This Part IV is follow-up of the third part of the legal brief that deals with the assessment of the Proclamation on Movable Property Security Right. This Part deals with enforcement of security right created against such movable property.
1. Enforcement of Security Right
Enforcement of the security right that is created as per the Proclamation is the principal remedy that is given to the secured creditor. However, the secured creditor is required to exercise its rights “in good faith and in a commercially reasonable manner” [Article 76 (3)]. Hereunder, we will see the manner in which the security right of the secured creditor can be enforced.
2. Post Default Remedies and Relief for Non-Compliance
Article 76 (1) clearly provides that the exercise of a post-default right of the secured creditor with respect to the collateral does not prevent the exercise of a post default right with respect to the secured obligation; and the vice versa is also true. In addition, the grantor and any other person that owes payment or other performance of the secured obligation cannot unilaterally waive or vary by agreement any of its right.
The secured creditor whose right is affected by non-compliance of another person is entitled to apply for relief to a court including by using the summary procedures (as provided under Articles 284 to 202 of the Ethiopian Civil Procedure Code) and the secured creditor will be liable for any damage it causes to the debtor or the obligor in the process of selling by auction of the collateral, in violation of the provisions of Articles 394 to 449 of the Ethiopian Civil Procedure Code [Articles 77 (2) cum 82 (4)].
3. Right of the Secured Creditor to Possess the Collateral
The secured creditor is entitled to obtain possession of the collateral if the grantor has consented in the security agreement to the secured creditor obtaining possession without applying to a court and at the time the secured creditor attempts to obtain possession of the collateral, the grantor or any other person in possession of the collateral does not object to such taking of possession [(Article 81 (1)].
In case where there is an objection to taking of the possession, the Collateral Registry Office is endowed with the right and is duty bound to order the police to enforce the handing over of the possession to the secured creditor. The secured creditor, without removing the collateral from the premise of the grantor, can also render the collateral given as security unusable [Article 81(2) and (3)].
4. Right of the Secured Creditor to Totally or Partially Acquire the Collateral
The secured creditor is also entitled to propose to acquire one or more of the assets subject to the security agreement, in total or partial satisfaction of the secured obligation. Such proposal needs to be made in writing, should be detailed enough and should be sent to the grantor, the debtor and any person who has registered or notified about its right over the collateral to the secured creditor [(Article 85 (1) to 85 (3)].
In case where no objection is lodged against such acquisition within 15 (fifteen) working days from the date of the sending out of the notice, then the secured creditor is entitled to acquire the collateral in full satisfaction of the secured obligation. However, in case of partial satisfaction of the secured obligation, the secured creditor can acquire the collateral only where it receives the affirmative consent of each addressees of the notice in writing within 15 (fifteen) working days after the notice is sent to that person [(Article 85 (4)].
5. Right of the Secured Creditor to Dispose the Collateral
As can be seen from Article 82 (1) and (5), the secured creditor can also dispose of the security right over the movable collateral by itself without involving court proceedings and as an agent of the grantor. However, the secured creditor is entitled to do so after the default of the grantor is ascertained. The secured creditor is required to sell or otherwise dispose of or lease or license the collateral in its present condition or following any commercially reasonable preparation or processing. In addition, the secured creditor is entitled to select the method, manner, time, place and other aspects of the sale or other disposition mechanisms [Article 82 (2)].
The secured creditor transfer may transfer the ownership of the collateral to the buyer at a public auction or if no buyer appears at the second auction, to acquire the property at the floor price set for the first auction and have the ownership of the property transferred to the secured creditor. In conducting the public auction, the secured creditor is required to observe the provisions of Articles 394 to 449 of the Ethiopian Civil Procedure Code. The secured creditor will be liable for any damage it causes to the debtor in the process of selling by auction in violation of these provisions [Articles 82 (3) cum 82 (4)]. It should be noted that this type of foreclosure right was given to banks by previous laws and as per this Proclamation all secured creditors, including banks, microfinance institutions and leasing companies, can enforce their rights using the foreclosure mechanism.
6. Requirements to Dispose the Collateral
The secured creditor who wishes to exercise its right of disposing the collateral of the grantor is required to give 10 (ten) working days notification of its intention to dispose the collateral. Such notification needs to be given to the grantor, to person whom notifies the secured creditor about its right over the collateral, to any other secured creditors and person who are said to have right over such collateral. The notification needs to be made in writing and it should identify the grantor, the secured creditor, describe the collateral, state the amount of the secured obligation, the manner of the disposition and the date of the disposal and the language of the notice should be at least the language of the security agreement [Articles 83 (1) to (3)].
The failure to include in the notice the contents as stated under Article 83 (2) or where the notice includes information not specified by this provision or minor errors that are not seriously misleading exists in the notice, such notice will be considered as "sufficient" as provided by Article 83 (4). Article 83 (5) exempts the secured creditor from giving notices if the collateral to be disposed may perish before the end of the 10 (ten) working days after the secured creditor obtained possession of such collateral, or where its value decline speedily, or where it is of a kind sold a recognized market, or the cost of care and storage of the collateral is disproportionately large relative to its value.
