This chapter considers the UNCITRAL Legislative Guide on Secured Transactions, including the Guide's purpose, terminology, scope, key objectives and fundamental policies.
For a full list of recommended finance lawyers and law firms, please visit PLC Which lawyer?
This article is part of the PLC multi-jurisdictional guide to finance. For a full list of contents visit www.practicallaw.com/finance-mjg.
As lawyers engaged in cross-border secured lending well know, the past two decades have witnessed a dramatic rise in the willingness of banks and other providers of secured loans to extend credit beyond their own borders. This shift in attitude has been driven in large part by the rapid globalisation of middle-market business, as companies have approached their lenders with increasing frequency to request financing for their foreign acquisitions and operations.
There is every reason to believe that this trend will continue. As it does, lawyers for secured lenders will continue to face the challenges of navigating the vast array of laws and business practices in other countries, as they seek to replicate, to the greatest extent possible, the functional equivalent of the legal protections that their lending clients enjoy at home. Ultimately, however, true efficiency in the structuring and documentation of cross-border secured loans will only be achieved as more countries recognise the value of secured lending to their domestic businesses and national economies, and embark on initiatives to modernise their secured transactions laws.
Fortunately, the past two decades have also witnessed a heightened awareness from many international organisations and international financial institutions of the benefits to be derived by promoting secured credit. This is reflected in important texts prepared by organisations and institutions such as the:
Hague Conference on Private International Law.
International Institute for the Unification of Private Law (Unidroit).
Organization of American States.
Asian Development Bank.
European Bank for Reconstruction and Development.
Inter-American Development Bank.
International Monetary Fund.
Building on this work, on 14 December 2007, the United Nations Commission on International Trade Law (UNCITRAL) adopted its Legislative Guide on Secured Transactions (Guide). On 29 June 2010, in recognition of the profound importance of intellectual property (IP) in modern financing transactions, UNCITRAL adopted a Supplement to the Guide (IP Supplement). Copies of the Guide and the IP Supplement are available through UNCITRAL's website: www.uncitral.org.
The Guide has already had a significant influence on legislators and organisations. Examples are:
Australia's Personal Property Securities Act 2009.
South Korea's draft secured transactions law.
The World Bank's secured transactions toolkit (2010).
The draft Uniform Securities Act of the Organisation for the Harmonisation of Business Law in Africa (Organisation pour l'Harmonisation en Afrique du Droit des Affaires) (OHADA).
This chapter provides an introduction to the Guide. It also reviews the contribution made by the IP Supplement (see box, The IP Supplement).
The Guide is the culmination of an intensive collaboration, spanning over five years, by:
The UNCITRAL Secretariat.
Delegates from the 60 member states of UNCITRAL and various other countries.
International governmental and non-governmental organisations.
Experts in the field of secured transactions.
It is a comprehensive blueprint for countries that wish to modernise their secured transactions laws to promote low-cost secured credit. Although the Guide addresses most forms of personal property, its primary focus is on core commercial assets such as receivables, inventory and equipment.
The Guide, which is comprised of 242 recommendations plus extensive commentary explaining and elaborating on the recommendations, spans over 550 pages. This chapter concentrates on:
The purpose of the Guide (Introduction, section A).
The Guide's terminology (Introduction, section B).
The scope of the legal regime envisaged in the Guide (Chapter 1, section A.2).
The organisation of the Guide into different chapters.
Key objectives and fundamental policies of an effective and efficient secured transactions regime (Introduction, sections D.2 and D.3).
The impact of insolvency on a security right (section XII).
The approach of the Guide is at once universal and practical. As noted in the Introduction:
"The Guide seeks to rise above differences among legal regimes to offer pragmatic and proven solutions that can be accepted and implemented in States with divergent legal traditions (civil law, common law, as well as Chinese, Islamic and other legal traditions) and in States with developing or developed economies."
