PPSA - Personal Property Security Act PDF

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Summary

Law and its Implementing Rules  A consolidation of House Bill No. 6907 and Senate Bill No. 1459.  Rules must be liberally construed.  Before PPSA’s approval, pledge and chattel mortgages are the security devices used to create security interest in personal property.Source of the PPSA:  United Na...

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PERSONAL PROPERTY SECURITY ACT Law and its Implementing Rules  A consolidation of House Bill No. 6907 and Senate Bill No. 1459.  Rules must be liberally construed.  Before PPSA’s approval, pledge and chattel mortgages are the security devices used to create security interest in personal property. Source of the PPSA:  United Nations Convention on the Assignment of Receivables in International Trade;  The UNCITRAL Secured Transactions Guide on Secured Transactions;  The Supplement on Security Transactions in Intellectual property;  The UNCITRAL Guide on the Implementation of Security Rights Registry. Framework of the PPSA:  Unitary approach: » Uses one concept for all types of security; » One device and a set of basic of terms, such as, “security agreement”, “security interest”, “grantor”, “secured creditor”  Functional approach: » Applies to all types of transactions that fulfill security purposes, such as, secured loan, a retention-of-title sale, or a financial lease. » PPSA applies to “all transactions of any form that secure an obligation with movable collateral”  Comprehensive approach: » Applies to all types of movable assets, all forms of secured obligations, and all categories of grantors and secured creditors. » PPSA applies to all types of movable collateral, all types of obligations, and all types of grantors and secured creditors. Policy Behind the Law  Promote economic activity by increasing access to least cost credit, particularly for micro, small, and medium enterprises. Key Benefits of the PPSA  Use of almost all types of movables as collateral » Allows the grantor to provide almost any type of movable property as collateral » Chattel mortgage also covered all types of movable property  No requirement of possession by secured creditor of collateral » Allows a security interest over the collateral even if the secured creditor does not take physical possession. » Business can continue to use assets in its operation.  Security Interest Over Future Assets » Makes it possible for a business to give security over a movable property not yet owned by the business (future inventory), with the security interest automatically attaching to that property as soon as the business acquires rights in it. » In pledge and chattel mortgages, parties may enter into an agreement to pledge or mortgage future properties.

PERSONAL PROPERTY SECURITY ACT

Commodity Contract  A commodity futures contract;  A contract providing for the making or taking delivery at a prescribed time in the future of a specific quantity and quality of a commodity or the cash value thereof, which is customarily offset prior to the delivery date, and includes standardized contracts having the indicia of commodities futures, commodity options and commodity leverage, or margin contracts. Commodity  Any goods, articles, services, rights and interests, including any group or index of any of the foregoing, in which commodity interests contracts are presently or in the future dealt in. Forward Contract  A contract between a buyer and a seller whereby the buyer is obligated to take delivery and the seller is obliged to deliver a fixed amount of an underlying commodity at a predetermined price and date.  Payment in full is due at the time of the delivery. Suspension of Registration and Trading of Commodities Futures Contract  Under the Security Regulation Code, no person shall offer, sell, or enter into commodity futures contracts except in accordance with rules, regulations, and orders the Securities and Exchange Commission may prescribe in the public interest.  Public trading of commodities futures contracts is suspended until further ordered otherwise by the SEC.  SEC does not allow the registration of Foreign Exchange, Commodity Futures Contract, Contracts for Difference and other similar derivatives nor their brokers as the pertinent rules governing these securities remain suspended…”  A commodity future contract is a valid and legitimate contract in many jurisdictions. Supreme Court Decision in Onapal  Payments made under said contracts were payments of difference in prices arising out of the rise or fall in market price above or below the contract price, thus making it purely gambling and declared null and void. Control Agreement  An agreement in writing between the grantor, the secured creditor and the issuer or intermediary or the deposit-taking institution, according to which the issuer, intermediary or the deposit-taking institution agrees to follow the instructions of the secured creditor without the further consent of the grantor.  An agreement in writing between the grantor, the secured creditor, and the intermediary, according to which the commodity intermediary will apply any value distributed on account of the commodity contract as directed by the secured creditor without further consent by the commodity customer or grantor.

