I. INTRODUCTION
In 2009 the United Nations Commission on International Trade Law (UNCITRAL) completed its long awaited Legislative Guide on Secured Transactions.Footnote 1 This article provides a critical evaluation of the main provisions of the Guide, looking at the Guide in the context of other international and national secured transactions instruments including article 9 of the United States Uniform Commercial Code.
The clear objective of the Guide is to facilitate secured financing. The possibility of taking security rights over the assets of the debtor is thought to expand the availability as well as to reduce the cost of credit, thereby producing benefits for both creditor and debtor as well as for the overall economy.Footnote 2 The Legislative Guide is very facilitating and enabling, and permits the creation of security in all sorts of situations. Security is seen as a good thing, through enhancing the availability of lower-cost credit. This perspective colours the approach adopted in the Legislative Guide on particular issues though, at the same time, it is recognized that beneficial economic results cannot be achieved by legislation alone—the legal and administrative infrastructure in a particular jurisdiction, including mechanisms for the enforcement of security, play a crucial role. In broad terms, the Legislative Guide follows the approach outlined in article 9 of the Uniform Commercial Code. While the Guide is not an exact mirror image of article 9, it is close in tone and spirit. It is submitted that this closeness in approach is likely to militate against the prospects of the Guide gaining widespread international acceptance. As Professor Catherine Walsh has remarked law is part of culture and fears of economic or cultural imperialism may be one of the factors inspiring resistance to models from a more powerful foreign state, however neutral or substantively superior the model may appear to be relative to the one adopted.Footnote 3 ‘Legal policy makers may have to be prepared to accommodate a higher level of tolerance for complexity and pluralism in laws and legal structures than traditional ideas about the logical relationship between market-oriented law and economic development contemplate’.Footnote 4
The discussion is divided into six parts. The first part looks at the overall philosophy of the Guide and how this can be situated within a particular political and economic context. The second part considers how the ideological underpinnings are exemplified in particular provisions of the Guide including the scope of assets that may be collateralized. It also notes, in this connection, important limitations on the scope of the Guide. The third part looks at all-assets security and possible carve-outs for unsecured creditors. The fourth part considers the creation and third party effectiveness of security rights. The fifth part addresses the treatment of quasi-securities. The sixth part considers the principles for working out priorities between competing securities including the extent of the super-priority status afforded to quasi-securities. This is followed by a conclusion which attempts to summarize some of the central themes in the discussion.
II. OVERALL PHILOSOPHY—BACKGROUND AND CONTEXT
Security rights give the credit provider property rights, normally in the debtor's assets. The whole harmonization and modernization agenda represented by the UNCITRAL Guide appears to be driven largely by a desire to strengthen security rights and to remove restrictions on the taking of security.Footnote 5 This is because of a widespread belief that a ‘liberal’ secured transactions regime promotes economic growth. In many World Bank and other studies, the availability of credit has been identified as one of the key factors driving economic growth.Footnote 6 Lack of access to credit, and in particular low-cost credit, is seen as a major constraint on economic developmentFootnote 7 While economic and other factors may hamper access to credit, legal, regulatory and institutional frameworks are also seen significantly to contribute to this problem.Footnote 8 In many jurisdictions, the laws relating to secured transactions are fragmented and antiquated. Businesses may be unable to utilize the full value of their assets or, if they try to do so, they are straight-jacketed down a particular and restrictive path. Unlocking the value of collateral to serve as security is seen as a highly important task. UNCITRAL itself has observed:Footnote 9
The key to the effectiveness of secured credit is that it allows borrowers to use the value inherent in their assets as a means of reducing credit risk for the creditor. Risk is mitigated because loans secured by the property of a borrower give lenders recourse to the property in the event of non-payment. Studies have shown that as the risk of non-payment is reduced, the availability of credit increases and the cost of credit falls. Studies have also shown that in States where lenders perceive the risks associated with transactions to be high, the cost of credit increases as lenders require increased compensation to evaluate and assume the increased risk. In some countries, the absence of an effective secured transactions regime has resulted in the virtual elimination of credit for consumers or commercial enterprises.
But the harmonization and modernization agenda also has its critics. The law of secured finance embodies cultural attitudes and public policy choices that vary greatly among States.Footnote 10 It can be argued that national law, even national commercial law, is closely connected with a country's history and developmentFootnote 11 and that the replacement of national provisions by supranational ones may involve casting aside a lot of a country's historical legacy.Footnote 12 Of course, not all aspects of a country's cultural and historical baggage are necessarily worth keeping, but proponents of cultural diversity may consider that the large scale submergence of national legal regimes in a supranational order is deeply troubling. Professor Cotterrell has suggested that the dominant trend in modern comparative law scholarship has been to assume that unification or harmonization of law is a primary objective of comparative legal studies.Footnote 13 Of the various reasons given for valuing the search for similarity in law, the main one has been to facilitate trade and transnational trade but Cotterrell points out that Law is not merely valuable as a facilitator of contractual, commercial and corporate relations. Law is also a protector and shaper of traditions, an expression of shared beliefs and ultimate values, and therefore, in much less definable ways, an expression of national expectations, allegiances and emotions. Put most imprecisely and mystically, law can be seen as embodying the spirit of a nation.
In the secured credit area, more than in other areas of commercial law, sovereignty issues remain central since many of the rules governing enforcement of security rights reflect policy interests that are external to the credit relationship itself. A debtor/creditor agreement cannot regulate completely the operation of the resulting security right against third parties. In the event of debtor insolvency, there is an additional layer of policy issues to be considered. The rules governing the distribution of the debtor's assets may reflect local social goals. In considering the whole harmonization and modernization agenda, the broader political element cannot be ignored. Indeed, it is ever present. Sir Otto Kahn-Freund has reminded us that anyoneFootnote 14 ‘contemplating the use of foreign legislation for law making in his country must ask himself: how far does this rule or institution owe its existence or its continued existence to the distribution of power in the foreign country which we do not share?’