7. Right to Collect Payments
The secured creditor who has security right in receivable, negotiable instruments or similar securities is entitled to collect payment from the debtor of the receivables, obligor under the negotiable instrument or issuer of the security, where the grantor or the debtor, as the case may be, has defaulted in honoring its obligation under the security agreement or where the secured creditor gets the consent of the grantor. The enforcement right of the secured creditor also extends to any personal or property right that secures or supports payment of the collateral and where such enforcement is made as per the provisions of Articles 70 to 74 [Articles 87 (1) to 87 (3)].
The secured creditor can also collect payments from financial institutions authorized to receive deposit without court order, where its security right is made effective by a control agreement lawfully concluded [Articles 17 (2) cum 87 (5)].
However, in case of an outright assignment of a receivable, the assignee is entitled to collect the receivables before or after the default of the assignor [Articles 88].
8. Distribution of the Proceeds of a Disposition of a Collateral
Article 84 provides for the order of the apportionment of the proceeds of the disposition of the collateral. Reasonable expenses of retaking, holding, preparing for disposition, processing and disposing of the collateral comes first; then the proceed will be used to satisfy the obligation secured by the security right under which the disposition is made and finally for the satisfaction of the obligations secured by any subordinate security right or other subordinate lines in the collateral, if the secured creditor receives from the holder of the subordinate security right or other lien a demand for proceeds before the distribution of the proceed is completed [(Article 84 (1)].
A holder of a subordinate security right or other lien holder is required to furnish reasonable proof of the interest or lien within a reasonable time and where such holder fails to do so, the secured creditor will not be obliged to distribute the proceeds to such holder [Article 84 (2)].
Where there is dispute as to the entitlement or priority between competing claimants, the enforcing secured creditor should deposit the surplus in an interest-bearing blocked account within 60 (sixty) days and keep the account [as blocked], until a claimant comes up with an order of court or any competent organ [Article 84 (3)].
In case where the proceeds from the disposition of the collateral fail to cover the secured obligation, the debtor will be legally liable for any such shortfall and in case where there is surplus, such amount is required to be paid to the grantor [Articles 84 (4) and (5)].
9. Rights of Buyers, Transferee, Lessee or Licensee of the Collateral
The buyers, or other transferees who acquires rights on the collateral disposed by the secured creditor will acquire the grantor’s right in the asset free of the rights of the enforcing secured creditor or any subordinate competing claimant except where there is priority right over the security right of the enforcing secured creditor [Article 86 (1)].
Similarly, the lessee or licensee who acquires rights on the collateral leased or licensed by the secured creditor is entitled to the benefit of the lease or license during its term, except as against creditors with right that have priority over the right of the enforcing secured creditor [Article 86 (2)].
The above rights of the buyers, transferee, lessee or licensee of the collateral will remain intact even where the secured creditor failed to sale, transfer, lease or licensee the collateral in accordance with the law, assuming that these beneficiaries do not have knowledge of a violation of the law that materially prejudiced the right of the grantor or another person [Article 86 (3)].
10. Enforcement Against Accessories to Immovable
As provided under Article 78 (1), the above enforcement mechanisms are applicable for secured creditors having right in security right in an accessory to immovable. However, where an obligation is secured by both a movable and immovable property of a grantor, the secured creditor can enforce its right against the movable property and immovable property separately but by following the distinct legal enforcement mechanisms put forward for each of these properties or on both of these properties but by following the law governing the enforcement of the encumbrances on immovable property [Article 78 (2)].
11. Right of Redemption and Right of the Higher-Ranking Secured Creditor to Take Over the Enforcement
Any person whose right is affected by the enforcement process is entitled to redeem the collateral by paying or otherwise performing the secured obligation in full, including by covering the reasonable cost of enforcement. The grantor is given the priority right of redeeming over any other person’s right to redeem the collateral [Article 79 (1) and 79 (2)].
Such right of redemption can be exercised by the grantor or any person until the collateral is sold or otherwise disposed of acquired or collected by the secured creditor or until the conclusion of an agreement by the secured creditor for that purpose [Article 79 (3)].
A movable collateral can be held as collateral by two or more secured creditors and also by non-consensual creditor. In such case the secured creditor whose right has priority over other secured creditor (s) or non-consensual creditor, who is referred to as “the Higher Ranking Secured Creditor”, is entitled to take over the enforcement process at any time before the collateral is sold or otherwise disposed of or acquired by the secured creditor or until the conclusion of an agreement by the secured creditor for that purpose [Article 80 (1)].
This right of the Higher-Ranking Secured Creditor will be applicable despite the commencement of enforcement by another secured creditor or non-consensual creditor and this right to takeover includes the right to enforce by any method available to a secured creditor as envisaged by the Proclamation [Article 80 (1)].
End of Part IV
Posted on May 15th 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 |