PERSONAL PROPERTY SECURITY ACT  An agreement in writing between the grantor and the secured creditor which perfects the security interests over intangible assets. Parties to, Form, and Contents of a Control Agreement  Intermediated securities o Executed in writing by the issuer of the intermediary, the grantor, and the secured creditor o Stipulate that the issuer or intermediary agrees to follow instructions from the secured creditor with respect to the security, without further consent from the grantor.  Rights to deposit account o Executed in writing among the deposit-taking institution, the grantor, and the secured creditor o Stipulate that 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.  Commodity contracts o Be executed in writing among the grantor, secured creditor, and intermediary o Stipulate that the commodity intermediary will apply any value distributed on account of the commodity contract as directed by the secured creditor without further consent by the commodity customer or grantor. Purpose of Control Agreement  Renders a security interest effective against third parties  Establishes a priority of the secured creditor that has entered into the control agreement  Help ensure the cooperation of the deposit-taking institution or the issuer of securities if the secured creditor needs to enforce its security right. Meaning of Terms  Securities » Refers to shares, participation or interests in a corporation or in a commercial enterprise or profit-making venture and evidenced by a certificate, contract, instruments, whether written or electronic in character. » Includes, but not limited to:  Shares of stocks, bonds, debentures, notes as evidence of indebtedness, asset-backed securities  Investment contracts, certificates of interest or participation in a profitsharing agreement, certificates of deposit for a future subscription  Fractional undivided interests in oil, gas, or other mineral rights;  Derivatives like options and warrants;  Certificates of assignments, certificates of participation, trust certificates, voting trust certificates;  Proprietary and nonproprietary membership certificates in corporation;  Issuer » Originator, maker, obligor, creator of the security  Intermediary

PERSONAL PROPERTY SECURITY ACT » A person, who in the course of a business or other regular activity, maintains securities accounts for others or both for others and for its own accounts » A clearing corporation or a person, including a bank or broker, that in the ordinary course of its business maintains securities accounts for others and is acting in that capacity » A person or entity 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.  Deposit account » A demand, time, savings, passbook, or similar account maintained with a bank » Does not include investment property or account evidenced by an instrument  Deposit-taking institution » Refers to a bank as defined in RA No. 8791 or the General Banking Law, a nonstock savings and loan association as defined under Republic Act No. 8367 or a cooperative as defined under the Republic Act No. 9520 Control Agreement Over Securities/Investment Property  The term investment property means any property right arising from an investment.  Investment Property was defined as a security, whether certificated or uncertificated, security entitlement, securities account, commodity contract, or commodity account  There is reasonable basis that it only covers uncertificated non-intermediated securities. Grantor  Debtor that secures its own obligation or a person that secures the obligation of a debtor  Buyer or others transferee of a collateral that acquires its right subject to a security interest is also considered a grantor to ensure that the PPS remains applicable even if the collateral has been disposed  Transferor in an outright transfer of an accounts receivable  Lessee of goods Non-intermediated Securities  Securities other than securities credited to a securities account and rights in securities resulting from the credit of securities to a securities account. Types of Securities:  Based on certification: o A certificated security is represented by a certificate o A non-certificated security is not represented by a certificate  Based on intermediation: o Intermediated securities are credited to a securities account and rights in securities resulting from the credit of securities to a securities account. They are held through an intermediary.  A securities account is an account maintained by an intermediary to which securities may be credited or debited.  Typically non-certificated.

