This Part II is follow-up of the first part of the legal brief that deals with the assessment of the Proclamation on Movable Property Security Right. In this Part we will deal with priority right relating to movable property security rights as envisaged by the Proclamation.
1. Priority of Rights in General
As defined by the Black’s Law Dictionary priority is a legal preference or precedence. When two or more persons have similar rights in respect of the same subject matter, but one is entitled to exercise his right to the exclusion of the other(s), he is said to have priority. With this understating we will explore the priority right relating to movable property security rights as envisaged by the Proclamation.
2. Priority Rights of Secured Creditors and the Extents of these Rights
The provision of Article 45(1) entitles the secured creditor to “have priority right over other creditors.” As can be seen from the sub-article 2 of this Article, this priority right of the secured creditor even continues “during insolvency or liquidation” [of the grantor or the secured creditor], unless the applicable “insolvency law provides otherwise”. As stated under Article 48, the knowledge of the existence of a security right on the part of a secured creditor does not affect its priority right.
As per Article 50, the priority right of the secured creditor relates to future advances and future collateral and it “extends to all secured obligations, including obligations incurred after the security become effective against third parties.” This priority right “covers all collateral described in a notice registered in the Collateral Registry, whether they are acquired by the grantor or come into existence before or after the time of registration”. The exception to this rule is where security right is created in favour of non-consensual creditor as provided under Article 55.
A person can at any time subordinate its priority right it has obtained as per the Proclamation in favour of any competing claimant without the need for the beneficiary to be a party to the subordination arrangement and such subordination does not affect the right of the competing claimants other than the person subordinating its priority and the beneficiary of the subordination [Article 60].
3. Priority of Security Rights in Proceeds
Article 51 is a general provision dealing with security right in proceeds. It provides “a security right in proceeds that became effective against third parties has the same priority over a competing security right as the security right in the collateral from which such proceeds arose”. Article 51 says its applicability will be subject to the provision of Article 58, which provides for detail rules relating to priority of security right in proceeds generated from equipment, inventory and intellectual property.
As stated under Article 58 (1) in case of an acquisition of security right in an equipment, a security right in proceeds has the same priority as the acquired security right. In case where the acquisition of the security right relates to an inventory or an intellectual property, a security right in proceeds has the same priority as the acquisition security right, except where the proceeds take the form of receivables, negotiable instruments, or rights to payment of funds credited to a deposit account [Article 58 (2)]. However, the priority right as stated under Article 58 (2) is conditional on the acquiring secured creditor notifying, before the proceeds arose, to the non-acquisition secured creditors with a security right in the same kind of asset, the fact that it has registered a notice in the Collateral Registry [Article 58 (3)].
4. Priority of Security Rights in Corporeal Assets Commingled in a Mass
If more than one security right extends to commingled goods, a security right that is effective against third parties before the goods become commingled has priority over a security right that is not effective against third parties at the time the collateral becomes commingled goods [Article 52 (1)].
If more than one security right in commingled goods is effective against third parties, the security rights rank equally in proportion to the value of the collateral at the time it become commingled good [Article 52 (2)].
5. Priority of Security Rights in Accessories to Immovable
A security right may be created in corporeal assets that are accessories to immovable or may continue in corporeal assets that become accessories to immovable. A security right, however, may not be created in ordinary building materials incorporated into an immovable [Article 53 (1)].
A security right made effective against third parties in an accessory to immovable under the Proclamation has priority over a competing right created and made effective against third parties under other applicable laws [Article 53 (2)].
6. Rights of Buyer or Other Transferees, Lessees or Licensees of Collateral
As can be seen from Article 54, the security right of the secured creditor subsist with the collateral even where such collateral is sold, transferred, leased or licensed while the right is still intact. A buyer or a transferee will secure such a collateral free of security right where the secured creditor authorizes the sale or transfer of the collateral free of the security right; in such case the right of the lessee or the licensee will not be affected. Article 54 (4) protects the right of the buyer of corporeal collateral sold in ordinary course of the seller’s business. In case where such buyer does not have the knowledge that the sale violates the rights of the secured creditor, such buyer is legally allowed to acquire the collateral free of the security right.
Similarly, unencumbered right is also respected for a lessee who does not have knowledge that the lease [contract] the lessee has concluded violates the rights of the secured creditors under the security agreement [Article 54 (5)]. The same also holds true for a non-exclusive licensee of intellectual property who acquires right over such property, where such licensee does not have knowledge that the license, which the licensee holds infringes the rights of the secured creditor under the security agreement [Article 54 (6)].
