The shift to better Personal Property Security Laws
It cannot be gainsaid that the Philippine economy has been severely impacted by the COVID-19 pandemic. The economic downturn has been brought about by the implementation of nationwide lockdowns, the closure of businesses due to serious business losses and financial reverses, the rise in unemployment, and the decrease in the productivity rate in agriculture, service, and other industries. While the Philippine government has put in place various relief measures to aid all the stakeholders on their road to recovery, the irreversible consequences of the pandemic nevertheless have taken a toll on a lot of enterprises.
One of the recognized driving forces of the Philippine economy is the Micro, Small, and Medium Enterprises (MSMEs). As reported by the Asian Development Bank Institute (2021), MSMEs accounted for 99.5% of all enterprises and employed 63.2% of the workforce as of the end of 2018. This, notwithstanding, MSMEs remain the most vulnerable to external factors that influence the business climate such as public health emergencies, disasters, and other natural calamities.
Now that the government is starting to ease restrictions, it has become a challenge for enterprises to think of ways by which they can bounce back and move forward. One of the methods that MSMEs can perhaps take into consideration is availing of the benefits granted under R.A. No. 11057, otherwise known as the Personal Property Security Act (PPSA). Should the Personal Property Security Registry (PPSR) be fully established and operational — which is a condition precedent for the provisions under the PPSA to take effect — these businesses will then have better opportunities to source out capital by obtaining loans from banks and other financial institutions with a wider range of objects that may be put up as collateral.
The Implementing Rules and Regulations (IRR) of the PPSA enumerates the variety of collateral over which a security interest may be created, to wit: a.) Rights arising from contracts, including but not limited to Securities, Commodity contracts, and Lease of goods including financial leases and operating leases for a period of not less than one year; b.) Equipment; c.) Inventory; d.) Deposit Accounts; e.) Negotiable instruments; f.) Negotiable documents of title; g.) Consumer goods; h.) Intellectual property; i.) Livestock; j.) Fixtures, accessions, and commingled goods; or, k.) Future property or after-acquired assets (Sec. 2.03, IRR).
The PPSA covers all transactions of any form that secure an obligation with movable collateral except interests in aircraft which are covered by the Civil Aviation Authority Act of 2008 and interests in ships by the Ship Mortgage Decree of 1978 (Sec. 4, PPSA).
These significant developments under the PPSA are a shift from the old laws, thereby giving mortgagor-enterprises better options over properties to put up as collateral. Prior laws on pledge and chattel mortgage were clear in that it allowed only as collateral personal properties that were absolutely owned by the pledgor or mortgagor. The old laws could not similarly cover future properties, there being a specific requirement for personal properties to be described with particularity, which description must appear in the Affidavit of Good Faith. The same is no longer controlling under the PPSA because other than removing the requirement of an Affidavit of Good Faith, the law also now expressly includes future property or after-acquired assets as among those that can be constituted as security interests subject to the qualification that the security interest over which is “created only when the grantor acquires rights in it or the power to encumber it” (Sec. 5[b], PPSA).
Moreover, the PPSA also adopts an expanded definition of security interest as a property right in collateral that secures payment or other performance of an obligation, regardless of whether the parties have denominated it as a security interest, and regardless of the type of asset, the status of the grantor or secured creditor, or the nature of the secured obligation; including the right of a buyer of accounts receivable and a lessor under an operating lease for not less than one year (Sec. 3[j], PPSA).
It is worthy to note, however, that the PPSA is crafted not only to entice borrowers but the lenders as well. One important development under the PPSA that is appealing to both parties is the simplified framework for purposes of creation, perfection, and enforcement of security interests in personal property. The PPSA paves the way for borrowers such as MSMEs to obtain loans from banks and other financial institutions by simply entering into a written and duly signed security agreement to create the security interest (Sec. 5[A], PPSA), which is perfected by registering a notice with the PPSR and by possessing the collateral by the secured creditor if it involves a tangible property or taking control over the same if it involves intangible property such as investment property or deposit account (Sec. 12, PPSA).
Personal security may be enforced by the creditor upon default simply by the sale or disposition of the collateral either publicly or privately. The only limitation provided for by the PPSA is that the sale or disposition must be done in a commercially reasonable manner (Sec. 50, PPSA). Under the old rules, it was required that the foreclosure of personal property must be made through a notary public in the case of pledge, while in the case of chattel mortgage, the sale must be done only publicly. Thus, the procedure under the PPSA is less cumbersome as the law now allows private sale.
Although it may now be simpler for lenders to enforce the collaterals under the PPSA, this does not mean to say, however, that pactum commissorium is now sanctioned by law. Pactum commissorium is the automatic appropriation by the creditor of the things given by way of pledge or mortgage (Art. 2088, Civil Code). There is no automatic appropriation under the PPSA as the law still requires the creditor to sell or dispose of the property either publicly or privately. Thus, while the PPSA expressly repeals Art. 2088 of the Civil Code, pactum commissorium remains to be against public policy.
Notably, all the foregoing developments are in keeping with the policy of the state to promote economic activity by increasing access to least cost credit, particularly for MSMEs, by establishing a unified and modern legal framework for securing obligations with personal property (Sec. 2, PPSA).
The PPSA aims to encourage lenders to grant loans to MSMEs with fewer risks involved. This, in turn, enables MSMEs to thrive, promote employment opportunities, and ultimately contribute to the country’s economic growth and recovery especially after the devastating effects brought about by the COVID-19 pandemic.
The views and opinions expressed in this article are those of the author. This article is for general informational and educational purposes only and not offered as and does not constitute legal advice or legal opinion.
Wildy L. Pahayahay is an associate of the Angara Abello Concepcion Regala & Cruz Law Offices (ACCRALAW), Davao Branch.
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