PERSONAL PROPERTY SECURITY ACT o Non-intermediated securities are those ther than securities credited to a securities account and rights in securities resulting from the credit of securities to a securities account.  Generally certificated; held directly by the securities owner Notice  A statement of information that is registered in the Registry relating to a security interest or lien.  Includes an initial notice, amendment notice, and termination notice.  Relates to a security interest and a lien. Proceeds  Refers to: o Any property received upon sale, lease, or other disposition of collateral o Whatever is collected on or distributed with respect to collateral o Claims arising out of the loss or damage to the collateral o Right to insurance payment or other compensation for loss or damage of the collateral.  Covers: o Proceeds of the sale or other disposition, or lease of an encumbered asset o Proceeds of proceeds (receivables generated by the sale of encumbered inventory) o Natural fruits (calves of a cow) or civil fruits (rental payments)  Includes proceeds received by a transferee of an encumbered asset when that transferee is treated as a grantor because it acquired the encumbered asset subject to the security right. Purchase Money Security Interest  Security interest taken by the seller to secure the price of the goods purchased, or;  Security interest taken by a person who gives value to enable the grantor to acquire the goods to the extent credit is used for the purpose.  In both instances, security interest must be taken or created through a security agreement. Registry  The electronic registry where notices of the security interests and liens over personal property may be registered. Secured Creditor  A person that has a security interest over the collateral  Includes buyer of account receivable and a lessor of goods under an operating lease for not less than one year for purposes of registration and priority only. Lease of property  An operating lease is an agreement by which the owner temporarily grants the use of his property to another who undertakes to pay the rent.  A finance lease refers to financial leasing of movable properties as defined in the Financing Company Act of 1998.

PERSONAL PROPERTY SECURITY ACT Security Interest  A property right in movable collateral that secures payment or other performance of an obligation.  Applies only to movable collateral  Includes right of a buyer of accounts receivable and a lessor under an operating lease for not less than one year.  Encompasses ownership right of a buyer/creditor under a sale of an asset by a grantor/seller of for security purposes. Liens  Encumbrances that are not security interests created and perfected under the PPSA  Qualified right or a proprietary interest, which may be exercised over the property of another. Rules on Liens  Notice of lien may be registered by a lien holder without the consent of the person against whom the lien is sought to be enforced.  Notice is a statement of information registered in the Registry relating to a security interest or lien.  The registry is the electronic registry where notice of a security interest or lien in personal property may be registered.  The priority of security interests and liens in the same collateral shall be determined according to tine of registration of a notice of perfection by other means, without regard to the order of creation of the security interests and liens.  Purchase money security interest in equipment or consumer goods perfected timely shall have priority over the rights of a buyer, lessee, or lien holder which arise between delivery of the equipment or consumer goods to the grantor and the time the notice is registered.  A lien holder is entitled to redeem.  A lien holder, who, 5 days before the date notification is sent to the grantor, held a lien in the collateral that was perfected by registration, is entitled to notice of disposition.  A lienholder may commence enforcement buy a high-ranking creditor may take over.  If the collateral is disposed of, excess proceeds must be applied to the satisfaction of obligations secured by any lien in the collateral.  If a secured creditor sells the collateral, the buyer shall acquire the grantor’s right in the asset free of the rights of ay secured creditor or lien holder.  A lienholder is entitled to object any proposed retention by the secured creditor of the collateral. Writing  Includes electronic writing or electronic records. Scope/Transactions Covered  Applies to all transactions of any form that secure an obligation with movable collateral  Applies to transactions whereby property rights, while not so called security rights, nevertheless serve security purposes. Includes transfers of title in tangible assets for