The Guide implements this approach by drawing on the most modern and effective principles from diverse secured transactions regimes to provide countries with the best tools to promote secured credit.
The Guide opens with a discussion of the importance of secured transactions to modern businesses and economies. Although the legal regime contemplated by the Guide is designed to accommodate even the most sophisticated, and evolving, forms of secured financing transactions, the core focus of the Guide is on proven financing techniques. Therefore, the Guide presents a series of examples of the types of secured transaction that the Guide covers: inventory and equipment acquisition financing; inventory and receivable revolving loan financing; factoring; securitisation; term-loan financing; and sale-and-leaseback financing (Introduction, section C).
The Introduction concludes with a detailed and pragmatic discussion of how countries can implement the secured transactions regime envisioned by the Guide.
Included in the Introduction is a glossary of more than 50 terms used in the Guide, intended to enable readers to interpret and apply the Guide's recommendations in a uniform way. The Guide adopts terms that may differ from those customarily found in many countries' secured transactions laws. For example, comparing the Guide's terminology to US terminology, the Guide uses:
Security right instead of security interest.
Creation instead of attachment.
Third-party effectiveness instead of perfection.
Acquisition financing right instead of purchase-money security interest.
This chapter uses the Guide's terminology.
The scope of the legal regime envisioned by the Guide is broad, covering (with certain exceptions (see below)) all forms of personal property, both tangible and intangible, and present and future, including:
Receivables (both contractual and non-contractual).
Contractual non-monetary claims.
Negotiable instruments and documents.
Rights to payment of funds credited to a bank account.
Rights to receive proceeds of an independent undertaking.
Each category of asset is covered by the general recommendations of the Guide and also, in many instances, by recommendations that are specific to that category.
Outright transfers of receivables (that is, transfers not intended to secure an obligation) are covered to a certain extent (as to registration and priority) because of the potential difficulty of distinguishing outright transfers from transfers for security, as well as their similarity to transfers for security in the practical mechanics of enforcement.
IP is covered to the extent that the recommendations of the Guide do not conflict with national law or international agreements to which a country is a party that specifically relate to IP. The precise manner in which the Guide affects security rights in IP is addressed in the IP Supplement (see box, The IP Supplement).
Certain specific categories of asset are excluded from the Guide, either completely or in certain circumstances:
Aircraft, railway rolling stock, space objects and ships, and other categories of mobile equipment, but only insofar as they are covered by national law or international agreements that address the matters covered by the Guide.
Payment rights arising under or from financial contracts governed by netting agreements (although the Guide covers receivables owed on the termination of all outstanding transactions).
Payment rights arising under or from foreign exchange transactions.
Immovable property (although several of the Guide's recommendations apply to attachments to immovable property).
Despite these exclusions, a security right in the proceeds of excluded assets (for example, proceeds of immovable property) will be covered by the law envisioned by the Guide except to the extent that other national law applies to that security right.
The Guide restricts itself almost exclusively to consensual security rights, although statutory and other non-consensual rights in assets are addressed in limited respects (see below, Priority between security rights and other rights).
The Guide breaks down the subject matter of security interests into various components, with successive chapters addressing:
The creation of a security right (its effectiveness as between the parties).
The effectiveness of a security right against third parties.
The registry system.
Priority of a security right.
Rights and obligations of the parties to a security agreement.
Rights and obligations of third-party obligors.
Enforcement of a security right.
Conflict of laws.
The impact of insolvency on a security right (see below, Impact of insolvency).
Each chapter contains an extensive commentary on the chapter's subject matter, often presenting the history of the topic in various legal traditions, as well as the policy choices the topic presents to legislators. Most chapters contain both general remarks that apply to all security rights covered by the Guide, and asset-specific remarks dealing with security rights in specific types of asset. In each chapter, the commentary is followed by general and asset-specific recommendations.
In the Introduction, the Guide discusses the key objectives of a modern secured transaction regime, and the fundamental policies by which these objectives can be achieved.
