding sale, lease, license, exchange, or other disposition of the collateral Exception: 1. When agreed upon by the parties (Sec 9) 2. When the movable property containing a security interest is acquired by a 3rd person in the ordinary course of business who acted in good faith. (Sec 21) Hence. Any person acting in good faith, who obtains, in the ordinary course of business, any movable property containing a security interest shall take the same free of such security interest. However, no such good faith shall exist if the security interest in the movable property was registered prior to his obtaining the property. (Sec. 21) Contractual Limitation on the Creation of a Security Interest A security interest in an account receivable shall be effective notwithstanding any agreement between the grantor and the account debtor or any secured creditor limiting in any way the grantor’s right to create a security interest. However, this will not affect any obligation or liability of the grantor for breach of the agreement. This shall apply only to accounts receivable arising from: 1. A contract for the supply or lease of goods or services other than financial services; 2. A construction contract or a contract for the sale or lease of real property; and 3. A contract for the sale, lease or license of intellectual property. (Section 10)

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Any stipulation limiting the grantor’s right to create a security interest shall be void. PERFECTION OF SECURITY INTEREST

Perfection of security interest 1. A security interest shall be perfected when it has been created and the secured creditor has taken any of the following actions: a. Registration of a notice with the Registry b. Possession of the collateral by the secured creditor c. Control of investment property and deposit account. (Sec 12) Action

Tangible assets Investment property Deposit account

Registration of notice √ √ √

Possession of the collateral by the secured creditor √

Control

√ √

2. On perfection, a security interest becomes effective against third parties. Perfection by Control A security interest in a deposit account or investment property may be perfected by control through: 1. The creation of the security interest in favor of the deposittaking institution or the intermediary; Definition of Intermediary A person, including, but not limited to, a bank, trust entity, depositary, broker, or central securities depositary, that in the ordinary course of business or regular activity maintains an account for such securities or assets, for another person, and is acting in that capacity. (Sec 1.05 o, IRR) 2. The conclusion or termination of a control agreement What is control agreement? Control agreement a. With respect to securities  means an agreement in writing among the issuer or the intermediary, the grantor and the secured creditor, according to which the issuer or the intermediary agrees to follow instructions from the secured creditor with respect to the security, without further consent from the grantor; b. With respect to rights to deposit account  means an agreement in writing among the deposittaking institution, the grantor and the secured creditor, according to which the deposit-taking institution agrees to follow instructions from the secured creditor with respect to the payment of funds credited to the deposit account without further consent from the grantor; c. With respect to commodity contracts  means an agreement in writing among the grantor, secured creditor, and intermediary, according to which the commodity intermediary will apply any

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value distributed on account of the commodity contract as directed by the secured creditor without further consent by the commodity customer or grantor. (Sec 3 b) 3. For an investment property that is an electronic security not held with an intermediary, the notation of the security interest in the books maintained by or on behalf of the issuer for the purpose of recording the name of the holder of the securities. Nothing shall require a deposit-taking institution or an intermediary to enter into a control agreement, even if the grantor so requests. A deposit-taking institution or an intermediary that has entered into such an agreement shall not be required to confirm the existence of the agreement to another person unless requested to do so by the grantor. (Sec. 13) Proceeds defined: Proceeds – any property received upon sale, lease or other disposition of collateral, or whatever is collected on or distributed with respect to collateral, claims arising out of the loss or damage to the collateral, as well as a right to insurance payment or other compensation for loss or damage of the collateral; Perfection in Proceeds a. Proceeds are in the form of money, accounts receivable, negotiable instruments or deposit accounts  Upon disposition of collateral, a security interest shall extend to proceeds of the collateral without further act and be continuously perfected. b. Proceeds are in a form Other than money, accounts receivable, negotiable instruments or deposit accounts  The security interest in such proceeds must be perfected by one of the means applicable to the relevant type of collateral within fifteen (15) days after the grantor receives such proceeds; otherwise, the security interest in such proceeds shall not be effective against third parties. (Sec 14) Change in Means of Perfection A security interest shall remain perfected despite a change in the means for achieving perfection: Provided, That there was no time when the security interest was not perfected. (Sec 15) Assignment of Security Interest If a secured creditor assigns a perfected security interest, an amendment notice may be registered to reflect the assignment. (Sec. 16) PRIORITY OF SECURITY INTEREST Priority Rules The priority of security interests and liens in the same collateral shall be determined according to time of registration of a notice

