Reforming Non‐Possessory Secured Transactions Laws: A New Strategy?
| DOI | http://doi.org/10.1111/1468-2230.12131 |
| Date | 01 July 2015 |
| Published date | 01 July 2015 |
| Author | Giuliano G. Castellano |
Reforming Non-Possessory Secured Transactions Laws:
A New Strategy?
Giuliano G. Castellano*
Non-possessory secured transactions are key components of market economies. National and
international legal reform projects have been advanced to further their use and broaden access to
credit. Yet reforms appear to be limited by practical obstacles posed by national legal categories.
This article shifts the focus from domestically defined categories to the operational rules that allow
secured transactions to perform their economic function of managing credit risk. This shift leads
to a reconsideration of the rules governing publicity and an examination of the policy issues
underpinning the evolution of publicity. The article argues that international publicity standards,
based on a registry system, could offer a new strategy for reforming secured transactions laws. The
recently adopted UNCITRAL’s Registry Guide is analysed and considered as a possible tool for
reforming national secured transactions laws.
INTRODUCTION
Secured transactions are key components of market economies and represent a
central legal component of sustained economic development and growth.1
Secured financing allows a creditor to obtain a security interest in collateral to
satisfy a debt or debts in the event of default. Lenders acquire a priority right on
an identified asset or group of assets that is enforceable against unsecured
creditors. Such a mechanism enables access to credit at a lower cost.2Moreover,
small and medium-sized enterprises may gain access to credit by collateralising
tangible or intangible assets that are integral to the operation of their respective
businesses through non-possessory security interests while retaining control and
continuing to profit from those same assets. Finally, and of particular importance
in recent economic history, the development of a market for secured credit that
includes non-possessory security interests can inject liquidity into the economy
and diversify risk while avoiding excessive reliance on real estate to secure debt.3
In pursuit of these benefits, national and international policymakers have
*Assistant Professor at the University of Warwick’s School of Law, Research Associate at the Ecole
Polytechnique (CRG-PREG). I gratefully acknowledge the stimulating discussions with the distin-
guished members of the UNCITRAL’s Working Group VI and Secretariat. I also would like to thank
Marek Dubovec, Carsten Gerner-Beuerle, and Alberto Monti for their insightful suggestions on earlier
versions of the manuscript, and two anonymous referees for their helpful and inspiring comments. All
errors and the views expressed in this article are solely the author’s own.
1 See R. Goode, ‘Security in Cross-Border Transactions’ (1998) 33 Texas ILJ 47.
2 See E. Benmelech and N. K. Bergman, ‘Collateral pricing’ (2009) 91 Journal of Financial Economics
339 and J. R. Booth and L. C. Booth, ‘Loan Collateral Decisions and Corporate Borrowing Costs’
(2006) 38 Journal of Money, Credit and Banking 67.
3 On the relationship between secured lending and growth after the global financial crisis, see A. A.
de la Campa, ‘Increasing Access to Credit Through Reforming Secured Transactions in the
MENA Region’ (2011) World Bank Policy Research Working Paper no 5613.
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© 2015 The Author. The Modern Law Review © 2015 The Modern Law Review Limited. (2015) 78(4) MLR 611–640
Published by John Wiley & Sons Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA
embarked on ambitious legal reform projects that aim to establish coherent and
internationally harmonised sets of rules. Nonetheless, numerous legal systems in
the Western legal tradition have found the process of reform particularly arduous
due to an original scepticism towards non-possessory security rights that remains
hardwired into various national legal categories.
This article sets forth an argument that legal reforms could follow an alter-
native reform path. There are three components of this argument. First, the
analysis shifts the focus from given, nationally determined legal categories to the
set of rules that allow non-possessory secured transactions to perform their
economic function. Publicity here is understood as a fulcrum for security
interests to serve as risk-mitigating devices. Second, this article discusses how
various publicity regimes share a common policy concern that can only be
addressed by understanding registration as a mechanism that reduces the cost of
gathering information to gauge credit risk. Third, building on this understand-
ing, the article argues that implementing a registry system offers an alternative
strategy for reforming secured transactions law without clashing with those
categorisations that are embedded in national legal systems. The article considers
the Registry Guide recently adopted by the United Nations Commission on
International Trade Law (UNCITRAL) as a possible reform instrument that
could be directly implemented as a standalone device, ie, without reforming the
whole system governing secured transactions law at the national level.
The legal regime for secured transactions has a direct impact on lending
behaviour.4Credit institutions tend to only grudgingly accept personal property
collateral in countries which have weak secured creditor protection.5Empirical
studies conducted in 27 European countries show that there is broader access to
bank credit when the scope of secured transactions law is extended.6Although
limited access to credit is particularly pronounced in less-developed and devel-
oping economies, it has also been a concern for developed economies in which
tangible and intangible personal property represents a valuable portion of the
capital owned by small- and medium-sized enterprises.7To unlock the potential
benefits of non-possessory security interests, a set of key legal issues must be
addressed: (i) the types of collateral over which security may be taken without
dispossessing the debtor; (ii) the extent of enforcement powers accorded to
secured creditors; (iii) the priority accorded to secured creditors over unsecured
creditors; and (iv) the mechanisms to publicly disclose the existence of security
interests.8
4 See R. Haselmann, K. Pistor and V. Vig, ‘How Law Affects Lending’ (2009) 23 Review of Financial
Studies 549, 564.
5 See International Finance Corporation (IFC), Secured Transactions Systems and Collateral Registries
(Washington: IFC Publishing, 2010) 6–7.
6 See M. S. Safavian and S. Sharma, ‘When Do Creditor Rights Work?’ (2007) World Bank Policy
Research Working Paper No 4296, 36.
7 See M. S. Safavian, ‘Firm-Level Evidence on Collateral and Access to Finance’ in F. Dahan and
J. Simpson (eds), Secured Transactions Reform and Access to Credit (Cheltenham: EE Publishing 2008)
110.
8 J. Armour, ‘The Law and Economics Debate About Secured Lending: Lessons for European
Lawmaking?’ in H. Eidenmüller and E.-M. Kieninger (eds), The Future of Secured Credit in Europe
(ECFR special volume, De Gruyter, 2008) 14.
Reforming Non-Possessory Secured Transaction Laws
© 2015 The Author. The Modern Law Review © 2015 The Modern Law Review Limited.
612 (2015) 78(4) MLR 611–640
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