GROUP PAPER on CREDIT TRANSACTIONS

Submitted to. Atty./Prof. Senga

SBCA- Section 2-A; 2-D 6:30-9:30 / Thursdays
Date submitted: May 16, 2019

Group Members:
Aureus, Eloisa V. 2017-400097
Collado, Monique C. 2017-400199
Gomez, Carlos Miguel 2017-400094
Laurel, Ronald Julian T. 2016-400001
Mendoza, Gladys Mae S. 2014-400077
Ramos, John Roland 2017-400131
Puno, Myles Justin D. 2017-400121
Salvador, Mary Joy B. 2010-400231
Sanchez, Jose Rio E. 2017-400095
Villan, Vera Mae Angelica 2017-400215
Villanueva, Fidel 2016-400051
Villarin, Modesto IV M. 2017-400174

Changing Times, Changing Concepts

A Look at Republic Act No. 11057 or the Personal Property Security Act

1.0 ​Background

The Personal Property Security Act or R.A. No. 11057 which is based on
House Bill No. 6907 was signed by President Rodrigo Roa Duterte on August 17,
2018. Section 2 provides that “[i]t is the policy of the State to promote economic
activity by increasing access to lease cost credit, particularly for micro, small, and
medium enterprises (MSMEs), by establishing a unified and modern legal framework
for securing obligations with personal property.” From the wording of the statute, it is
evident that such was created to boost access to credit of micro, small and medium
enterprises.

One of the benefits of the changes introduced by R.A. No. 11057 is that small
store owners and farmers who do not have immovable properties can now use their
personal and/or movable property as collateral to secure a loan obligation. Some
examples of movable collateral it allows are the following: 1) deposit accounts, 2)
accounts receivable, 3) negotiable instruments, 4) security certificate or electronic
securities, 5) consumer goods, 6) livestock and other agricultural products, 7)
vehicles and 8) intellectual property. However, interest in aircraft and in ships are not
included because they are governed by R.A. No. 497 and P.D. No. 1521 or the Ship
Mortgage Decree of 1978, respectively.

Since accepting movable properties as collateral increases the risk for

creditors, the same also calls for the establishment of a unified and centralized
electronic registry which will be implemented and operated by the LRA (Land
Registration Authority). This electronic registry will allow creditors/lenders to monitor
and make sure that the collaterals of the applicants will no longer be used for more
than one loan or credit application.

What is an MSME?

MSME, or micro, small and medium enterprises in the Philippines is defined

under Section 3 of Republic Act No. 9501 as “any business activity or enterprise
engaged in industry, agribusiness and/or services, whether single proprietorship,
cooperative, partnership or corporation whose total assets, inclusive of those arising
from loans but exclusive of the land on which the particular business entity’s office,
plant and equipment are situated, must have value falling under the following
categories:”

Micro Not more than Php 3,000,000.00

Small Php 3,000,001 - Php 15,000,000

Medium Php 15,000,001 - Php 100,000,000

MSMEs may be classified as well by employment size. Micro enterprises

employ fewer than 10 workers. Small enterprises employ from 10 to 99 workers
while medium enterprises employ 100 - 199 workers. Classifying businesses as
micro, small, medium or large enterprises is important as it allows the government to
provide the needed support and properly regulate such systems according to the
type of business they engage in.

Throughout the years, there has been an improvement in the Philippine

economy. One factor is the growth of MSMEs as evidenced by the number of
Filipinos going into entrepreneurship, which in turn resulted in the increase in
number of working Filipinos in the provinces or countryside. The same contributed to
an increase in tourism activity through the promotion of products made from quality
indigenous materials, making these commodities ideal for global export.

According to the Department of Trade and Industry, the 2017 List of

Establishments of the Philippine Statistics Authority (PSA) recorded a total of
924,721 business enterprises operating in the Philippines, 99.56%, or 920,677 of the
total establishments of which are MSMEs. 89.59% (828,436) were microenterprises,
9.56% (88,412) were small enterprises, and 0.41% (3,829) were medium
enterprises. The remaining 0.44% (4,044) belongs to the large enterprises.