(ATTY. JOHNSON A.H. ONG – MAY 2021) or perfection by other means, without regard to the order of creation of the security interests and liens. (Sec 17) Priority for Perfection by Control (Intangible assets) (a) A security interest in a deposit account with respect to which the secured creditor is the deposit-taking institution or the intermediary shall have priority over a competing security interest perfected by any method. (b) A security interest in a deposit account or investment property that is perfected by a control agreement shall have priority over a competing security interest except a security interest of the deposit-taking institution or the intermediary. (c) The order of priority among competing security interests in a deposit account or investment property that were perfected by the conclusion of control agreements shall be determined on the basis of the time of conclusion of the control agreements. (d) Any rights to set-off that the deposit-taking institution may have against a grantor’s right to payment of funds credited to a deposit account shall have priority over a security interest in the deposit account. (e) A security interest in a security certificate perfected by the secured creditor’s possession of the certificate shall have priority over a competing security interest perfected by registration of a notice in the Registry. (f) A security interest in electronic securities not held with an intermediary perfected by a notation of the security interests in the books maintained for that purpose by or on behalf of the issuer shall have priority over a security interest in the same securities perfected by any other method. (g) A security interest in electronic securities not held with an intermediary perfected by the conclusion of a control agreement shall have priority over a security interest in the same securities perfected by registration of a notice in the Registry. (h) The order of priority among competing security interests in electronic securities not held with an intermediary perfected by the conclusion of control agreements is determined on the basis of the time of conclusion of the control agreements. (Sec 18) Priority Rules for Tangible Assets a. A security interest in a security certificate perfected by the secured creditor's possession of the certificate shall have priority over a competing security interest perfected by registration of a notice in the Registry. b. A security interest in an instrument or negotiable document that is perfected by possession of the instrument or the negotiable document shall have priority over a security interest in the instrument or negotiable document that is perfected by registration of a notice in the Registry. c. A perfected security interest in livestock securing a11 obligation incurred to enable the grantor to obtain food or

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medicine for the livestock shall have priority over any other security interest in the livestock, except for a perfected purchase money security interest in the livestock, if the secured creditor providing credit for food or medicine gives written notification to the holder of the conflicting perfected security interest in the same livestock before the grantor receives possession of the food or medicine. Priority for Instruments and Negotiable Documents A security interest in an instrument or negotiable document that is perfected by possession of the instrument or the negotiable document shall have priority over a security interest in the instrument or negotiable document that is perfected by registration of a notice in the Registry. (Sec 19) By operation of law a. Priority and right of Retention – A person who provides services or materials with respect to the goods, in the ordinary course of business, and retains possession of the goods shall have priority over a perfected security interest in the goods until payment thereof. (Sec. 20) b. Effect of the Grantor’s Insolvency on the Priority of a Security Interest - Subject to the applicable insolvency law, a security interest perfected prior to the commencement of insolvency proceedings in respect of the grantor shall remain perfected and retain the priority it had before the commencement of the insolvency proceedings. (Sec. 22) Purchase money security interest A security interest in goods taken by the seller to secure the price or by a person who gives value to enable the grantor to acquire the goods to the extent that the credit is used for that purpose. (Sec 3, g) Purchase Money Security Interest (a) A purchase money security interest in equipment and its proceeds shall have priority over a conflicting security interest, if a notice relating to the purchase money security interest is registered within three (3) business days after the grantor receives possession of the equipment. Definition of Equipment Means a tangible asset other than inventory or consumer goods, or livestock, that is primarily used or intended to be used by the grantor in the operation of its business. (b) A purchase money security interest in consumer goods that is perfected by registration of notice not later than three (3) business days after the grantor obtains possession of the consumer goods shall have priority over a conflicting security interest. Definition of Consumer goods Goods that are used or acquired for use primarily for personal, family or household purposes; (c) A purchase money security interest in inventory, intellectual property or livestock shall have priority over a conflicting

(ATTY. JOHNSON A.H. ONG – MAY 2021) perfected security interest in the same inventory, intellectual property or livestock if: (1) The purchase money security interest is perfected when the grantor receives possession of the inventory or livestock, or acquires rights to intellectual property; and Definition of Inventory

Means tangible assets held by the grantor for sale or lease in the ordinary course of the grantor's business, including raw materials and work in process (Sec 1.05 q, IRR) (2) Before the grantor receives possession of the inventory or livestock, or acquires rights in intellectual property, the purchase money secured creditor gives written notification to the holder of the conflicting perfected security interest in the same types of inventory, livestock, or intellectual property. The notification sent to the holder of the conflicting security interest may cover multiple transactions...