Changes to law and legal doctrine in a particular jurisdiction often mirror however, to a greater or lesser extent, changes that have taken place in other jurisdictions.Footnote 15 The desire for change may stem from societal developments or from a desire to promote the social and economic infrastructure of a particular country.Footnote 16 Turkey has been highlighted as an example of a country that set out on a path of modernity as a result of top-down political leadership and then consciously borrowed laws and legal institutions from other jurisdictions that were considered to offer a superior product.Footnote 17 Changes may also to a greater extent be coerced. In decades and centuries past, England exported the common law to its overseas territories and possessions, and generally these former colonies persisted with the common law as they gained political independence and cut away the apron strings of the Mother Country in other respects. The French Napoleonic Code found its way to Spain as a result of military conquest and from there it passed to the Hispanic world of Latin America.Footnote 18 In recent times, coercion has come in more subtle forms perhaps through conditions attached to international loans to developing countries from the World Bank and International Monetary Fund (IMF).Footnote 19
The US strongly influences, if not entirely controls, the workings of these international financial institutions, in particular the IMF. World Bank and IMF conditionality may require economic austerity measures, and also changes to the economic structures of the country concerned, including privatization and restructuring of State-owned enterprises and strengthening the role of the private sector. The conditions may also require changes to corporate law, as well as the enactment of measures to enhance the availability of credit by means of a modern secured transactions regime. Prescriptions in this regard are most unlikely to be expressed as crudely as ‘Enact Article 9 of the American Uniform Commercial Code’. Instead, they are more likely to call for progress and advancement in line with best international practice.
As one US commentator remarks ‘efforts to export U.S. legal models are more likely to succeed if they eschew detailed, distinctively US-derived prescriptions in favour of presenting advice or exemplars in terms of more ‘general’ standards, ‘international’ norms, ‘universal’ principles … 'Footnote 20 Best international practice is considered to be represented by the work of organizations such as UNCITRAL.Footnote 21 The US, by virtue of its economic power, and the associated prestige of its economic and legal models, heavily influences the work of UNCITRAL and analogous bodies.Footnote 22 Critical commentators have therefore spoken of a process of imperialism and imperialist law.
Professor Ugo Mattei has suggested:Footnote 23
Imperial law is produced, in the interest of international capital, by a variety of both public and private institutions, all sharing a gap in legitimacy, sometimes called the ‘democratic deficit’. Imperial law is shaped by a spectacular process of exaggeration, aimed at building consent for the purpose of hegemonic domination. Imperial law subordinates local legal arrangements world-wide. … Predatory economic globalization is the vehicle, the all-mighty ally, and the beneficiary of imperial law.
The French economist Michel Albert has spoken of the irresistible force of US legal expansionism.Footnote 24 US legal paradigms gain a competitive advantage as a result of the sway exercised by the United States from the political and ideological perspective. Alternative approaches are overwhelmed by the political and cultural influences of the American competitor. Albert explains the spread of American influences using notions of seductiveness and appeal. In his view, the intrinsic characteristics of the neo-American model exalt the success of risk-taking, gambling and ‘glittery’ behaviour.
In the realm of literary and cultural discourse, notions of imperialism and American hegemony have been advanced by Edward Said.Footnote 25 He talks about American culture's phenomenally incorporative capacity and a system of pressures and constraints which induces other States to follow the essentially imperial identity and direction of US norms.Footnote 26 In his view, the pressures are subtle, and generally indirect.Footnote 27 Said makes the point that:Footnote 28
American attitudes to American greatness, to hierarchies of race, to the perils of other revolutions (the American revolution being considered unique and somehow unrepeatable anywhere else in the world) have remained constant, have dictated, have obscured the realities of empire, while apologists for overseas American interests have insisted on American innocence, doing good, fighting for freedom.
He also links his theory of imperialism with a law-making creed that suggests it is the goal of US foreign policy to bring about a world increasingly subject to the rule of law, as defined in US terms.
In the secured credit context, the US article 9 has heavily influenced the Organisation of American States (OAS) Model Law on Secured Transactions.Footnote 29 The relative lack of success of this Model Law has been explained on the basis of a ‘fundamental and longstanding suspicion that transplanting ‘modern law’, sold under the label of establishing an ideal environment for business and economic growth and thus a push for development, will only benefit foreign multinationals doing profitable business in Latin America.'Footnote 30 This analysis refers to fears about the role of the creditor ‘especially because they are often based on unfortunate experiences’ thereby producing a lack of trust and mutual understanding. The strong socio-economic disparity between primarily creditor countries such as the US, directly and indirectly, exporting legal models and the mainly debtor countries who are recipients of these legal models can also be highlighted in this connection.Footnote 31
It is hardly surprising however that US government agencies, as well as US private interests, should act to defend what they consider to be US business interests. An American-based organization, the Commercial Finance Association, played a significant role in the formulation and detailed drafting of the UNCITRAL Guide. Particular provisions of the Guide reflect particular provisions of the US article 9. To the extent that particular States adopt the Guide, then this creates an environment that is comfortable and familiar for US business interests.Footnote 32 In simple terms, what they consider to be good for the US they also consider of benefit for the world.Footnote 33 Others may disagree in the assessment of what is good both for the US and for the world.
To sum up this section, formal law like secured credit law is situated within a broader set of relationships that may appropriately be termed as ‘legal culture’. This legal culture reflects a country's history and development; the distribution of political power and the broader constellation of special interest groups within a particular country. Legal culture is not impervious to change but change is often seen to be most effective if it takes in a path dependent fashion making use existing legal concepts within a particular country and of indigenous legal institutions.Footnote 34 Coerced changes to national legal culture have taken place in the place through political or military conquest. But in the modern world of independent, albeit interdependent, nation states, the appearance of coercion is likely to engender opposition on the grounds of interference with national sovereignty. Countries wanting to ‘export’ their own national legal orders are likely to encounter less opposition if they avoid the appearance of coercion.
