This is the final part of the legal brief that deals with the captioned subject matter at hand. This part will deal with the duties and responsibilities of the “Collateral Registry Office”, (herein after referred to as the Office) and the miscellaneous provisions of the Proclamation and the Directive of NBE.

1.   Establishment and Main Purpose of the Office

As per Article 20, the Office is to be established by Regulation to be issued by Federal Democratic Republic of Ethiopia’s the Council of Ministers. However, as stated under Article 95, until such time of the establishment of an autonomous Office by such regulation, the National Bank of Ethiopia (NBE) is mandated to establish the Office, operationalize the Collateral Registry and appoint the Registrar. Accordingly, NBE has issued the Directive No. MCR/01/2020 on the “Operationalization of Movable Collateral Registry”, which came into effect as of 26^th of February 2020 (herein after referred to as the Directive). As per Article 4 of this Directive, the Movable Collateral Registry Office is established and will be housed in NBE. A Director who is appointed by NBE will supervise and administer the Office and the Director will also act as the Registrar of the Office.   

As per Articles 2(5), 2 (6) cum 21 the main purpose of the Office is managing the “collateral registry”, which in turn is defined as “receiving, sorting and making information accessible to the public in registered notices with respect to security right and non-consensual creditors.” As per Article 4 (1) of the Directive, the Office will execute the power, duties and responsibilities vested in it as per Article 95.   

2.   Necessity of Registration Notices of Security Rights in Collateral Registry

From the cursory readings of the Proclamation notices relating to security rights over movable property will be legally acceptable upon their entry into the collateral registry. As per Articles 22 (1) to (4), registration of notices in the collateral registry shall be made by the secured creditor or its authorized representatives and to make effective the registration of initial notice as well as the amendments to the notice that adds collateral not covered in the security agreement, the grantor shall authorize them in writing.  Similarly, an amendment to registration notice that adds a grantor will be effective only where the added grantor consents in writing. As per Article 2 (31) “notice” includes “an initial notice, an amendment notice submitted to the Office by the secured creditor or other authorized person under this Proclamation.”

As per Articles 22 (5) and (6), “a written security agreement is considered as sufficient evidence in constituting an authorization by the grantor for the registration notice” and in such case the Office “will not require evidence of the existence of the grantor’s authorization”.  As per Article 23 one notice is sufficient in case where the security right is created by the grantor under one or more than one security agreements but with the same secured creditor.

3.   Public Access of the Registration of Security Rights in Collateral Registry, Fees and Modes of Payment and Form of Communication  

The registration of the notice can be undertaken by the Office or by person who is given user account. As per Article 24, a person who establishes an account with the Office can submit for the registration of the notice by itself and upon payment of the fee to be prescribed by the Directive of the Office. As per Article 5 of the Directive any secured creditor or an authorized representative is required to have a “User Account” approved by the Office to access the Collateral Registry upon fulfilling the requirements set out under Articles 7 to 9 of the Directives and the relevant provisions of the Proclamation. Article 2 (16) of the Directive defines “User Account” as “a designated person or institution registry account that has met the terms and conditions of use of the Collateral Registry for the purpose of transacting on the Collateral Registry. The User Account will store a username, password, and other administrative information.”

Similarly, an amendment or cancellation notice can be submitted through the user account and by the person that is authorized to submit such notice.  However, any person can submit to the Office, a search request by using prescribed search request form of the Office.   In case where, the Office refuses access, it is required to communicate its reason to the registrant or searcher without delay. As per Article 2 (40), “registrant” is “the person who submits the prescribed registry notice form to the Office”.

As stated under Article 18 of the Directive, the Office is required to make available its services on twenty-four hours a day, every day of the week, except in case of suspension of access, in whole or in part, for maintenance or due to circumstances beyond its control; even in such circumstances the Office is required to give prior notice to its users.

The amount of the fees to be paid by secured creditors or an authorized representative and a searcher, which ranges from Birr 30 to Birr 200, are detailed under Articles 9(1) to 9 (5) of the Directives. Article 9.5 of the Directives lists out the services that are given by the Office free of charge, which includes registration of an initial notice, an amendment notice, a cancellation notice and searches without printed fees. Article 9.6 has introduced the postpaid and prepaid modes of payment for the fees and has mandated the Office to introduce any other mode of payment including online or electronic payment methods. It should be noted that Article 21 of the Directive has exempted all users of the Collateral Registry from the payment of fees that are stated under Article 9 of the Directive for 90 (ninety) days from the entering into force of the Directive.  

As per Article 6 of the Directive any communication from the Office including the notifications of refusal to access, rejections of registration of notices, provision of copy of information and search results will be made electronically and in automated manner.