The Guide adopts 11 key objectives, remarkable for their breadth, which inform all of the Guide's recommendations. A regime's aims should be to:
Promote low-cost credit by enhancing the availability of secured credit.
Allow debtors to use the full value inherent in their assets to support credit.
Enable parties to obtain security rights in a simple and efficient manner.
Provide for equal treatment of diverse sources of credit and of diverse forms of secured transactions.
Validate non-possessory security rights in all types of asset.
Enhance certainty and transparency by providing for registration of a notice of a security right in a general security rights registry.
Establish clear and predictable priority rules.
Facilitate efficient enforcement of a secured creditor's rights.
Allow parties maximum flexibility to negotiate the terms of their security agreement.
Balance the interests of all persons affected by a secured transaction.
Harmonise secured transactions laws, including conflict-of-laws rules relating to secured transactions.
One of the most important parts of the Guide is its treatment of 12 fundamental policies underlying all of the Guide's recommendations. An examination of those policies is the best way to convey the spirit of the Guide's approach. Some of these policies "represent a significant departure from basic principles that are currently reflected in the secured transactions law of many States" (Introduction, section D.3).
Comprehensive scope. The Guide adopts the view that the best way to promote secured credit is to adopt a secured transactions regime that is comprehensive in all respects, that is, one that embraces all:
Forms of secured transactions.
Categories of borrowers or other parties granting security rights and secured creditors (parties providing secured credit).
All types of movable asset and obligation.
The idea is to create a level playing field that brings within the scope of the Guide every transaction in which any type of personal property is used to secure any type of obligation. This eliminates preferential treatment for any category of creditor and therefore promotes credit by encouraging competition among all potential providers of credit.
Functional, integrated and comprehensive approach. The Guide adopts a "functional, integrated and comprehensive approach" that treats all forms of traditional personal property security devices, such as pledges, mortgages, fiduciary transfers and hypothecs, as security agreements governed by the Guide's principles. For example, retention-of-title claims, which many national laws exclude from the secured transactions laws (and which offer a special status to sellers of goods), are expressly brought within the legal regime envisioned by the Guide (see below, Equality of treatment of all creditors that provide credit to enable grantors to acquire tangible assets).
Security rights in future assets of a grantor. Some secured transactions regimes do not allow a security right to extend automatically to future assets, such as future-arising receivables or after-acquired inventory. The Guide recommends that security rights may extend to future assets without requiring any additional future documentation or action. This accommodates modern revolving credit facilities based on the value of a constantly changing pool of receivables and inventory.
Extension of a security right into proceeds. The Guide considers that a security right in an asset automatically extends to its identifiable proceeds (including proceeds of proceeds) unless the parties to the security agreement agree otherwise. This recognises that the economic value of a security right often lies in the secured creditor's right to receive the proceeds of the asset on a sale or transfer.
Distinguishing effectiveness as between the parties from effectiveness against third parties. Some countries' secured transactions laws do not distinguish between creation and third-party effectiveness of a security right. In these countries, a security right becomes effective against third parties on its creation. Other countries draw a distinction between creation and third-party effectiveness, requiring a separate act. The Guide adopts the latter approach, considering that a public act enhances the transparency of security rights and provides a strong foundation for a system of priority rules. Reflecting the overwhelming trend of modern secured transactions regimes, the public act recommended by the Guide is the registration of a simple notice of the security right in a public security rights registry.
Establishment of a general security rights registry. A cornerstone of the Guide is a modern and efficient security rights registry, easily accessible by prospective creditors and searchers alike. Ideally, the system would be fully electronic, though the Guide recognises that not all countries are currently able to depart from a paper-based system. The registry also provides the basis for the Guide's rules for determining the priority of conflicting security rights, according priority to the first to register (see above, Distinguishing effectiveness as between the parties from effectiveness against third parties). (Although the Guide gives significant attention to this registry, there is a separate project currently underway at UNCITRAL to provide countries with detailed guidance on the establishment and administration of a secured transactions registry.)