John Braithwaite and Peter Drahos, in their seminal book Global Business Regulation,Footnote 35 have spoken of how foreign legal models are adopted by countries ‘when they appeal to identities that we hold dear. An identity that is particularly crucial in this regard is that of being successful, modern, civilised, advanced.’ If a country adopts a text suggested by UNCITRAL this sends out a powerful signal that the country is modern and advanced. The flip side of the coin is that a country, such as the US, that may wish to have its national legal models used overseas, is more likely to achieve success indirectly by having its models adopted by UNCITRAL and then replicated elsewhere. The extent of the linkages between the UNCITRAL Guide and article 9 will now be explored.
III. SCOPE OF THE GUIDE
The Secured Transactions Guide is a detailed document and the details were increased in 2010 with the addition of a separate annex that applies to security over intellectual property rights.Footnote 36 Subject to certain limitations, the Guide is designed to be comprehensive in its reach, both in terms of the range of persons to whom it may apply and also in terms of the assets that may serve as security. Essentially the Guide is an exhortation to States to be as comprehensive as possible in the process of framing their secured credit law and not to leave inadvertent gaps in coverage.
The first recommendation in the Guide sets out this key objective stating that the law should be designed: (a) To promote low-cost credit by enhancing the availability of secured credit; (b) To allow debtors to use the full value inherent in their assets to support credit; (c) To enable parties to obtain security rights in a simple and efficient manner; (d) To provide for equal treatment of diverse sources of credit and of diverse forms of secured transactions; (e) To validate non-possessory security rights in all types of asset; (f) To enhance certainty and transparency by providing for registration of a notice of a security right in a general security rights registry; (g) To establish clear and predictable priority rules; (h) To facilitate efficient enforcement of a creditor's rights; (i) To allow parties maximum flexibility to negotiate the terms of their security agreement; (j) To balance the interests of all affected persons; and (k) To harmonize secured transactions laws, including conflict-of-laws rules relating to secured transactions.
The Guide is broad and sweeping in its remit insofar as the kinds of assets that may be ‘collateralized’ (used as security) is concerned. All types of property, both property presently owned by the debtor and property that may be acquired by the debtor in the future, can be the subject of security.Footnote 37 Moreover, a security right in assets extends to the proceeds, unless otherwise agreed.Footnote 38 An important aspect of the Secured Transactions Guide is to facilitate receivables financing and security may be created over future, fluctuating and conditional obligations owed to the debtor.Footnote 39 In addition, security rights may be created in bank accounts despite any contrary agreement between the grantor of the security interest and the depositary bank but, by virtue of the security agreement, no duties are thereby imposed on the depositary bank.
The Guide applies essentially to contractually created property rights. Security rights that arise by operation of law rather than from the agreement of the parties are outside its sphere of operation.Footnote 40 There is also a statement in the Guide to the effect that the law should apply equally to legal and natural persons i.e. to both companies and individuals. The extension envisaged by the Guide to persons that do not necessarily transact business through the corporate form carries with it however the caveat that the scope of consumer protection legislation should not be affected.Footnote 41
At first, the reason for recommending the application to non business-oriented transactions seems obvious—it complicates the law if differing requirements apply to the creation and recognition of security interests depending on whether the security giver acts for business purposes, or as a consumer. The difficulty with the recommendation however, is that a particular jurisdiction may not have a very developed consumer protection regime to offset against the risks in the grant of security. Consumers may grant security without a full appreciation of the consequences in terms of the control that the creditor may exercise over their assets. Depending also on the bankruptcy laws in the jurisdiction, debtors may find themselves losing assets that are essential to their livelihood or sense of personality e.g. a family home. If there are no developed consumer protection principles in play, a more primitive form of protection is simply to deny the possibility of individuals creating security over certain types of property. A blanket ban of this nature is undoubtedly a blunt tool and may restrict the availability of credit. On the other hand, it provides consumers with a degree of respite from certain types of creditor enforcement action and in a world where ‘consumer overindebtedness’ is seen as a pressing social problem, limiting consumer credit availability may be no bad thing.
A. Limitations on Scope
The Guide does not apply to security rights in ‘securities’ (in other words, investment intangible such as shares or bonds). This is a very significant omission and stems from a desire to avoid overlap with the work of other international organizations, in particular the Hague Conference on Private International Law.Footnote 42 The law relating to intermediated securities, including security rights in the same, was considered to fall within the domain of the Hague Conference and UNCITRAL did not wish to duplicate its efforts.
The Secured Transactions Guide also does not apply to immovable property with the exception of chattels that are attached to land and become so-called ‘fixtures’.Footnote 43 The reasons for this exclusion appear pragmatic. Real property is often considered to be an area where sovereignty issues are particularly important. National governments, or even provincial or regional governments, guard jealously their legislative competence in this field. Article 9 applies only to personal property and against this backdrop it appeared logical to have a similar limitation on the sphere of application of the Guide. On the other hand, if the overall philosophy of the Guide is to facilitate the taking of security with a view to promoting the availability of low cost credit, should this same philosophy not permeate the law relating to security over real estate? Certainly, the European Bank for Reconstruction and Development (EBRD) seems to think so, for its Guide to Mortgage Law applicable to real estate is virtually identical in terms of substantive content to its Secured Transactions guidelines applicable to personal property.Footnote 44
IV. ALL-ASSETS SECURITY AND POSSIBLE ‘CARVE-OUTS’
Under the Guide it is perfectly permissible to create ‘all-assets security’ i.e. the equivalent of a floating security or universal business security over the entirety of the business operations of an enterprise.Footnote 45 In many jurisdictions, it is perhaps only a slight exaggeration to speak about a wilderness of single instances when talking about the taking of security. For instance, in one comparative study it is suggested thatFootnote 46 ‘none of the jurisdictions of the EU Member States has developed a comprehensive, functional approach to security rights in movables. Instead, there exists in each jurisdiction a wide range of security devices, which differ from each other with respect to the character of the secured debt, the collateral that may be used, and the legal concept on which the security rights are based: title-based security rights such as retention of title, security transfer of ownership or leasing exist side by side with the possessory pledge and various devices that are based on the idea of the pledge such as non-possessory registered charges in individualized property or entities of assets.’ Often we have sector specific legislation that permits security in certain situations. This legislation may have been passed at the prompting of important political constituencies or pressure groups and it may be difficult to explain on more principled grounds. Interest groups who find their needs satisfied have no particular need to urge the enactment of more universal security instruments.