As per Article 54 (7) as long as a buyer or other transferee of corporeal acquires its rights free of security right, any subsequent buyer or other transferee also acquires its rights free of that security right. Similarly, if the rights of a lessee of a corporeal collateral or licensee of incorporeal collateral are not affected by the security right, the rights of any sub-lessee or sub-licensee will not be affected by the security right [Article 54 (8)].
7. Competing Security Rights
As per Article 46, in case where the same grantor creates security rights in the same collateral, the priority rights among competing security rights will be determined “according to the order of registration [on Collateral Registry] without regard to the order of creation of the security right”. Similarly, the time of registration will be taken into account to determine the priority right among competing claimants, “where notice is registered with the Collateral Registry before the conclusion of the security agreement or in case of a security right in a future asset, before the grantor acquires right in the asset or the power to encumber it”. “Competing claimant” is “a creditor of a grantor or other person with right in the collateral that may be in competition with the right of a secured creditor in the same collateral” [Article 2(7)]. As can be seen from the provision of Article 57 (1), the priority between competing acquisition security is determined according to the above stated provision of Article 46.
As provided under Article 47, creation of successive security rights over the same collateral by different grantors is possible. This happens where one grantor transfers the collateral on which he has already created valid security right to another grantor who subsequently gives it as security for another secured creditor. In such case the priority right of the subsequent secured creditor will be “subordinate” to the security right already created in favour of the previous secured creditor.
Similarly, as per Article 49 the change in the method by which the security right is made effective against third parties will not affect the security right of the secured creditor as long as “there is no time gap during which the security right is not effective against third parties.”
8. Priority Rights of Non-consensual Creditors
In case where the non-consensual creditor has registered a notice in the Collateral Registry, before the security right is made effective against third parties, then the right of the non-consensual creditor has priority security right [Article 55 (1)]. However, in case where security right is made effective against third parties before the non-consensual creditor registers a notice, then the priority right of the non-consensual creditor is limited to credit extended by the secured creditor within 30 (thirty) working days from the time the secured creditor received a notification from the non-consensual creditor that the non-consensual creditor has a registered a notification in the Collateral Registry or pursuant to an irrevocable commitment in a fixed amount or an amount to be fixed pursuant to a specified formula of the secured creditor to extend credit, if the commitment was made before the secured creditor received a notice from the non-consensual creditor that the non-consensual creditor had registered a notice [Article 55 (2)].
In case where a possessory lien on goods which secures payment or performance of an obligation for services or materials furnished with respect to goods by a person in the ordinary course of the person’s business, such a person has priority over a security right in the goods as long as the holder of the possessory lien remains in possession of the goods [Article 55 (3)].
Notices with respect to a right of non-consensual creditor and other persons is required to fulfill the requirements of Article 16 of the Directive. Accordingly, a notice with respect to a right of a non-consensual creditor or other persons should provide the same required information as that are applicable to an initial notice relating to a security right and a notice submitted will not be rejected if it does not provide statistical information.
9. Priority Rights in Case of Acquisition Security Rights in Goods, Equipment, Intellectual Property, Inventory and Corporeal Assets Commingled in a Mass or Product
As defined by Article 2 (2) acquisition security right is “a security right in a corporeal asset or intellectual property, which secures the obligation to pay any unpaid portion of the purchase price of the asset or other credit extended to enable the grantor to acquire right in the asset to the extent the credit is used for that purpose.”
An acquisition security right in consumer goods, equipment or intellectual property has priority as against a competing non-acquisition security right created by the grantor provided that the acquisition secured creditor is in possession of the asset or a notice is with respect to the acquisition security right is registered in the Collateral Registry within 7 (seven) working days after the grantor obtains possession of the asset or acquires a right in intellectual property [Article 56 (1)].
The same principle also applies in case of an acquisition security right in inventory [Article 56 (2)]. Accordingly, an acquisition security right in inventory has a priority as against a competing non-acquisition security right created by the grantor if the acquisition secured creditor is in possession of the asset or a notice is with respect to the acquisition security right, which is registered in the Collateral Registry before the grantor obtains possession of the asset and the holder of the acquisition security right notifies the secured creditor that has registered a notice against the collateral of the same kind that it has or intends to obtain an acquisition security right [Article 56 (2)]. It should be noted that under Article 56 (2) there is no time limit provided for the registration as opposed to Article 56 (1) that provides that the registration to be made within 7 (seven) working days.
An acquisition security right in a corporeal asset that extends to a mass or product, which is effective against third parties has priority over non-acquisition security right granted by the same grantor in a mass or product [Article 59]. Mass or product is defined as "corporeal assets that are so physically associated or united with other corporeal assets that they have lost their separate identity" [Article 2 (25)].
An acquisition security right of a seller, lessor or licensor has priority over a competing acquisition security right of a secured creditor, as can be seen from the provision of Article 57 (2).
End of Part II
Posted on 11th May 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 |