To further improve the growth of MSMEs, one recommendation is that

measures be taken to foster their development, one of which is to increase their
access to finance to support their business. In line with this, the signing of Republic
Act No. 11057 will significantly benefit the MSME sector as it broadens the range of
options for financial assistance through the procurement of loans for sustaining
trade.

R.A .No. 11057 repealed, amended and/or modified the following:

Sections 1 to 16 of Act 1508​, otherwise known as the Chattel Mortgage Law;

Articles 1484-1486, 2085-2123, 2127, 2140-2141, 2241, 2243, and 2246-2247 of

Republic Act No. 386​, otherwise known as the ​Civil Code of the Philippines;​

Section 13 of Republic Act No. 5980,​ as amended by ​Republic Act No. 8556​,
otherwise known as the ​Financing Company Act of 1998;

Section 10 and Sections 114 to 116 of Presidential Decree No. 1529​, otherwise
known as the ​Property Registration Decree​; and

Section 5 (e) of Republic Act No. 4136​, otherwise known as ​Land Transportation and
Traffic Code​.

2.0 ​Specific Modifications and Changes: Highlights

In general, the differences between the old laws and statutes prior to R.A. No. 11057
and the latter can be summed up as differences in formalities as to creation,
perfection, registration and enforcement.

2.1 ​Prior to Republic Act No. 11057, future property cannot be pledged
or mortgaged as ownership is required as a requisite for either or both.

Under the Civil Code, a party cannot pledge or mortgage property he does not
own absolutely. Under R.A. No. 11057, the security agreement allows for the
existence of security interest based on a future property although subject to
the the acquisition of the borrower of rights in such future property or the
power to control and encumber it.

2.2 ​The long-standing distinction between a pledge and chattel

mortgage based on the right of the creditor-lender to recover deficiency
in credit (or whatever else the debtor may owe him) has been removed.

Under the Civil Code, it is well-settled that the mortgagor is liable to the
mortgagee if the proceeds of the sale resulting from the foreclosure of the
mortgaged property are not sufficient to answer for the full amount of the loan.
On the other hand, foreclosing the pledge completely extinguishes the loan
obligation and any stipulation that allows the pledgee to recover any
deficiency (i.e. difference between the amount of the loan and the proceeds of
the pledge against the interest/advantage of the pledgee) is deemed void.
Under the new law, R.A. No. 11057, the secured creditor (whether of the
pledge or chattel mortgage) is accountable to the grantor for any surplus, and
unless otherwise agreed, the debtor is now made liable for ANY deficiency.

2.3. ​In pledge, delivery is necessary to make the object or thing pledged
a valid object of such transaction; on the other hand, in mortgage,
delivery is not a requisite. Under Republic Act No. 11057, a signed,
written contract is sufficient to create a security interest, which in turn is
perfected through the act of registering such security interest.

In contrast with the pertinent provisions of the Civil Code, R.A. No. 11057
ensures that perfection of security interest is made through the following: (a)
by registration of a notice with the registry; (b) by possession of the collateral
by the secured creditor; and/or (c) by control of investment property and
deposit account. Likewise, priority rules have been provided to determine the
order of preference of interests and liens in the SAME collateral. Whereas
before, as provided in the Civil Code, a pledge must be recorded in a public
instrument containing a description of the thing pledged and the date of
execution to make the agreement binding to third persons. In mortgage,
likewise, registration of the mortgaged property in the place where such is
situated is the necessary requirement to make the mortgage binding to third
persons. R.A. No. 11057 simplifies the process by allowing for the above
options instead (i.e. those listed under a, b, and c above).

When a contract of pledge or mortgage is constituted to secure the fulfilment

of a principal obligation such becomes binding only if the latter (i.e. the
principal obligation) is valid and binding. The reverse, however, does not
follow. An invalid pledge or mortgage can be used as evidence of an existing
principal obligation, the validity of which operates independently of the pledge
or the mortgage used to secure it.