Availability of multiple security rights in the same assets. The laws of many countries do not permit the granting of multiple security rights in the same assets. This deprives many companies of the ability to use the full value of their assets to obtain credit. The regime envisioned by the Guide, on the other hand, permits the granting of multiple security rights, which accommodates the granting of subordinate security rights.
Temporal basis for priority among multiple security rights. With limited exceptions, the Guide recommends that the priority of conflicting security rights in the same asset be determined by the order of registration of a notice in the security rights registry, rather than the order of third-party effectiveness. One of the great practical advantages of this approach is that it allows creditors to register a notice, and establish the priority of their security rights, before extending credit.
Priority between security rights and other rights. Although the Guide focuses almost exclusively on consensual security rights, it considers non-consensual security rights and other rights in various respects, for example, in the following areas:
How consensual security rights interact with non-consensual security rights and other rights on matters of their relative priority (for example, a priority dispute between a security right in an asset and a competing judgment lien on the same asset, the claim of a buyer or other transferee of the asset (including a lessee or licensee) or the claim of the insolvency representative in the grantor's insolvency).
The importance of limiting, to the greatest extent possible, the preferential claims of governments and other third parties that may arise after the granting of a security right but which take priority over that security right.
Facilitative rather than formalistic regulation. Recognising and accommodating the fluid and evolving nature of modern financing transactions, the Guide recommends that parties to a secured transaction be given the greatest possible freedom to design their financing arrangements, limiting mandatory rules to those necessary to ensure fairness and protect the limited interests of third parties, and therefore recommends restricting mandatory rules to:
Requiring the party in possession of an encumbered asset to take reasonable steps to preserve the asset and its value.
Requiring a secured party to return an encumbered asset in its possession to the grantor when all commitments to extend credit have been terminated and the security right has been extinguished by full payment or otherwise.
The Guide also recommends simplified procedures for creating security rights, without expensive and time-consuming formalities.
Extrajudicial enforcement. The Guide recommends efficient methods for enforcing security rights without resort to costly and inefficient judicial proceedings, with appropriate safeguards for the legitimate interests of the grantor and affected third parties.
Equality of treatment of all creditors that provide credit to enable grantors to acquire tangible assets. The Guide treats any type of transaction in which personal property is intended to secure an obligation as a security right, regardless of the name used to describe the transaction. Significantly, the Guide extends this principle to the rights of suppliers under retention-of-title arrangements, which are in widespread use in many parts of the world. Here, the Guide offers two alternatives:
Unitary approach. Retention-of-title arrangements are treated as other security rights granted to finance the acquisition of goods (acquisition security rights) for all purposes, including:
third party effectiveness;
Non-unitary approach. Retention-of-title arrangements are treated as security rights for purposes of creation, third-party effectiveness and priority. Countries, however, can retain:
the conventions and nomenclature of ownership for purposes of enforcement;
enforcement mechanisms that are consistent with the secured party's ownership of the encumbered assets.
However, the rules relating to retention-of-title rights under the non-unitary approach must "produce functionally equivalent economic results" to other acquisition security rights. Therefore, under both the unitary and the non-unitary approaches, registration of a notice in the secured transactions registry is necessary to achieve third-party effectiveness for a retention-of-title arrangement. This enables prospective secured creditors to determine, with precision, the existence and scope of any of those arrangements to which a prospective borrower is a party.
One of the Guide's most noteworthy features is its recognition that a security right will ultimately have little or no value unless it is appropriately recognised in the grantor's insolvency proceeding, so that the holder of the security right will ultimately be entitled to receive the economic value of the right (subject to reasonable delays necessary for the efficient administration of the insolvency proceeding). Therefore, to promote the availability of secured credit, it is essential that insolvency law contain clear rules as to the effect of insolvency proceedings on the rights of a secured creditor, so as to:
Enable secured creditors to quantify the risks associated with insolvency.