There are at least two arguments against the recognition of universal security rights. The first is the proposition that a debtor should have a cushion or margin of ‘free’ assets that are available to satisfy claims by unsecured creditors. The second is the proposition that certain assets can never serve as the subject of security. For instance, many non-lawyers may find baffling the concept that a debtor can create security over assets that it does not yet own. On the other hand, article 9 freely permits the creation of such security and the English common law does likewise through the medium of the floating charge.Footnote 47
The arguments against the recognition of universal security rights have also been made in the US. While article 9 has no truck with the arguments, this outcome represents the result of a long process of historical development.Footnote 48 Pre-article 9 United States law did not have any place for a universal security right.Footnote 49 This conclusion comes through in a leading case—Zartman v First National Bank of Waterloo Footnote 50 where the security, in express terms, covered after-acquired property but the court, nevertheless, denied effectiveness to the provision. It was said that a borrower could not create security over property that it did not yet own and secondly, the borrower's freedom of disposition sanctioned by the security meant that the security was fraudulent as against other creditors.
This line of authority was confirmed at the highest judicial levels in the United States.Footnote 51 Over time however, a sophisticated avoidance industry developed which had the effect of permitting large scale receivables and other financing.Footnote 52 This resulted in most types of personal property, including both tangible and intangible property, becoming available to serve as security. Like the current situation in Europe, this was often the result of legislative initiatives mounted by interest groups in the individual States.Footnote 53 Article 9 rationalized and systematized this state of affairs. The relevant terminology was simplified with the effective abolition of the multiplicity of separate security devices and their replacement by the concept of a single security interest that could exist in all a grantor's property. Article 9 implements the idea that there is no necessary incompatibility between the existence of a security interest in property and the debtor's freedom to dispose of the secured assets in the ordinary course of business. So, amongst other things, article 9 brings together a multiplicity of separate security devices as well as permitting universal security. The Secured Transactions Guide does likewise but a number of jurisdictions, including France, continue with an incremental approach adding to the number of security devices and leaving it to the market place to sort out those that will be made use of in practice.Footnote 54
A. Carve-outs for Unsecured Creditors
The validation of ‘all-assets security’ is one of the most significant features of the Guide.Footnote 55 This reflects an article 9 approach but one might also argue that it merely legislates for the equivalent of an English-style floating charge, which has functional analogues in other countries. These other countries however, including the UK, generally carve out a proportion of all-assets security for the benefit of unsecured creditors.Footnote 56
Under English law, a certain percentage of floating charge realizations are set aside for the benefit of unsecured creditors. The percentage is calculated by secondary legislation on a sliding scale but subject to a global ceiling of £600,000.Footnote 57 Moreover, the carve-out is inapplicable if the company's net property is less than a prescribed minimum and where the insolvency representative considers that the cost of making a distribution to unsecured creditors would be disproportionate to the benefits. Defenders of the English provision suggestFootnote 58 it constitutes a fair concession to unsecured creditors without destroying the notion of security in its entirety. It is admittedly a blunt instrument since it benefits all unsecured creditors and not merely non-adjusting creditors i.e. those who are unable to adjust the explicit or implicit lending terms to take into account the fact that the borrower has granted security.Footnote 59 The fixed ceiling however, allows attendant risks to be calculated.
The Guide does not recommend however, this approach of setting aside a proportion of security, or all-assets security, for the benefit of unsecured creditors. This clearly indicates a preference for the US approach where the idea of ‘carve outs’ for the benefit of unsecured creditors failed to gain acceptance in the article 9 revision process. Carve-out advocates pointed out that while the US Bankruptcy Code recognized security rights to their fullest, nevertheless, there were a number of rules, doctrines and practices that effectively operated to erode the priority of secured claims in bankruptcy.Footnote 60 For example, Chapter 11, which governs proceedings for the restructuring of ailing businesses, imposes restrictions on the enforcement of security interests and during this time the value of the collateral may fall.Footnote 61 State legislatures also had power to sanction the creation of statutory liens with priority over the claims of secured creditors and this power was increasingly exercised.Footnote 62 Advocates of a carve-out were sceptical at suggestions that their proposals would lead to a diminution in credit. They pointed out that a partial priority regime already obtained to a degree and that, in the final analysis, matters might turn on the extent of the carve-out.