A pledge or mortgage executed by one who is not the owner of the

property pledged or mortgaged is without legal existence and registration
cannot validate it. Furthermore, the Civil Code requires that the pledgor or
mortgagor be the absolute owner of the property. This means that the
property must be unencumbered. The absolute owner of a property, therefore,
has legal and beneficial ownership.

The persons constituting the mortgage or pledge must also have the free
disposal of the property, and in the absence thereof, that they be legally
authorized for the purpose. Accordingly, the property must not be subject to
any claim by a third person, and the pledgor or mortgagor has the capacity
or authority to make a disposition of the property.

The secured creditor will account to the grantor for the surplus amount in case
of enforcement of the security. Thus, the residue after satisfying the obligation
and costs shall be given to the mortgagor or the latter’s representatives. In the
absence of any evidence showing that the mortgage also covers other
obligations of the mortgagor, the proceeds shall not be applied to such
obligations. However, the debtor continues to be liable for deficiencies
resulting from the difference between the amount obtained in the sale at
public auction. The secured creditor may take possession of the property
without need of judicial process and proceed to dispose the collateral in a
public or private sale upon notice to debtor. ​Delivery is not necessary as it is
perfected when it has been created and secured creditor has taken one of the
actions in accordance with Section 12 of R.A. No. 11057. Therefore, there is
no more need to deliver the pledged property to the creditor as previously
required by the Civil Code​.

2.4 ​Republic Act No. 11057 simplified the registration process for
personal assets by reconciling the law on chattel mortgage found on the
New Civil Code with that of the Chattel Mortgage Law of 1906.

R.A. No. 11057 created a modern centralized registry for personal assets. It
explicitly stated that a security interest is created through a security
agreement. It simplified the procedure for the registration of personal assets
and changed the priority of security interests and liens in the same collateral
from the order of creation of the security interests and liens to determining it
according to time of registration of a notice or perfection by other means.
The priority of security interests and liens in the same collateral is changed
from its date of creation to the date of security interest and liens to time of
registration. It also expedites extrajudicial foreclosure of rapidly deteriorating
assets. It enforces security interest in personal properties and allows private
sales to maximize proceeds from personal assets.

2.5 Rules on concurrence and preference of credit on movables have

been modified by Republic Act No. 11057 as well.

The pertinent provisions are laid out in Articles 2236 to 2251 of the New Civil
Code with regard to concurrence and preference of credits. Concurrence of
credit exists when two or more creditors possess equal rights or privileges
over the same property or on all of the properties of the debtor. On the other
hand Preference of credit is a right to be paid first, out of the debtor’s assets.
This simply creates a right to be paid first or ahead of the others from the
proceeds of the sale of property in cases wherein there are two or more
creditors who have separate and distinct claims against the same debtor, who
has insufficient property.

Under Section 17 of R.A. No. 11057, the priority of security interests and liens
in the same collateral shall be determined according to time of registration of
a notice or perfection by other means, without regard to the order of creation
of the security interests and liens. Sections 18 to 25 emphasizes the process
in determining the priorities in security interests regarding movables,
particularly deposit account, investment property, electronic securities,
security certificate, negotiable instruments, goods, purchase money, livestock
as well as fixtures, accessions and commingled goods. It did away with the
order of preference as provided under Article 2247, which states that credits
are to be satisfied pro rata after payment of dues owed to the State, as well as
with the equality of all credits listed under Article 2241 of the New Civil Code.
It expressly repealed Articles 2241, 2243, 2246 and 2247, all of which refer to
the preference of credits with reference to the specific movable property of the
debtor. It must be noted that the repeal of the above mentioned sections
changed the rules on the preference of credits in relation only to movables.