PERSONAL PROPERTY SECURITY ACT security purposes, transfer of receivables for security purposes, various forms of retention-of-title and financial leases Receivables  Applies to outright transfers of receivables by agreement, even if outright transfer of a receivable does not secure the performance of an obligation  A person who transfers a receivable is generally treated as though it had been granted a security right over the receivable, and the transferee only holds it as security over the receivable.  Receivables financing is often done using an outright transfer of receivables instead of the creation of a security interest over the receivables  Often extremely difficult to tell whether transferring a receivable is an outright transfer or a transfer by way of security. Finance Leases and Retention-of-Title Sale  Certain transactions serve a security function.  Under a finance lease of an automobile, the finance company or lessor takes ownership of the automobile during the duration of the lease, while the lessee operates the car.  Under a retention-of-title sale, the automobile manufacturer or the seller may retain the ownership of the automobile until the buyer repays the full purchase price of the car.  From a commercial perspective, title or ownership of the automobile under these transactions serves the function as a security right. They retain title as a security mechanism so they can repossess asset if the lessee or the buyer defaults. Security Interests in Aircrafts  PPSA does not apply to the creation of a security interest in aircrafts.  However, to resolve any issue, the creation of a security interest in an aircraft is under the PPS but perfection and priority shall be made based on the registration of the conveyance with the Civil Aviation Authority.  The security agreement over an aircraft must be initiated on each page and must be notarized following a specific notarial attestation format. Security Interests in Ships  PPSA applies to creation and perfection of a mortgage over ships.  The Ship Mortgage Decree is a special law that has not been repealed by the PPSA, it is possible to create a mortgage over a ship. The Ship Mortgage Decree will govern all matters relating to ship mortgage. Creation vs. Effectiveness  When the security interest is created, the security interest is effective between the parties.  When the security interest is perfected, the security is effective against third parties.  The security agreement is sufficient to make the security interest as between the parties.  However, it is not sufficient to make the security interest effective against third parties, such as secured creditors, judgment debtors, or subsequent transferees of asset. Concept of Security Agreement

PERSONAL PROPERTY SECURITY ACT  A security agreement is the agreement under which a security interest is created.  An agreement between a grantor and a secured creditor that provides for the creation of a security interest in collateral.  A contract of sale where the buyer or other transferee of a collateral acquires it subject to a security interest.  An agreement for the outright transfer of receivables.  A financial lease agreement for the lease of goods. Parties to the Security Agreement  Grantor » Person who grants a security interest in collateral to secure its own obligation or that of another person; » A buyer or other transferee of a collateral that acquires its right subject to a security interest; » A transferor in an outright transfer of accounts receivable; » A lessee of goods. » NOTE: grantor does not have to be the absolute owner of the collateral, as long as he has rights in the collateral or the power to encumber it. » NOTE: grantor may be the debtor or a third person who creates the security interest to secure the debtor’s obligation.  Secured Creditor » The person that has a security interest  Debtor » Person that owes payment or other performance of a secured obligation, whether or not that person is the grantor of the security right securing payment or other performance of that obligation, including a secondary obligor such as a guarantor. Essential Requisites of a Security Agreement  Like all other contracts: o Consent of the contracting parties o Object certain which is the subject matter of the contract o Cause of the obligation  Delivery of collateral is not essential. It is possible that security interest is created without the possession of the movable asset through the registration of a notice with the registry. Consent of the Contracting Parties  Manifested by the meeting of the offer and acceptance upon the thing and the cause which are to constitute the contract.  May be expressed tacitly or expressly.  Must be given by parties with capacity to give consent. Minors, insane, demented cannot give consent to a security agreement. Cause of the Contract  Security agreement is an accessory contract. The cause is the principal obligation.  If grantor is not the debtor, the cause is the compensation stipulated for the security agreement or the mere liberality of the grantor.

PERSONAL PROPERTY SECURITY ACT

Object of the Contract  Applies to all transactions of any form that secures an obligation with movable assets.  Applies to tangible movable assets and intangible movable assents  Rights arising from contracts, including but not limited to: o Securities o Commodity contracts o Lease of goods including financial leases and operating leases for a period of not less than one year. o Equipment o Inventory deposit accounts o Negotiable instruments o Negotiable documents of title o Consumer goods o Intellectual property o Livestock o Fixture, acc...