Carve-out critics suggested however, that it would be factored into the borrowing base and secured creditors would extend less credit as a result. This would have a particularly adverse impact on marginal businesses resulting in more bankruptcies.Footnote 63 The lawyers responsible for the drafting of article 9, Professors Harris and Mooney,Footnote 64 took on board these concerns. In their view, even a partial subordination of secured credit would cause many potential lenders to refuse to advance loans. They urged caution since the social and economic benefits of priority rights were indirect.Footnote 65 In their assessment, the denial of full priority might detract from the capacity of entrepreneurs to attract investors although it was impossible to identify particular companies that never came into existence as the result of a particular change in priority rights. Unpaid workers were easier to spot than workers who were never able to find a job because a particular project did not receive start-up financing.Footnote 66 It was suggested that while secured creditors might lose profits under a carve-out regime, the biggest losers would be debtors, who would receive less funding, and potential contracting parties with such debtors.Footnote 67
The US Attorney General's Office concurred with this general assessment stating that the carve-out proposal:Footnote 68 ‘could have detrimental effects on many highly leveraged sectors of the economy, such as small businesses and agriculture.’ Political realities meant that carve out proposals fell by the wayside in the United States. But the political realities are different in the rest of the world and what plays well in Peoria, Illinois may not necessarily play well in Beijing or St Petersburg or Poitiers.Footnote 69
V. CREATION AND THIRD PARTY EFFECTIVENESS OF SECURITY RIGHTS
The Guide provides that a security right is created by an agreement concluded between the grantor and secured creditor. The relevant agreement may be oral if it is accompanied by dispossession of the grantor pursuant to the agreement.Footnote 70 Otherwise however it must be in writing or evidenced in writing. The Guide is however, medium neutral and the writing requirement can be met by something that serves as its electronic equivalent.Footnote 71 The security agreement must identify the parties and also reasonably describe both the secured obligation and the assets to be encumbered by the security interest.Footnote 72 The Guide cautions however against overly exactly description requirements and suggests that a generic description of the secured obligation and the encumbered assets is sufficient. A security agreement may relate to property that is not yet in existence, or not yet owned by the grantor.Footnote 73 In those circumstances, the security right is deemed to have been created when the grantor acquires rights in the asset, or the power to encumber the asset.Footnote 74 It is also the case that a security right may be effective as between the grantor and the secured creditor even if it is not effective against third parties.Footnote 75
As far as receivables financing is concerned, the Guide tracks the provisions of the United Nations Convention on the Assignment of Receivables in International Trade.Footnote 76 Bulk assignments, for example, are permissible and so too the assignment of future receivables and parts of, and undivided interests in, receivables.Footnote 77 An assignment is declared to be effective despite a non-assignment clause in the contract creating the receivable.Footnote 78 With respect to the secured party, the Guide tries to limit liability for breach of a non-assignment clause. A third party who took an assignment notwithstanding the non-assignment clause is not liable say for inducing a breach of contract on the ‘sole ground that it had knowledge of the agreement’.Footnote 79 It should be noted also that knowledge, in the context of the Guide, means ‘actual knowledge’ and not ‘constructive knowledge’ i.e. the knowledge that one would have acquired had one deigned to make reasonable inquiries.Footnote 80
A. Security rights and publicity
Under the Secured Transactions Guide, third party effectiveness of security rights generally requires registration of the security in a general security rights register.Footnote 81 Of itself, this notion is pretty controversial in that many jurisdictions, mostly notably Germany, are committed to the concept of registrationless regimes of personal property security. Even someone not ill-disposed towards the US article 9 approach like Professor Ulrich Drobnig has downplayed the importance in this connection of the publicity principle asking ‘is the complicated technical system really necessary if all the information it offers is a notice that there may exist a security interest, so that intending creditors are put on notice but have to turn to the debtor in order to verify the true state of affairs. Is not nearly the same effect achieved in countries without a registration system where the courts proceed from a general presumption that business people must know that any major piece of equipment is bought on credit?Footnote 82 On the other hand, one might argue that a registrationless regime of personal property security only works well in a relatively closed credit market like Germany where there are a number of powerful players with a quasi-monopolistic control on credit.Footnote 83 In a closed credit market, leading banks have detailed information on the financial behaviour and credit needs of businesses. This is much less likely in a global credit market with financial institutions operating across national frontiers. Potential lenders simply do not have the business background and information on potential borrowers. If one does not have information that is publicly available through a filing system, then financial institutions who are trying to enter the credit market are also effectively excluded. They do not have the fund of built-up knowledge and experience and have to rely more on credit reference agencies who may operate less transparently than a public filing system. Advocates of the American approach argue that it is more facilitative of entrepreneurial endeavour than the German one i.e. it opens the availability of credit to persons who were previously not on first name terms with bankers.Footnote 84
B. Methods of Achieving Third Party Effectiveness
Article 9 uses the expression ‘perfection’ as a general synonym for third party effectiveness of security rights. Filing is the standard method of perfecting an article 9 security interest though other methods of perfection are permissible in certain circumstances including possession where physical possession of the property used as security is handed over to the security taker. Of course the transfer of physical possession is not practicable in most situations. The assets may be intangible, or the debtor may need them for the carrying on of its business. In deference to the needs and wants of the capital markets, the revised article 9 makes use of a notion of perfection by control.Footnote 85 In the case of certain types of financial collateral, including dematerialized or immobilized shares, the security taker can perfect the security though taking control of it. An example of control is where a securities intermediary agrees to respond to instructions from the secured party rather than from the debtor.
In its approach to the third party effectiveness of security rights, the Guide follows the basic tenor of article 9. Filing or registration is given pride of place notwithstanding the general lack of appeal of this construct to civil law jurisdictions. The Guide also contains asset-specific recommendations along the lines of article 9 that validate alternative methods of achieving third party effectiveness of security rights in relation to particular types of collateral.Footnote 86
In the Guide moreover, it is the US concept of notice filing that finds favour, rather than the concept of transaction filing found in English law, and also more familiar to other jurisdictions.Footnote 87 Under the notice filing regime, the security agreement itself is not filed but a so-called ‘financing statement’ providing limited information.Footnote 88 The filed notice merely indicates that a person may have a security interest in the collateral concerned but further inquiry by a searcher from the potential creditor and/or debtor will be necessary to ascertain the true state of affairs. Notice filing is party specific rather than transaction specific. The information filed is an invitation to further inquiry rather than being a synopsis of the transaction. The notice may be filed either before, or after, a particular transaction and a single filing is effective to cover multiple transactions.Footnote 89
Advance registration allows a secured party to mark out its intentions in advance of the conclusion of the agreement and while negotiations between the parties are continuing. It is claimed that this is more convenient and flexible than ‘after the event’ transaction filing.Footnote 90 The parties are given more time to attend to registration rather than having to do it post-transaction when there may be a lot of other formalities to deal with. Moreover, the facility whereby a single filing covers multiple transactions renders more concrete the possibility of extending registration requirements to trade credit transactions where there may be a number of separate transactions between the same buyer and seller. If each one required individual registration, then cost and inconvenience would militate against registration being achieved in practice.