2.6 ​In contrast with the pertinent provisions in R.A. No. 8556 (amending
R.A. No. 5980 or the Financing Company Act of 1998) and those of P.D.
No. 1529, Republic Act No. 11057 operates under a notice-based
registry--a national, collateral registry that is centralized and can be
accessed online.
 More specifically, Section 13 of R.A. No. 8556 confers authority on the
Register of Deeds, the basic functions of which are enumerated in Section 10
of P.D. No. 1529 as follows: “It shall be the duty of the Register of Deeds to
immediately register an instrument presented for registration dealing with real
or personal property which complies with all the requisites for registration. He
shall see to it that said instrument bears the proper documentary and science
stamps and that the same are properly cancelled. If the instrument is not
registerable, he shall forthwith deny registration thereof and inform the
presentor of such denial in writing, stating the ground or reason therefor, and
advising him of his right to appeal by consulta in accordance with Section 117
of this Decree.” Sections 114 and 115 of the same charges the Register of
Deeds with the recording of the chattel mortgage in the province or city where
the mortgagor resides as well as where the property was situated or ordinarily
kept, and establishes the procedural measures for recording chattel
mortgages respectively. On the other hand, under R.A. No. 11057, registry is
lodged with the Land Registration Authority (LRA) to reduce potential risks
and liabilities involved in accepting movable collaterals.

3.0​ ​A Table of Contrasts

It should be noted that some of the Civil Code provisions regarding Mortgage are still
in force. The particular provisions relating to Pledge, however, are deemed repealed
by R.A. No. 11057. Nevertheless, these may be distinguished as follows:

MORTGAGE R.A. No. 11057 ( Personal Property

Security Act)

As to formalities
The parties need to observe the The parties only need to observe the following
requisites under Article 2085 of formalities laid down in Section 12:
the New Civil Code:

1.)​ ​That they be constituted to

1.)​ ​Written security agreement signed by the
secure the fulfillment of a
parties
principal obligation;

2.)​ ​ ​A description of the collateral, whether

2.)​ ​ ​ That the pledgor or
specific or general, that reasonably identifies
mortgagor be the absolute
the same
owner of the thing pledged or
mortgaged;

​ .)​ ​ ​ That the persons

3 3.)​ ​Perfection of the security interest by
constituting the pledge or registration of a notice with the electronic
mortgage have the free disposal registry and either possession of the object (if
of their property, and in the the collateral is tangible property) or control of
absence thereof, that they be the account (if the collateral is investment
legally authorized for the property or deposit account)
purpose.

As to the right of the debtor to surpluses

Under Section 4, Rule 68 of the
Rules of Court, if there be any
balance or surplus, it shall be
paid to the mortgagor or his duly
authorized agent, or to the
person entitled to it.
It uniformly provides under Section 52 (b) that
in case of enforcement of the security, the
secured creditor will account to the grantor for
the surplus amount

As to the right of creditor to recover deficiency

It is a settled rule that the As provided for under Section 52 (b), in case
mortgagee may recover any of deficiency, the debtor continues to be liable
deficiency in the mortgage for such deficiency.
account.

As to the right of creditor to enforce security

In case of enforcement of In case of enforcement of security, under

security, the remedy given to the
mortgagee is foreclosure of the
subject property where the
mortgagor is in default in the
payment of said obligation.
Section 47 the secured creditor may take
possession of the property without need of
judicial process and proceed to dispose the
collateral in a public or private sale upon
notice to debtor, in accordance with the
provisions under Section 49.

As to its binding effect against third persons

As stated under Article 2125 of Not necessary that it appears in a public

the civil code, it is necessary instrument as it is enough under Section 6 if it
that the instrument be recorded is contained in a written contract and signed
in the Registry of property in by the parties.
order to bind third properties.

