This Final Part is follow-up of the second part of the legal brief that deals with the assessment of the Proclamation on Movable Property Security Right. This Part deals with rights and obligations of the parties to the security right and the third-party obligors.
1. Rights and Obligations of the Parties to Security Rights and the Third-party Obligors
A grantor or secured creditor who is in possession of the collateral which is subject to the security right are required to “exercise reasonable care to preserve the asset” [Article 66]. Upon termination of the security right, the secured creditor is required to return the collateral to the grantor, register the cancellation notice and release the collateral from its control [Article 67].
As per Article 68 a secured creditor is entitled for the reimbursement by the grantor of any reasonable expenses the creditor has incurred for the preservation of the collateralized asset, including the cost of insurance, payment of taxes and other charges. The secured creditor by reasonably using the collateral can apply the sum generated from it for the payment of the secured obligation. The secured creditor has also the right to inspect the collateral in the possession of the grantor or another person.
The grantor is entitled to request from the secured creditor for information in relation to the secured obligation or the secured collateral and the secured creditor is required to provide the requested information within 5 (five) working days [Article 69].
2. Security Rights over Corporeal Assets
As defined by Article 2 (10) corporeal assets include "money, negotiable instrument and certificated securities". In case of money, Article 63 provides that a transferee obtains possession of the money that is subject to the security right free from such right, unless the transferee has knowledge that such transfer violates the right of the secured creditor under the security agreement.
As stated under Article 61 (1), “a security right in a negotiable instrument that is made effective against third parties by possession of the instrument, has priority right over a security right in the instrument that is made effective against third parties by registration of a notice in the Collateral Registry”. As per Article 61 (2) “a buyer or other consensual transferee of an encumbered negotiable instrument acquires its right free of a security right that is made effective against third parties by registration of a notice in the Collateral Registry, if the buyer or other consensual transferee qualifies as a holder in due course under the Commercial Code or where the buyer or other consensual transferee takes possession of the negotiable instrument and gives value without knowledge that the sale or other transfer is in violation of the right of the secured creditor under the security Agreement”. It should be noted that negotiable instruments include "a bill of exchange, promissory notes and other instruments issued to bearer, specified name or order and excludes cheques" [Article 2 (29)].
As per Article 64 (1) a security right in corporeal asset made effective against third parties by possession of the negotiable document that covers the asset, has priority over a competing security right made effective against third parties by other method(s). A transferee of an encumbered negotiable document obtains possession of the document and gives value without knowledge that the sale or other transfer is in violation of the right of the secured creditor under the security agreement, acquires its right free of a security right in the document and the corporeal assets covered thereby that is made effective against third parties [Article 64 (2)]. Negotiable documents include "a bill of lading, way bill, voucher or a warehouse receipt for goods warehoused that represents a right to delivery of corporeal assets and may be transferred by negotiation" [Article 2 (28)].
Article 65 (1) provides that a security right in certificated securities made effective against third parties by the secured creditor’s possession of the certificate has priority over a competing security right created by the same grantor in the same securities made effective against third parties by registration of a notice in the Collateral Registry. Certificated securities are "documents evidencing ownership of share or bond registered in the name of the holder or issued to a bearer" [Article 2 (4)].
As per Article 65 (2) a security right in electronic securities made effective against third parties by a notation of the security right or registration of the name of the secured creditor as the holder of the securities in the books maintained for that purpose by or on behalf of the issuer has priority over security right in the same securities made effective against third parties by any other method.
In case where the security right over the electronic securities is made effective against third parties by the conclusion of a control agreement, then such right has priority over a security right in the same securities made effective against third parties by registration of a notice in the Collateral Registry and in case where two or more control agreements are concluded on the same electronic securities the priorities will be determined based on “the time of conclusion of the control agreements” [Article 65(3) and 65 (4)]. Electronic securities are "shares and bonds registered and transferable electronically but not represented by a certificate" [Article 2 (15)].
A transferee of securities who takes possession of the certificated security or acquires right in an electronic security and give value without knowledge that the sale or other transfer is in violation of the right of the secured creditor under the security agreement, acquires its right free of such security right [Article 65 (5)].
3. Security Rights over Receivables
At the outset it is imperative to see the definition of receivables as provided by the Proclamation. Receivable is defined as “a right to payment of a monetary obligation, excluding a right to payment evidenced by a negotiable instrument, a right to payment of funds credited to a deposit account and a right to payment under security” [Article 2 (37)].
In relation to the security rights created in receivables detailed provisions are provided under Articles 70 to 74. As per these provisions, the creation of security rights in receivables does not affect the rights and obligations of the debtor of the receivable, including the payment terms contained in the contract that gave rise to the receivable. The right over the receivable will have legal effect where the same is notified to the debtor of the receivable by the secured creditor. The debtor can request from the secured creditor reasonable period of time and adequate proof of its security right so as the debtor will be able to discharges its obligations to the secured creditor.
Unless he agrees otherwise in writing with the secured creditor, the debtor of receivable can raise all defenses or set off right that arises from the contract that gave rise to such receivable. However, the debtor cannot agree to waive defenses arising from “fraudulent acts on the part of the secured creditor or based on the incapacity of the debtor of the receivable.”
Any modifications to the original contract that gave rise to the receivables will have effect against the secured creditor where such modification is made before the secured creditor serves notice to the debtor of the receivable. However, the debtor of such receivable is not entitled to recover from the secured creditor or the grantor a sum paid by the debtor, even where the grantor or the assignor fails to perform the contract that gave rise to the receivable.
4. Security Rights over Funds Credited to Deposit Accounts
As per Article 62 (1), a security right in a right to payment of funds credited to a deposit account that is made effective against third parties by the secured creditor becoming the accountholder has priority over a competing security right that is made effective against third parties by any other method(s). In case where the secured creditor is a financial institution, it will have priority over a competing security right made effective against third parties by any method other than by the secured creditor becoming the accountholder [Article 62 (2)].
A security right in a right to payment of funds credited to a deposit account that is made effective against third parties by control agreement has priority over a competing security right except where the security right is held by the financial institution or where the security right is made effective against third parties by the secured creditor that has become the accountholder. In case where there are two or more control agreements are concluded on payment of funds credited to a deposit account, the order of the priority among competing security right will be determined based on the time of the conclusion of the control agreement [Article 62 (3) and 63 (4)].
A financial institution’s right to set-off obligations owed to it by the grantor, has priority as against a security right in the right to payment of funds credited to the deposit account. However, where the security right is made effective against third parties by the secured creditor becoming accountholder, then it will have priority over the financial institution’s right to set-off [Article 62 (5)].
A transferee of funds from a deposit account pursuant to a transfer initiated or authorized by the grantor acquires its right free of a security right in the right to payment of funds credited to the deposit account, except where the transferee has knowledge that the transfer violates the right of the secured creditor under the security agreement [Article 62 (6)].
As per Article 75, the security right that is created against a right to payment of funds credited to a deposit account does not affect the right and obligation of the financial institutions authorized to receive deposits from the public with which that deposit account is maintained, without the consent of the financial institutions. Such institution will not be required to provide any information about that deposit account to third parties and the right of the financial institutions for set-off against such account also remains unaffected.
End of Part III
Posted on May 12th 2020
| File | Description | File size |
|---|---|---|
 Directive-No.-MCR-01-2020-Operationalization-of-Movable-Collateral-Registry_compressed.pdf | 1199 kB | |
| Movable-Property-Security-Right-Proclamation-1147-2019.pdf | 8138 kB |