Many observers, and indeed legislatures, however, remain to be convinced about the merits of notice filing. Registration in advance of a transaction seems relatively small beer and, in any event, its benefits can largely be secured through a modification of a transaction based filing system that allows registration in advance but under which the registration lapses if a confirmatory filing is not made within a particular period of time. Divorcing registration from particular individual transactions opens up the possibility that the register may become less reliable as a source of information. A searcher cannot be sure whether a particular entry on the register relates to an actual transaction between the parties or whether it relates to a transaction that was contemplated but never in fact materialized. The information that is publicly available is less than under a transaction filing system and, in the modern information age, this state of affairs hardly seems justifiable. The Internet and modern methods of data capture should also allow easy registration of security instruments and any loss of financial privacy associated with such a procedure could be alleviated by the hiving off of commercially sensitive information to a separate document.Footnote 91
VI. THE TREATMENT OF QUASI-SECURITIES
In nailing its colours to the mast of notice filing, the Guide demonstrates the US influence in its drafting. This influence is also evident in the Guide's treatment of quasi-securities. Quasi-securities are legal devices or arrangements, that do not strictly speaking, in terms of the law, constitute securities but which serve many of the same economic functions in terms of releasing funds to an entity in need of finance.
Article 9 and legal regimes modelled upon it, such as those in New Zealand and in the common law provinces of Canada, adopt a ‘recharacterisation’ approach towards quasi-security. Attention is paid to what is perceived to be the economic substance of a transaction rather than to its legal form.Footnote 92 Article 9 is also specifically stated to apply to certain transactions like factoring of debts and retention of title clauses that, in traditional legal terms, do not involve the creation of security but nevertheless, in economic terms, serve the same financing purpose. In its deeming provision, article 9 seems to be consciously extending the concept of security. Certain transactions are redesignated as security rights and the security rights regime is then applied to them subject to certain modifications.Footnote 93
The Guide takes the same functional track. It provides that the law should treat all devices that perform security functions as secured transactions, including the transfer of title to tangibles or the outright assignment of receivables for security purposes.Footnote 94 This comprehensive approach would cover more or less all title transfer ‘security’ devices i.e. rights of a proprietary kind that secure payment or the performance of obligations. There is a general principle enshrined in the Guide that public notice of quasi-security interests must be given by means of filing in a register that is open to public inspection.Footnote 95
The European approach is very different.Footnote 96 The dividing line between security strictly so-called and ‘quasi-securities’ may be a thin one in particular cases, but it is a line that is generally respected. In the main, quasi-securities do not have to be publicized through registration as a condition of third party effectiveness. By and large, European jurisdictions, both civil and common law, do not apply registration requirements to quasi-securities.
The Guide has the general rule of registration for quasi-securities. Moreover, while certain exceptions are allowed, these are much more in keeping with American article 9 sentiments than with European legal traditions. Under article 9 there is a certain grace period for registration of a quasi-security—20 days from the date of creation, and this provision finds its way into the Guide.Footnote 97 One might ask rhetorically why does the Guide mirror article 9 in this respect? There are other international parallels close at hand such as the EBRD Model Law on Secured Transactions under which a simple retention of title clause is categorized as an unpaid vendor's charge and is valid for 6 months without registration.Footnote 98
More fundamentally, one might criticize the article 9 approach for ignoring and overriding the parties' intentions. The parties never intended to create a security interest but are deemed by legislation to have done what they never intended to do. Critics say that this approach does not so much involve looking to the substance of the transaction. The intention of the parties, as manifested in the form that they have drawn up, represents the substance of the transaction and what article 9 does is to disregard the substance.Footnote 99 Even some supporters of article 9 type regimes have acknowledged this argument:Footnote 100
There are two features of the UCC, Article 9 approach that appear to be troublesome even to those who are attracted to it. The first is the total reconceptualisation that it requires in the context of types of transactions that traditionally are not viewed as secured financing devices. … The second feature … is the extent to which it requires a bifurcated approach to the characterisation of certain types of transactions. Since a title retention sales contract or a lease falls within a secured financing regime because it functions as a security device, it follows that the seller or lessor is not the owner of the goods sold or leased. … What is troublesome is that outside this regime, the recharacterisation might not be acceptable with the result that same transaction is viewed differently depending on the legal issues being addressed.
In the same vein Professor Roderick MacDonald has argued that the ‘boosterism of Article 9 norm entrepreneurs needs to be tempered by a realistic assessment of what can actually be accomplished in transnational commercial law reform.’ He also suggests that the ‘claim to universalism in accounts of modernization must be given up in favour of more differentiated analyses and prescriptions for particular times and for particular places.’Footnote 101
Perhaps recognizing these realities, there is a twist to the tale in that the Guide admits the possibility of a ‘non-unitary approach’. Under this approach, the substantive treatment of functionally similar transactions would be the same as for security rights strictly so-called but the legal characterization would remain different.Footnote 102 In deference to primarily civilian sensibilities, and with a view to gaining greater international acceptance, the UNCITRAL Guide is more subtle in its approach than the blunt tool of article 9. Two options are available with one option (the unitary approach) being an article 9 style regime with all its trappings. Another possibility however, is the non-unitary approach. The latter approach would entail States still applying a different formal characterization to quasi-security devices. States nevertheless, would effectively be obliged to apply the same legal rules to both security and quasi-security. Both types of transaction would be subject to filing or registration obligations for third party effectiveness.Footnote 103
VII. PRIORITY RULES
One of the perceived advantages of article 9 is the presence of clear and rationally determined priority rules. There is the general principle that the first security interest to be filed has priority over competing security interests over the same property subject to an exception for purchase money security interests.Footnote 104 The latter outrank general security interests that extend to the same property. The purchase money security interest is basically the provision of funds to enable a debtor to acquire particular property with the debtor obtaining a security interest in the property. Under article 9, there is a distinction drawn between general security interests and purchase money security interests with the latter enjoying a form of super-priority that has traditionally been enjoyed by those relying on quasi-securities such as title retention devices. Other financiers extending credit to facilitate the acquisition of property can now enjoy this super-priority status in certain circumstances. If, for example, a debtor has created security over all its assets, including future property then, despite the general first-to-file priority principle, a financier whose credits facilitated the acquisition of ‘new property’ by the debtor will take priority over the earlier creditor in respect of the new property.Footnote 105
In its provisions in this area, the Guide once again sticks to the contours of article 9.Footnote 106 There is a first to file has priority principle but subject to a special priority treatment of purchase money security interests. In the associated commentary, purchase money lending, or acquisition financing as it is referred to, is spoken of as potentially a more competitive source of financing than all-assets financing. The provisions on acquisition financing are said to embody the general policy objective of providing a source of affordable credit particularly for small/medium-sized enterprises; ensuring the equal treatment of all acquisition financiers and creating transparency.Footnote 107 There is a broad definition of ‘acquisition security rights’ to encompass all security rights in an asset that secure the obligation to pay any unpaid portion of the purchase price or other obligation incurred to enable the grantor of the security right to acquire the asset. The definition includes retention of title rights, financial lease rights and ‘hire-purchase’ agreements (lease agreements with the option to purchase the goods).Footnote 108
Pursuant to the ‘equivalence of treatment’ principle, the same general rules on the creation of general security rights apply to the creation of acquisition security rights.Footnote 109 But the idea of requiring registration for third party effectiveness of finance lease and title retention mechanisms is likely to be controversial for many jurisdictions.