4.   Mandates of the Office in the Registration of Notice and Undertaking Search Request

As per Article 25, the Office is entitled to reject the registration of a notice only “if no information is entered in one or more of the required designated fields” and in relation to this the provision of Article 27 to 31 lists out the information that the initial notice should fulfill. The major ones are identifiers of the grantor, the secured creditor, description of the movable asset to be encumbered and the time of effectiveness of the registration of the notice. It is only where these are absent that the Office can reject the registration of the initial notice and in such case the Office is required to communicate its reason to the registrant or searcher without delay. In case where there is more than one grantor or secured creditor, the required information should be entered separately for each grantor or secured creditor. However, as can be seen from the provision of Article 26, the Office is not entitled to “conduct any scrutiny of the content of a notice or a search request”.

Article 11 of the Directive lists in detail and distinctly the grantor identifier for natural person or his/her representative who is an Ethiopian citizen, for non-Ethiopian citizen, his/her representative and legal person or its representative. Articles 12 and 13 of the Directive deals with the secured creditor identifier and address of the grantor and secured creditor, respectively.      

As per Article 31, “the registration of the initial, amendment or cancellation notices are effective from the date and time when the information in notices is entered into the records of the Collateral Registry so as to be accessible for searchers”. The Office is obliged to record, without any delay, the information in a notice into its records along with the specific date and time when the information on the notice is recorded.

As per Article 32, the registration of notice that are entered into record as provided under Article 31 will remain in force for period as stated in the initial notice but it cannot exceed 10 (ten) years from the date indicated by the registrant in the designated field. As long as the renewal of the notice is submitted 6 (six) months before the expiry of the initial notice, the validity period can be extended more than once but the newly extended period cannot “exceed ten years” from the date of the expiry from the initial registration.

As per Article 33 the Office is obliged to send a copy of the registered notice to the registrant and the grantor, without delay and within 10 (ten) working days after the registrant receives the notice, respectively.  The information to be sent should “indicate the date and the time the registration became effective and its registration number”.  

The Office also gives service of public search of its record and as per Article 37 this can be done “based on identifier of the grantor and the serial number of the collateral”. As per Article 2 (45) “serial number” refers to “the serial number located on the chassis or body frame”, while Article 2 (46) defines “serial-numbered collateral” as “motor vehicle, trailer, agricultural machinery, construction machinery or industrial machinery and other that have a serial number permanently marked on or attached by the manufacturer. ” Article 14 (2) of the Directive has extended the list of “serial-numbered collateral” so as it also includes “equipment and machinery held for business use”.     

As per Article 38, upon the submission of a search request that satisfies the requirements by any persons, the Office is required to give the search result without delay to the applicant. As per Article 38 (3), the search result that is issued by the Office will be considered as “proof of its contents in the absence of evidence to the contrary”.

5.   Amendment or Cancellation of Notice, Post-Registration Changes and Transfer, and Rectification of Error

As per Article 34, only the secured creditor or its authorized person can willfully request for amendment or cancellation of the initial notice by an amendment or cancellation notice that should fulfill the information as required by Article 35.  However, where the situations that are mentioned under Article 36 occurs the secured creditor is compulsorily required to register the amendment or cancellation of the notice, as the case may be. In case where situations that necessitated compulsory amendment or cancellation of the notice occurs, the obligor is entitled to ask, in writing, the secured creditor to register an amendment to the notice and “the secured creditor may not charge or accept any fee or expense” for doing so. If the secured creditor does not comply with the grantor’s written request, within 10 (ten) working days, the obligor is entitled to request for the required amendment or cancellation from the Office and the Office is required to register the amendment or cancellation without delay and it should communicate the same to the secured creditor [Article 36(5) and 36 (6)].  

Article 40 obliges the grantor to notify the secured creditor of the changes in the “grantor identifier” at least 10 (ten) days before the change. As can be seen from Article 28, grantor identifier is the “unique identification number” of the grantor. If the change to the grantor identifier occurs after the notice is registered, the secured creditor is required to undertake the amendment of the notice based on the new grantor identifier and where the secured creditor undertakes the change within 10 (ten) days from the date of the receipt of the notice by the secured creditor and as long as the amendment is made within the effective period of the registered notice, then the priority right of the secured creditor remains effective against third parties and as stated under Article 40 (2) the secured creditor, “retains the priority it had over the right of competing claimants before the change”. However, where the secured creditor registers the amendment notice after the expiry of 10 (ten) days, then the priority right it has will be limited and those persons that has buys, leases or license the collateral between these times are entitled to acquire their “right free of the security right to which the amendment notice relates” [Article 40 (3)].  

As can be understood from the provision of Article 41, “a security right in collateral that was made effective against third parties by registration of a notice remains effective against third parties and retains its priority over the right of competing claimants after the collateral is sold or otherwise transferred by the grantor to a transferee that acquires its right subject to the security right.”

