The House of Peoples’ Representatives of the Federal Democratic Republic of Ethiopia has approved the Proclamation on Movable Property Security Right (herein after referred to as Proclamation) and it is published in the Federal Negarit Gazette on 7th of August 2019. The provision of Article 96 provides that it will come into force on the date of the expiry of 12 (twelve) months after the publication in the Federal Negarit Gazette or the commencement of operation of the Collateral Registry Office, whichever comes first [1]. The Proclamation and the Directive of the National Bank are attached hereunder. 

   
The Proclamation has 8 Parts and 96 Articles. In the five-part series of the legal briefs we will try to highlight the salient features of this Proclamation. This first part will deal with the rationales for the enactment of the Proclamation, the major definitions included in the Proclamation, its scope of application, the modalities for and the requirements for the creation of security rights, extents of security right between the grantor and the secured creditor as well as the extent of security right against third parties. 

 

1. Rationale of the Proclamation

This Proclamation was drafted by the National Bank of Ethiopia with the view of implementing its purpose of fostering “healthy financial system” and it said it is enacted based on the laws of the United Nation Commission on International Trade law (UNCITRAL). The details of the rationales that necessitated the promulgation of the Proclamation are provided in its preamble.

 

The first is “modern secured transactions system enables individuals and entities to use their movable assets as security for generating new productive capital, expands investments, creates more job opportunity, increases production and productivity, fosters access to and usage of financial products and services, creates opportunity to expand banking services to rural areas”. The second is “to provide for the creation of security in movable property, ensure their publicity and effectiveness through efficient enforcement mechanisms”. Finally, “establishment of single comprehensive electronic registration regime for secured transactions in movable property to determine priority rights among [competing] claimants are necessary”. 

 

2. Main Definitions included in the Proclamation

The definitional part of the Proclamation includes 48 sub-articles[2]. Here we will consider only those that relates to the main gist of the Proclamation and the others will be used in dealing with the other parts of this legal brief. The Proclamation has defined “movable property” under its Article 2 (27) as including “inventories, agricultural products, incorporeal assets, the right to use land unless prohibited by pertinent laws; a security right under a hire-purchase agreement, security trust deed, trust receipt, commercial consignment, mortgage of business, sale with ownership reserved, sale with the right of redemption, security rights in certificated securities, security rights in warehouse receipt, motor vehicles, trailer, agricultural machinery, construction machinery, industrial machinery and other properties excluding land, house and building.” 

 

Article 2 (6) of the Directive No. MCR/01/2020 (herein after the Directive) has defined “movable property” as “any incorporeal or corporeal asset as defined in Article 2 (27) irrespective of the manner in which it is used”. In relation to the definition of movable property, “certificated security” is defined as “document evidencing ownership of share or bond registered in the name of the holder or issued to a bearer” [Article 2 (4)].

 

On the other hand, “Security Right” is defined as “property right in movable property that is created by an agreement to secure payment or other performance of an obligation, regardless of whether the parties have denominated it as security right, and regardless of the type of property, the status of the grantor or secured creditor, or the nature of the secured obligation” [Article 2 (44)]. “Security Agreement” is defined as “an agreement regardless of whether the parties have denominated it as a security agreement, between a grantor and a secured creditor that provides for the creation of a security right” [Article 2 (43)]. 

 

3. Scope of Application of the Proclamation

In accord with the definition given to movable property, and as stated under its Article 3, the Proclamation is applicable to rights in movable property created by agreement that secures payment of credit or other performance of an obligation. It excludes security rights that are created on: securities traded on exchanges, ships and their accessories, aircrafts, unless specifically provided by the Proclamation a lien or other interests given by law, and security right in proceeds of collateral outside of the scope of this Proclamation. However, the law does not prohibit the creation of an encumbrance in accessories to immovable under the applicable immovable laws. It should be noted that Article 2 (1) has defined “accessories to immovable” as “a corporeal asset that despite the fact that it is physically affixed to an immovable is treated as movable”. 

 

Article 3 of the Directive in delimiting its scope of application has provided that “This Directive shall apply to rights in movable property created by agreement that secure payment of credit or other performance of obligation.” This is verbatim of what is stated under Article 3 (1) of the Proclamation. 

 

4. Modalities for and Requirements for Creation of Security Right 

The main modality for creating security right over movable right is through security agreement. From the readings of the Proclamation, it can be understood that this type of security right is created as result of the “consensual grantor to secured creditor relationship”. As per Articles 4 (5) cum 6 the security agreement is required to be made in writing and it should be signed by the grantor. It should also identify the secured creditor and the grantor, describe the secured obligation and describe the collateral.