As to its perfection

In order that the mortgage may Delivery is not necessary as it is perfected

be validly constituted, it is
provided for under Article 2125
that the document in which the
mortgage appears be recorder
in the Registry of Property.
when it has been created and secured creditor
has taken one of the actions in accordance
with Section 12 of R.A. No. 11057

PLEDGE R.A. No. 11057 ( Personal Property

Security Act)

As to formalities
The parties need to observe the
requisites under Article 2085 of
the New Civil Code:
1.)​ ​That they be constituted to
secure the fulfillment of a principal
obligation;
2.)​ ​ ​ That the pledgor or
mortgagor be the absolute owner
of the thing pledged or
mortgaged;
3.)​ ​ That the persons constituting
the pledge or mortgage have the
free disposal of their property, and
in the absence thereof, that they
be legally authorized for the
purpose.
As to the right of the debtor to surpluses
Article 2115 of the New Civil Code
states that If the price if the sale is
more than the said amount, the
debtor shall not be entitled to the
excess, unless it is otherwise
agreed.
As to the right of creditor to recover deficiency
Under Article 2115, if the price of
the sale is less, the creditor shall
not be entitled to any deficiency,
notwithstanding any stipulation to
the contrary.
As to the right of creditor to enforce security
The parties only need to observe the
following formalities laid down in Section 12:
1.)​ ​ ​Written security agreement signed by
the parties
2.)​ ​ ​A description of the collateral, whether
specific or general, that reasonably identifies
the same
3.)​ ​Perfection of the security interest by
registration of a notice with the electronic
registry and either possession of the object
(if the collateral is tangible property) or
control of the account (if the collateral is
investment property or deposit account)
It uniformly provides under Section 52 (b)
that in case of enforcement of the security,
the secured creditor will account to the
grantor for the surplus amount
As provided for under Section 52 (b), in case
of deficiency, the debtor continues to be
liable for such deficiency.
In case of enforcement of
security, Under Article 2112 the
creditor may proceed before a
Notary Public to the sale of the
thing pledged and the sale shall
be made at a public auction
In case of enforcement of security, under
Section 47 the secured creditor may take
possession of the property without need of
judicial process and proceed to dispose the
collateral in a public or private sale upon
notice to debtor, in accordance with the
provisions under Section 49.

As to its binding effect against third persons

As stated for under Article 2096,
the pledge shall take effect
against third persons when the
description of the thing pledged
and the date of the pledge appear
in a public instrument.
Not necessary that it appears in a public
instrument as it is enough under Section 6 if
it is contained in a written contract and
signed by the parties.

As to its perfection

Delivery of the thing pledged is Delivery is not necessary as it is perfected

necessary for its validity. Article
2093 provides that the thing
pledged must be placed in the
possession of the creditor or of
the third person be common
agreement.
when it has been created and secured
creditor has taken one of the actions in
accordance with Section 12 of R.A. No.
11057

CHATTEL MORTGAGE - Civil code R.A. No. 11057/PPSA

As to registration
The registration of chattel mortgage is
necessary as provided for by the law.
Article 2140
By a chattel mortgage, personal property is
recorded in the Chattel Mortgage Register
as a security for the performance of an
obligation.
As to perfection
The registration as provided for by
the civil code is not necessary. It
is sufficient that there is a signed
written contract which will create a
security interest. It may be
perfected through notice with
registry, possession of collateral
or control of the property.
R.A. No. 11057
A signed written contract is
enough to create a security
interest. Perfection of such
security interest may be by
registration of a notice with the
registry, possession of the
collateral by the secured creditor
or control of investment property
and deposit account.
The delivery of the thing will operate as a
pledge and not chattel mortgage.
If the movable, instead of being recorded, is
delivered to the creditor or a third person,
the contract is a pledge and not a chattel
mortgage.
As to ownership: as a collateral
The mortgagor must be the owner of the
property in order to use it as a collateral
Article 2085 of the New Civil Code:
That the pledgor or mortgagor be the
absolute owner of the thing pledged or
mortgaged;
As to formalities
The delivery or non-delivery of the
thing or property is not necessary
or not material anymore. What is
required is that it is in compliance
with Section 12 of the R.A. No.
11057.
Section 12. Means of Perfection. -
A security interest may be
perfected by:
(a)​ Registration of a notice with
the Registry;
(b)​ Possession of the collateral by
the secured creditor; and
(c)​ Control of investment property
and deposit account.
It is possible to use future property
as collateral, provided that the
security interest is not created
until and unless the borrower
acquires rights in it or the power to
encumber it
Section 5. Creation of Security
Interest.
A security agreement may provide
for the creation of security interest
in a future property, but the
security interest in that property is
created only when the grantor
acquires rights in it or the power to
encumber it.
The requisites of chattel mortgage is The formalities given by the R.A.
provided for by Article 2085. No. 11057 are:

Must be in accordance with Articles 2085 to Section 12. Means of Perfection. -

2123, 2140 to 2141. A security interest may be
perfected by:

(a)​ Registration of a notice with

the Registry;

(b)​ Possession of the collateral by

the secured creditor; and

(c)​ Control of investment property

and deposit account.

As to enforcement of security

foreclosure may only be done before a
notary public (pledge), public officer, or court
(chattel mortgage), and foreclosure sales
were required to be done publicly.
the secured creditor may take
possession of the property without
need of judicial process (Section
47) and proceed to dispose the
collateral in a public or private
sale upon notice to the debtor
(Section 49).

As to right of the lender to recover deficiency

the mortgagor is liable to the mortgagee if The secured creditor, whether a

the proceeds of the foreclosure sale are not
enough to satisfy the loan.
mortgagee or pledgee, shall
account to the grantor for any
surplus, and, unless otherwise
agreed, the debtor is liable for any
deficiency.

As to priority of security interests and liens in the same collateral

It shall be in the order of creation of the
security interests and liens. The date of the
creation of security interest and liens are
important because it will indicate what shall
be prioritized.
shall be determined according to
time of registration of a notice or
perfection by other means. Here,
the time of registration is the
determining factor on which
security interest and liens shall be
prioritized

As to the default of the debtor/mortgagor

The creditor may move to foreclose the In case of default, borrowers and
mortgaged property and subject it to public lenders may opt to put movable
auction, the proceeds thereof shall be collateral for private sale.
applied to the principal obligation or the
creditor may file for an action to recover sum
of money in which case the property may be
subjected and be attached to the judgement
in case the creditor won the case.

References

https://attyatwork.com/personal-property-security-act-republic-act-no-11057-fa
ct-sheet-of-house-bill-no-6907/

https://www.entrepreneur.com.ph/news-and-events/your-car-and-other-movabl
e-assets-can-now-be-collateral-for-bank-loans-a00200-20180822?ref=feed_1

https://tribune.net.ph/index.php/2018/09/17/securing-obligations-with-movable-
assets/

https://www.gmanetwork.com/news/money/economy/675246/rules-on-personal
-property-as-loan-collateral-to-be-signed-before-end-2018/story/

https://www.dfdl.com/resources/legal-and-tax-updates/philippines-legal-alert-m
ovables-as-security-in-the-philippines-new-law-provides-more-stable-regime/?f
bclid=IwAR3c6gToXFNPnk5OH7Ewy0g4IsGQJdcvYyuATIC1uJPj_oDfpm3e0p9
dkyM

https://divinalaw.com/securing-obligations-movable-assets/?fbclid=IwAR2Wlz
qh5bVoATZd3AeexrO9C96B9zd1KQzc81fG0reL1jwP90CGF6qYsW0
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assets/

https://thecorpusjuris.com/legislative/republic-acts/ra-no-11057.php

https://attyatwork.com/personal-property-security-act-republic-act-no-11057-fa
ct-sheet-of-house-bill-no-6907/

https://philippinecivillaw.wordpress.com/category/obligations-contracts/19-co
ncurrence-preference-of-credits/

https://batasnatin.com/law-library/civil-law/obligations-and-contracts/826-conc
urrence-and-preference-of-credits-articles-2236-2251.html

https://divinalaw.com/securing-obligations-movable-assets/?fbclid=IwAR2Wlz
qh5bVoATZd3AeexrO9C96B9zd1KQzc81fG0reL1jwP90CGF6qYsW0

http://www.congress.gov.ph/press/details.php?pressid=11126