As per Article 39, only error in the grantor identifier renders the registration notice ineffective with respect to that particular grantor but will remain effective against other grantors that are correctly identified in the notice. Similarly, the error in description of the collateral does not render the registration notice ineffective with respect to other collateral sufficiently described [Article 39 (5)]. However, as stated under Article 39 (3) “unless the error would seriously mislead a reasonable searcher” like error in statistical information or description of the collateral will not make the registered notice ineffective. “Statistical information” is defined by the provision of Article 2 (15) of the Directive as “any information collected by the Collateral Registry for internal purposes” and the details of statistical information is stated under Article 15 of the Directive.

But it should be noted that as per Article 39 (6) “an error in the serial number of the serial-numbered collateral renders the registration ineffective against a buyer or lessee of that asset”.      

6.   Information Contained in Collateral Registry and Limitation of liability of the Office

As stated under Article 42 (1), except for what is stated under Article 36 (6), “the Office may not amend or delete information contained in the registered notice” and Article 42 (2) requires the Office to “preserve information contained in its records and reconstruct it in the event of loss or damage.”

However, as per Article 43 the Office can remove information in a registered notice from its public records “only upon the expiry of the period of effectiveness of the registration of a notice” and the Office shall “archive information removed from its public for 10 (ten) years in a manner that enables the information to be retrieved.”

As per Article 44, the liability of the Office is limited for loss or damage caused by “an error or omission in a search result issued to a searcher or in a copy of a registered notice provided to the registrant, in accordance with Article 36 (5) and (6), an error or omission in entering or failing to enter information in the records or in erroneously removing information from records, a failure of the Office to send a copy of the registered notice to the registrant and for provision of false or misleading information to a registrant or searcher.”

7.   Duties and Responsibilities of Banks, Microfinance Institutions and Capital Goods Finance Companies

Banks, microfinance institutions and capital goods finance companies are required by Article 7 of the Directive to formulate and put in use clear policies and procedures and other relevant documentations for secured transactions. In addition, these institutions are required to assign, at least, an administrator and a senior office at senior managerial level who will oversees the effective implementation of the provisions of the Proclamation and the Directive.   

As per Articles 19 (1) to 19 (3) of the Directive, all banks are required to allocate at least 5% (five percent) of their credit disbursements of the year to individuals and other persons, which these persons can take against movable property as collateral as of July 1^st 2020 and banks can partner with microfinance institutions to allocate these funds.  Microfinance institutions who generate funds as per the partnership with the banks exclusively for the purpose of using the fund for the provision of credit against movable property as collateral.

A bank that failed to achieve the target of allocating the fund as of July 1st 2020,  will be required to allocate double of the preceding year and if the bank failed to do so in the subsequent year, NBE is mandated to take appropriate actions that ensures the allocation of such fund. All banks and microfinance institutions are also required to provide quarterly information about the allocation of such fund to NBE [Articles 19 (4) to 19 (6)].     

8.   Miscellaneous Provisions of the Proclamation and the Directives

8.1.    Exemption from Stamp Duty: - As per Article 89, transactions that gives rise to security right under the Proclamation are exempted from payment of stamp duty.  

8.2.   Security Rights Created Prior to this Proclamation and that are Covered by Other Laws: - security rights that are created against third parties prior to the date of this Proclamation will not be covered by this Proclamation, as can be seen from Article 90.  

8.3.    Transfer of Rights and Obligations: - as per Articles 91 (1) and (2) the registration of security rights on movable collaterals such as vehicles (which was used to be done by the Ministry of Transport), construction machineries and equipment (which was used to be done by the Ministry of Construction), and business mortgage and hire purchase  (which was used to be done by the Ministry of Trade and Industry) and that were undertaken by other government institutions are transferred to the Office.

As per Article 91 (3), those government organs that are responsible for providing title deeds for corporeal and incorporeal assets are required to check from the Office and ascertain whether or not the assets have been free from any pledge before effecting the title transfer.

8.4.    Penalty under the Directive: - financial institutions that fails to comply with any of the provisions of the Directives will be liable for penalty of Birr 10,000 for each violation [Article 20 of the Directive].  

8.5.    Repealed and Inapplicable Laws: - The Proclamation has totally repealed and replaced the Business Mortgage Proclamation No. 98/1998 (as amended) and partially repealed and replaced the provisions relating to movable security rights that are provided in the Property Mortgaged or Pledged with Banks Proclamation No. 97/1998 (as amended) [Article 93 (1)].

End of the Legal Brief

Posted on May 17^th 2020

Attachments:

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

17 May 2020

2306

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21 April 2020

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21 April 2020

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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 15^th 2020

Attachments:

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

15 May 2020

1816

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21 April 2020

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20 April 2020

9847