Incorporate those risks into their assessment of whether to extend credit and on what terms.
The chapter that the Guide devotes to this subject is the result of a significant joint effort with the Working Group that developed the UNCITRAL Legislative Guide on Insolvency Law (2004) (Insolvency Guide). The chapter reproduces those recommendations from the Insolvency Guide that deal specifically with security rights in personal property (together with substantial new commentary). These recommendations cover matters such as:
Third-party effectiveness and priority of a security right in the grantor's insolvency.
The protection of secured creditors against reduction in the value of their encumbered assets.
Relief from the stay of enforcement actions by secured creditors.
Use and sale of encumbered assets during the insolvency proceeding.
The impact of a plan of reorganisation on security rights.
The Guide also offers a number of additional recommendations not included in the Insolvency Guide. These recommendations relate to:
The extension of a security to right to assets acquired by the debtor after the commencement of the insolvency proceeding, to the extent they represent proceeds of assets subject to pre-insolvency security rights.
The absence of an obligation by a secured creditor to make a loan or extend credit under a loan facility in existence as of the commencement of the insolvency proceeding.
The preservation of the pre-insolvency priority of a security right.
The recognition of pre-insolvency subordination agreements.
The right of the insolvency representative to recover the costs and expenses of maintaining, preserving or increasing the value of encumbered assets for the benefit of the secured creditor.
The recognition that assets in a reorganisation proceeding may be valued at their going-concern value.
The genius of UNCITRAL lies in its recognition of the important role of commerce as a force for positive change in the world, by helping businesses grow, creating jobs, raising standards of living and promoting understanding and economic interdependence among peoples of different countries. UNCITRAL also recognises the important role that secured credit can play in promoting commerce, particularly during times of economic crisis. UNCITRAL has now presented the world with a thoughtful, comprehensive and forward-looking blueprint for modernising and harmonising secured transactions law.
The IP Supplement bridges the two worlds of secured transactions law and IP law to demonstrate how the principles of the Guide can be extended and applied to modern financing transactions involving IP.
The IP Supplement is designed to focus, in an in-depth way, on security rights in patents, trade marks, copyrights and other IP, in recognition of the increasingly important role that these assets play in financing transactions throughout the world.
The Introduction states that the IP Supplement is intended to "make credit more available and at a lower cost" to IP owners and other holders of IP rights. The aim is to enhance the value of IP rights as security for credit, but without interfering with fundamental legal policies relating to IP. The IP Supplement:
Discusses in detail how the Guide's recommendations apply to IP.
Offers six asset-specific recommendations addressing security rights in IP.
Throughout the two years that UNCITRAL devoted to the preparation of the IP Supplement, the Working Group frequently observed that terminology and concepts used by IP practitioners and non-governmental organisations often do not fit neatly into the transactions and legal frameworks that are familiar to secured transactions. The Working Group, therefore, used the IP Supplement as an opportunity to clarify and make adjustments to the commentary and recommendations in the Guide to account for these differences in legal traditions.
The IP Supplement mirrors the structure of the Guide, discussing IP issues as they arise in connection with the creation, third-party effectiveness, priority and enforcement of security rights. Significantly, the IP Supplement discusses those issues not only where IP assets are themselves offered as collateral, but also where IP issues affect other collateral, such as inventory branded with trade marks, or accounts receivable that represent royalty payments flowing from a patent licence. Therefore, the IP Supplement discusses such issues as:
The treatment of IP royalty payments in licensing transactions.
The effect of the "exhaustion" (or "first-sale") doctrine on the foreclosure of inventory that incorporates IP.
Priority disputes between a secured party and assignees or licensees of copyrighted software.
Qualified. United States (Illinois), 1969
Areas of practice. Commercial finance, with significant emphasis on cross-border asset-based credit facilities