 

The Proclamation requires the description of the collateral and secured obligation “…in a manner that reasonably allows their identification” and the collateral given as security should be “…listed, categorized and the type and the quantity of the collateral” should be specified. In similar wording Article 14 (1) of the Directive states that "A description of collateral shall reasonably identify the collateral including by a type of collateral, category, quantity or specific listing."

 

As stated under Article 4, the grantor can give security right over movable property that it owns or entitled to encumber it. “Grantor” is defined as “a person that creates a security right to secure either its own obligation or that of another person; a buyer or other transferee, lessee, or licensee of the collateral that acquires its right subject to a security right” [Article 2 (20) and Article 2 (3) of the Directive]. While “secured creditor” is defined as “a person that has a security right or non-consensual creditor” [Article 2 (42) and Article 2 (14) of the Directive]. 

 

In case of hire-purchase, the grantor can create security right over the capital goods but to the maximum amount realizable under the security right is limited to the goods value in excess of the amount owed to the lessor. The Proclamation has defined “hire purchase” as “a type of leasing by which a lessor provides a lessee with the use of a specified capital goods, against payment of mutually agreed installments over specified period under which, with each lease payment, an equal percentage of ownership is transferred to the lessee and upon effecting the last payment, the ownership of the capital goods shall automatically be transferred to the lessee.” This definition is similar to the definition given to “hire purchase” under Article 2 (4) of the Capital Goods Leasing Business Proclamation No. 103/1998 (as amended by Proclamation No. 807/2013).

 

The movable property can be “future asset”, which is defined as “a movable property, which does not exist or which the grantor does not have right in or the power to encumber at the time the security agreement is concluded” [Article 2 (18)]. In addition, security right can encumber and continue in accessory to movable or immovable, and a security right is not extinguished by an affixation of the accessory to movable or immovable property. 

 

In relation to the obligation to be secured by movable property, Article 5 states that “a security right may secure one or more obligations of any type, present or future, determined or determinable, conditional or unconditional, fixed or fluctuating”. As per Article 6 (3), “the secured obligation may be described as all obligations currently owed and to be incurred in the future, generally or specifically, including by a reference to the maximum amount secured by the right.

 

The other modality that leads to the creation of security right on movable property is the one that is created as result of “non-consensual grantor to secured creditor relationship”. The provision of Article 2 (30) defines “non-consensual creditor” as “a creditor that has obtained a right in the collateral, on the basis of a court order or applicable law”. This clearly shows this type of security right creation is not based on the agreement of the grantor and the non-consensual creditor but rather it is imposed by the law on the grantor.  

 

5.  Extents of Security Right between the Grantor and the Secured Creditor 

As provided by Article 7 (1) the security right that is validity established extends “...to its identifiable proceeds”. “Proceeds” are defined as “whatever is received in respect of the collateral, including what is received as a result of sale or other disposition or collection, lease or license of the collateral, fruits, insurance proceeds, claims arising from defects in, damage to or loss of the collateral and proceeds of proceeds” [Article 2 (36)].

 

As per Article 7 (2), in exceptional situations the security right extends to proceeds that are not identifiable. This happens where the proceeds are in the form of funds credited to a deposit account or money is commingled with other assets of the same kind. However, the security right is limited to the amount of the proceeds before they commingled. Similarly, as per Article 8, “a security right in a corporeal asset that is commingled in a mass of assets of the same kind or product extends to the mass or product”. “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)].

 

As provided under Article 9, security right in receivables and in rights to payment of funds is effective even where the debtor and the financial institution, respectively, have by agreement has limited the grantor’s right to create security right over the receivables and the payment of funds. Hence, the security agreement that is concluded between the grantor and the secured creditors over receivables and over payment of funds credited to a deposit account will be effective between the grantor and the secured creditor irrespective of whether the debtor of the receivable and the financial institution that is obliged for the payment of the fund have consented to the creation of the security right or not. 

 

Although as per Article 2 (37), defines “receivable” 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”, the consent of the debtor of receivable will not be required for creation of security right only to receivables arising from “a contract for the supply of goods or services other than financial services, a construction contract or contract for the sale or lease of immovable property and a contract for the sale, lease or license of intellectual property.”

 

As per Article 10(1) “a secured creditor with security right in incorporeal asset or a negotiable instrument has the benefit of any personal or property right that secures or supports payment or other performance of the collateral without a new act of transfer.”   However, as stated under Article 10 (2) “…where the transfer of these assets requires new act of transfer, the grantor is obliged to transfer the benefit of that right to the secured creditor”.

 

The provisions of Articles 2 (22) has defined “incorporeal asset” as “all types of movable property other than corporeal assets that include receivables, deposit accounts and intellectual property rights” and the provisions of Articles 2 (23) has stated that “intellectual property” will have the same meaning as given to it by the “intellectual property law”.  