The economic justification for investing acquisition security rights with super-priority status focuses on the fact that the debtor's total pool of assets has been increased. Existing debt is not simply being refinanced. With the infusion of funds the debtor is acquiring new assets and if existing security interest holders were allowed to claim priority in these new assets then, it is argued, they would receive a windfall benefit as they had done nothing to fund the acquisition.Footnote 110 Moreover, if an all-assets financier is allowed to obtain priority with respect to the debtor's after-acquired assets, then that financer may have an effective credit monopoly. If the financier is unwilling to advance any further funds then it may be very difficult for the debtor to procure financing from other creditors who may be loath to accept lower-ranking security or to lend on an unsecured basis. Moreover, financiers who are lending against specific assets may be in a position to offer more competitive interest rates than general all-assets financiers. The financiers who are lending against specific assets are lending against specific risk rather than general risk. They may be able more easily to establish the risk associated with specific assets including risk of default etc.Footnote 111
There are counter-arguments. For instance, it might be argued that lenders against discrete assets are more likely to be smaller, secondary lenders and less likely to provide competitive interest rates than general lenders. Moreover, attributing a privileged status to acquisition loans seems premised on the assumption that the advance of funds which is specifically tied to the purchase of ‘new’ assets is somehow more valuable for the debtor's business than the advance of funds for non acquisition reasons, such as to pay the wages of employees.Footnote 112 One might question whether this is necessarily the case and whether paying the wages of employees should not be regarded at least as equally socially valuable.
Acquisition security rights exist in embryonic form in many jurisdictions through the recognition of quasi-securities. In the main, these quasi-securities have priority over security interests, strictly so-called, over the same property.Footnote 113 The move to an article 9 regime however, would greatly expand the boundaries of purchase money super-priority. This would have implications for other creditors, both secured and unsecured, that are not always fully appreciated. Moreover, purchase money super-priority is not an ever present feature of international model laws on secured transactions. The mechanism is not contained, for example, in the EBRD Model Law on Secured Transactions. Under this Model Law however, like many national laws, creditors are free to vary the order of priorities amongst themselves, though without prejudicing the position of third parties. One might argue that if purchase money super priority is really beneficial to existing lenders then existing lenders should be perfectly prepared, on a voluntary basis, to consent to a new lender having super-priority.
A. The Extent of Super-priority and Enforcement
Under the Guide, like in article 9, there is a special rule to deal with purchase money security interests in consumer goods. Such a security right—an acquisition security right in the language of the Guide—becomes automatically effective against third parties upon creation and has super-priority over any claims by third parties even though the latter may have secured their claim by a prior filing. This result, although express in complex conceptual language, seems eminently sensible. If, say an individual buys a computer from a retailer for personal use and the retailer retains ownership of the computer until it is paid for, then the retailer under the Guide is deemed to have an acquisition security right. Ordinarily such a right should be registered in a public register against the name of the purchaser to be effective against third parties such as a prior creditor with a claim against the consumer's after-acquired property. This result however, would seem to run counter to the expectations of the parties and to make credit sales fraught with hazards for the retailer. The Guide avoids this inconvenient conclusion by deeming the retailer to have an acquisition security right which has automatic third party effectiveness and is given super-priority status.
Leaving aside consumer goods, in article 9 and PPSA regimes there are difficult questions more generally about the conditions that must be satisfied before super-priority status can be obtained and whether a distinction should be drawn, as in some schemes, between inventory and capital equipment. It is also debatable how far the super-priority of the acquisition financier should extend into proceeds of the original goods supplied. The Secured Transactions Guide, while specifying the required outcomes in considerable detail, allows for alternative approaches on both these issues. Basically the possibility of alternative approaches is carried through into both the unitary and non-unitary treatment of acquisition security rights.
One alternative laid out in Recommendations 180 and 192 is to make super-priority in inventory more difficult to establish. In the case of inventory, before delivery of goods to grantor/buyer etc, the holder of potentially competing and already registered security right should be notified of the acquisition financier's intentions. On the other hand, to acquire super-priority in ‘non-inventory’, registration of the acquisition rights within a 20/30 day grace period after delivery of the goods to the grantor/buyer is all that is required. The justification for the difference in the legal treatment of inventory and ‘non-inventory’ can be accounted for by differences in the risk equation insofar as new financing is concerned. As Professors Kanda and Levmore have remarked in respect of similar rules in article 9: ‘The rules intimate that the acquisition of new inventory and its associated debt is more threatening to earlier creditors than the debt-financing of new equipment but that debt tied to new inventory is still less threatening than new money unlinked to particular assets.’Footnote 114 The Official Comment to Article 9-324 of the Uniform Commercial Code explains that the purpose of a notification requirement is to protect a non-purchase money inventory secured party which, under an arrangement with the debtor, is typically required to make periodic advances against incoming inventory, or periodic releases of old inventory as new inventory is received. If the inventory secured party receives notice it may not make an advance. The notification requirement is not the same as giving the existing secured party a veto on the new financier having super-priority, but it may function in roughly the same way through the existing secured party exerting pressure on the debtor.
