Volume 4, Number 25, Page 3

Secured Financing and Electronic Registries

The significance of secured financing from a commercial standpoint part 1 of 2

by Mariana Silveira

The articles in this series derive from a visit by NLCIFT staff to the Personal Property Registry in Regina, Saskatchewan, and the information presented at the May 1997 Canadian Conference on Personal Property Security Law, especially that prepared by Ron C. C. Cuming and Greg Hebert. —Editor

Asset-secured transactions benefit issuers by providing liquidity to working capital at interest rates that are often significantly more favorable than what the creditworthiness of the owner of the assets (the originator) would support under more conventional financing. “More conventional financing” refers to the situation in Mexico as well as in other countries in Latin America, where lending has mostly been based on using real estate as a security. However, real estate is not readily accessible, and the unavailability of this type of security or the existence of prior liens on it forces debtors to enter into highly onerous agreements, considering the interest rates on their loans.

The notion of a security interest on all kinds of goods, tangible or intangible, should be introduced into Mexican law. Access to credit would be easier in Mexico if legal vehicles such as those adopted by the U.S. Uniform Commercial Code (UCC) Art. 9 or the Canadian Personal Property Security Act (PPSA) were implemented. These methods allow borrowers to obtain loans while giving guarantees that do not imply the transmission of possession of the goods. Third parties are protected through an effective registration that gives notice to the world of creditors’ rights regarding goods that remain in the possession of the debtor.

Some of the basic features of the U.S. and Canadian systems are as follows:

Pledges comprise future goods or the proceeds of presently existing goods.

General descriptions, such as inventories, accounts receivables and their products, or “all machinery and equipment,” are considered to be detailed descriptions from a legal point of view. This facilitates “floating liens,” in the sense of a guarantee that “floats” over a constantly fluctuating and changing group of goods.

The commercial registry where pledges are registered functions on the basis of a wide concept of personal guarantee; that is, only one concept of pledge that comprises all legal classifications—conditional sale, lease (consignación), etc.—exists. Consequently, by carrying out just one search, a creditor could discover all the guarantees he may acquire against a particular debtor’s goods and the validity and priority thereof (a debtor registry).

The function of the registry is neither to detail all the information regarding a loan and its corresponding guarantee, nor to register the whole text of the security agreement. The object of registration is to give notice to third parties that the goods have been encumbered.

Priority is established in general following the date of registration. The same hierarchy of chronological priority applies even when the pledge is registered without the existence of a prior contractual obligation. Thus, in many credit operations, the first step by the parties is to fill out the form and file the pledge in the registry, in case a loan is granted in the future. (The notion of purchase money security—when certain categories or types of creditors are given priority over others—introduces flexibility and a certain freedom to the rigid system of chronological priorities.)

Personal property registration is virtually nonexistent in Mexico. The Regulation of the Public Registry of Commerce currently does not consider the possibility of registering acts or contracts related to personal property that cannot be easily identified, thus making its application very limited.

Registration is an essential condition to the effectiveness of a secured financing system with the features mentioned above. Adequate notice of the existence of the security interest must be available, and this can only be achieved through registration.

Perfection by registration—notice registration—is one of the essential points when dealing with registration issues because the effect of registration is not the same in all cases. The current registry system is very different from the system it replaced. Under the old systems in Canada, a copy of the security agreement was filed with the registry. Now a simple document or computer screen of information, essentially a financing statement that sets out some basic information about the secured party and the debtor and their relationship, is registered.

Apart from reducing the volume of paper, this provides greater confidentiality because the secured party does not need to release the details of the security agreement, except upon demand by the debtor or other persons with interests in the property. A single financing statement can relate to one or more security agreements. It is possible that a properly drawn financing statement can meet registration requirements for many security agreements between the same parties over several years. Furthermore, a financing statement of pre-filing can be registered before a security agreement is executed between the parties.

Registration Search Criteria

Two different search criteria can be generally used in the registration of secured financing transactions: the debtor’s name and the collateral. Some systems use only the debtor's name or the collateral criterion, while others use both.

In Canada, all of the systems use the debtor’s name as the basic search criterion. Several of the important features of the system could not function on the basis of collateral description criteria. For example, an important aspect of the PPSA is the extent to which it facilitates business financing transactions where the collateral is inventory or accounts that cannot be easily identified.

Access through Computer Terminals

Access to computerized personal property registries for registering financing statements, searching for registrations and amending and discharging registrations is possible through remote computer terminals (simple PC equipment and a modem) in a government office, in the office of a financing institution or in any business premise. However, users of remote communication facilities must make prior arrangements for payment of registration and search fees. Casual users of the system can go to regional government offices and obtain direct access to the registry upon payment of the applicable fees.

Verification Statements

When a registration is effected at the Personal Property Registry (PPR), the computer automatically prints out a statement containing the information that has been entered into the pertinent system. Next the statement is sent to the registering party electronically or via mail, depending on the province. The verification statement provides a fail-safe measure that permits a registering party to determine if the information contained in the database of the registry is accurate (if not, errors can be corrected immediately by filing an amendment).

Priority Rules

An important feature of a PPSA is that it facilitates secured financing of inventory while leaving it in the possession of the debtor. If a financing statement relating to the security agreement is registered, the secured party’s interest is generally given priority. The one important exception to this is that when the debtor sells an item of inventory in the ordinary course of business, the buyer takes the item free of the security interest even though the security interest is protected by registration, even if the buyer is aware that the item is subject to a security interest. The only time the buyer is not given priority is when the security agreement contains restrictions on the debtor’s right to sell the collateral and the buyer is aware of such restrictions.

Mariana Silveira is the Research Director at the National Law Center for Inter-American Free Trade.