 

As per Articles 11 and 12 “a security right in negotiable document extends to the corporeal asset covered by the document” while “a security right in corporeal asset with respect to which intellectual property is used shall not extend to the intellectual property and a security right in the intellectual property shall not extend to the corporeal asset”.   As per Article 2 (28) “negotiable document” includes “a document such as 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.” 

 

6.  Extents of Security Right against Third Parties 

A security right in movable property is effective against third parties where the conditions stated by the Proclamation are fulfilled. As stated under Article 13, a security right in movable property will be effective against third parties if, “a notice is registered with the Collateral Registry by the secured creditor, or where the secured creditor has possession of the corporeal asset that is money, negotiable instruments, negotiable documents and certificated securities or the secured creditor has acquired control over the right to payment of funds credited to a deposit account or an electronic security.” 

 

As per Article 10 of the Directive "any information in a notice must be written in English or Amharic". As per Article 2 (26) “money” is defined as “bank notes and coins which are legal tender issued and minted by the National Bank of Ethiopia; and notes and coins which are legal tender in any other country outside Ethiopia to which the National Bank of Ethiopia has declared to be acceptable for payment in Ethiopia” and as per Article 2 (29), “negotiable instrument” includes “a bill of exchange, promissory note and other instruments issued to bearer, specified name or order, except check.” 

 

As per Article 14 (1) a security right in any proceeds (as defined under Article 7 herein above) will be effective against third parties “without any further act by the grantor or the secured creditor if the proceeds are in the form of money, receivables, negotiable instruments or rights to payment of funds credited to a deposit account”. Similarly, as stated under Article 14 (3), “a security right in a mass or product (as stated herein above under Article 8) is effective against third parties without any further act”. 

 

However, as stated under Article 14 (2), in case where the types of the proceeds are other than what is stated under Article 14 (1), then the right over such types of proceeds will be effective against the third party “for ten working days after the proceeds arise and thereafter, only if the security right in the proceeds is made effective against third parties by one of the methods applicable to the relevant type of collateral before the expiry of ten working days.”  

 

As stated under Article 15 provides that “a security right continues to be effective against the third party despite a change in the methods for achieving third-party effectiveness provided there is no time gap when the security right is not effective against third parties”. In addition, as stated under Article 16 (1), “if the secured creditor transfers a security right in whole or in part, such transfer needs to be registered in form of an amendment notice”. However, as stated under Article 16 (2) failure to do so will not affect the effectiveness of the security right.  As per Article 17 of the Directive, an amendment notice relating to the transfer of a security right shall identify the transferee and the collateral that relates to that security right. 

 

The effectiveness of security right against third parties also differs on whether the movable property is fund credited to a deposit account, or it relates to negotiable document and corporeal assets or it relates to electronic securities. Accordingly, Article 17 provides that a secured creditor acquires control over a right to payment of funds credited to a deposit account “upon the creation of the security right in favour of the financial institution, upon the conclusion of a control agreement or when the secured creditor becomes the deposit account holder.” The second part of Article 2 (9) states that with respect to right to payment of funds credited to a deposit account, “control agreement” refers “to an agreement in writing among the financial institution, the grantor and the secured creditor, according to which the financial institution agrees to follow the instruction from the secured creditor with respect to the payment of funds credited to the deposit account without further consent from the grantor.” Article 2 (13) has defined “deposit account” as “an account maintained by a financial institution authorized to receive deposit from the public.”

 

As stated under Article 18 (1), if a security right in a negotiable document is effective against third parties, “the security right extends to the corporeal asset covered by the document” and hence this extended right over the corporeal asset “will also be effective against third parties.” As per Article 18 (2) where the negotiable document is under the possession of the secured creditor, the security right will be effective on the corporeal assets covered by the document and against third parties. 

 

As stated under Article 19, a secured creditor acquires security over an electronic security upon “the notation of security right or entry of the name of the secured creditor in the books maintained by or on behalf of the issuer for the purpose of recording the name of the holder of the securities or the conclusion of a control agreement.” Article 2 (15) has defined “electronic security” as “shares and bonds registered and transferable electronically but not represented by a certificate.”  The first part of Article 2 (9) states that with respect to right to electronic securities, “control agreement” refers “to an agreement in writing among the issuer, the grantor and the secured creditor, according to which the issuer agrees to follow the instruction from the secured creditor with respect to the securities without further consent from the grantor.

End of Part I

Posted on 27^th of April 2020

 

[1] As per the “Operationalization of Movable Collateral Registry” Directive No. MCR/01/2020 issued by the National Bank of Ethiopia, the Movable Collateral Registry Office, which is housed in the National Bank of Ethiopia, is established as of 26^th of February 2020.

[2] In this legal brief unless it is explicitly mentioned all the provisions that are cited are from the Proclamation on Movable Property Security Right (Proclamation No. 1147/2019).