One might object to a notification requirement however, on the basis that it complicates the law unnecessarily, and that the distinction between inventory and non-inventory is somewhat arbitrary. Recognizing these realities, the UNCITRAL admits the possibility of an alternative approach which does not discriminate between inventory and other types of collateral. Under this alternative approach, there would be no prior notification requirement for inventory. A supplier etc. could acquire super-priority simply by filing a general notice in the security rights register without having to contact existing financiers on the register individually.Footnote 115
The Secured Transactions Guide is also pluralistic when it comes to the extension of super-priority of the acquisition financier into proceeds. The alternative approaches are set out in Recommendation 185 dealing with unitary treatment of acquisition and non-acquisition security and Recommendation 199 (non-unitary). The second, and simpler alternative, is to deny the possibility of super-priority in proceeds, thus limiting it to the original assets financed. The first alternative is more complex. Basically it again makes the distinction between inventory and non-inventory, with super-priority in proceeds of the latter easier to establish. There is also a distinction in part between different kinds of proceeds. For non-inventory, the principle is that super-priority should extend into proceeds. For inventory the same principle obtains except where the proceeds consists of receivables etc. In the latter scenario, super-priority is conditional on the acquisition financier notifying secured creditors that have already filed notice of a security interest that would cover the receivables.
The justification for not extending the super-priority of the inventory financier into proceeds consisting of receivables is to encourage a receivables financier to provide credit against the receivables. The proceeds of this credit would then be used to pay the inventory financier. In many jurisdictions including England where retention of title clauses are recognized, the supplier's super-priority is limited in practice to the physical goods supplied and does not extend to receivables arising from the resale of those goods.Footnote 116
The unitary/non-unitary divide also comes into play when it comes to the enforcement of acquisition security rights. Under the unitary approach, the Secured Transactions Guide takes the line that enforcement of acquisition security rights should conform to the law that applies to the enforcement of security rights generally.Footnote 117 Moreover, in the case of insolvency proceedings with respect to the debtor, the provisions that apply to security rights should apply also to acquisition security rights.Footnote 118 The non-unitary approach is less prescriptive however. In the insolvency context, it allows for the possibility that the law governing retention-of-title rights or financial lease rights could be made compatible with the regime applicable to the enforcement of ownership rights of third parties rather than with the security rights regime.Footnote 119 The same recognition of alternative possibilities carries through to the principles governing post-default enforcement of acquisition security rights under the non-unitary approach.Footnote 120 It stipulates however that the law should specify whether a retention of title seller or financial lessor has any right to retain surplus value if goods subject to retention of title or financial lease were repossessed by the seller or lessor and resold for more than the outstanding debt plus expenses. But there is also a statement that the regime applicable to the post-default enforcement of security rights applies to the post-default enforcement of retention-of-title or financial lease rights, except to the extent necessary to preserve the coherence of the overall sale and lease regime.Footnote 121
8. CONCLUSION
The UNCITRAL Secured Transactions Guide adds to the toolbox for States wishing to reform their law on secured transactions. In broad terms, the Guide follows an article 9 functional approach towards security with the treatment of title-retention devices assimilated to that of traditional security rights. Registration is required for third party effectiveness of the rights in question. There is a subtle twist however in the recognition and development by the Guide of a ‘non-unitary’ approach to so-called acquisition security rights such as title retention devices. Under the ‘non-unitary’ approach, title retention mechanisms may still be labeled somewhat differently by the law of a particular jurisdiction than security rights in the strict sense but the same outcomes would result irrespective of the classification exercise. This ‘non-unitary’ approach is designed to make the contents of the Secured Transactions Guide more acceptable to Civil Law Jurisdictions.Footnote 122 It remains to be seen however whether the apparent sleight of hand in the Guide will prove convincing in practice.
Generally the UNCITRAL Secured Transactions Guide is a much more detailed instrument than say the EBRD Model Law on Secured Transactions or EBRD's Core Principles on Secured Transactions Laws.Footnote 123 The Core Principles cover the same ground as the UNCITRAL Guide, and embody many of the same points, but they are on the whole much less prescriptive. The Core Principles do not track the content of article 9 to the same degree. There is much greater flexibility and tolerance of divergence in the Core Principles than in the Guide. For example, while the Core Principles talk about having an effective means of publicizing the existence of security rights, unlike the UNCITRAL Guide they do not come down in favour of notice filing as distinct from transaction filing. Article 9 enthusiasts extol the virtue of notice filing to the nth degree but this paper has suggested that the arguments are not all one way. The same considerations apply in relation to priority rules. Article 9 has a specific set of priority rules that may facilitate the extension of credit in an American context but these rules are not exactly replicated in Europe. The UNCITRAL Guide, in the main, however follows the straight-down-the-line prescriptions of article 9.
In the introduction to this paper it was suggested that this closeness in approach to article 9 is likely to militate against the prospects of the Guide gaining widespread international acceptance. This is so for three interlocking reasons. The first is that the Guide may be technically deficient in certain respects or at least there are alternative models that offer equally, if not more, plausible solutions. The second reason is the American imprint itself on the Guide, however subtle and disguized this may be in certain respects. Frederick Schauer, for instance, comments that ‘factors other than the receiving nation's own evaluation of the worth of legal ideas, and other than an objective assessment of the worth of legal ideas, are significant determinants of the patterns of legal transplantation and legal globalization.’Footnote 124 He also makes the point that ‘copying’ US law has a bad smell in numerous parts of the world, or in some political quarters, and therefore avoiding American influence, just because it is American, often appears tog be a driving force. The third reason is the battering that American legal and financial norms have taken with the Crash of 2008. It is almost as if the Guide harks back to an ‘age of innocence’ before the Crash when belief in the self-correcting mechanisms of markets reigned supreme and American global financial hegemony went largely unchallenged.
