Goodbye chattel mortgage and pledge. Hello PPSA

By Atty. Eduardo T. Reyes III

While everyone was enmeshed in the pandemic, a law which was enacted a year before Covid-19 struck which had been envisaged to change the legal landscape in terms of putting up securities or collaterals in credit transactions, had escaped much attention.  REPUBLIC ACT No. 11057 entitled “An Act Strengthening the Secured Transactions Legal Framework in the Philippines, Which Shall Provide for the Creation, Perfection, Determination of Priority, Establishment of a Centralized Notice Registry, and Enforcement of Security Interests in Personal Property, and for Other Purposes”, gained approval on 18 August 2018.

The short title of this new law is “Personal Property Security Act” or PPSA for brevity. Foremost in the legal contemplation of PPSA are micro, small and medium enterprises (MSMEs) who are considered to be key in promoting economic activity when provided access to “ least cost credit”.

PPSA establishes “a unified and modern legal framework for securing obligations with personal property”.

Pursuant to Chapter 5, Section 26, among the objectives of PPSA is the creation of a centralized “Registry” which shall be administered by the Land Registration Authority (LRA) where data on the series of transactions involving a certain personal property can be recorded. The sequence of recording in turn will provide the history of the personal property as a collateral for purposes of ascertaining which credit must be prioritized when the debtor’s loan turns sour.

How else has PPSA affected the old law on chattel mortgage and pledge?

Let me count the ways.

1)       The terms “chattel mortgage” and “pledge” as we used to know them, had now been subsumed in the term “Security Interest”. It refers to “a property right in collateral that secures payment or other performance of an obligation, regardless of whether the parties have denominated it as a security interest, and regardless of the type of asset, the status of the grantor or secured creditor, or the nature of the secured obligation; including the right of a buyer of accounts receivable and a lessor under an operating lease for not less than one (1) year”. 

2)      Whereas chattel mortgage and pledge belong to the category of real contracts which pursuant to jurisprudence are only “perfected upon delivery”, security interest under Chapter 3, Sections 11 and 12 of the PPSA is perfected in three (3) ways: (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.

3)      As to scope, PPSA  “shall apply to all transactions of any form that secure an obligation with movable collateral, except interests in aircrafts subject to Republic Act No. 9497, or the “Civil Aviation Authority Act of 2008”, and interests in ships subject to Presidential Decree No. 1521, or the “Ship Mortgage Decree of 1978”.

Thus, chattel mortgage over motor vehicles, furniture, appliances, and even bank deposits, other interest over any investments, and livestock, are within the PPSA’s ambit.

4)     Under the PPSA, instead of only two parties (ie., creditor and debtor), there are three parties involved. The third party to the transaction is known as the “Grantor” who may be any of the following: “(1) The person who grants a security interest in collateral to secure its own obligation or that of another person; (2) A buyer or other transferee of a collateral that acquires its right subject to a security interest; (3) A transferor in an outright transfer of an accounts receivable; or(4) A lessee of goods”;

5)     Another attractive feature of the PPSA is the new concept which it had introduced known as  “Expedited Repossession of the Collateral”. Basically, this allows for the creditor to take possession of the personal property which was put-up as a collateral without need of court order. Under the old law, a creditor cannot just summarily retake possession upon non-payment by the debtor. The creditor must file a petition for replevin first and obtain a court order. However, the expedited right to repossession under PPSA cannot be forced upon, if the creditor’s act of regaining possession of the personal property will incur the hostility of the debtor such that to push forward with the repossession will cause a “breach of the peace”. In which case, the creditor must not proceed. The creditor in the latter case must then secure a court order. For this purpose, PPSA mandates of courts to conduct an “expedited hearing”.

6)     In special cases involving bank deposits, if the parties agreed that the manner of payment will be through automatic deduction from the account, and the same is insufficient, the creditor can “instruct the account debtor to make payment”. If the debtor is maintaining an account, the creditor can “apply the balance of the deposit account to the obligation secured by the deposit account”.

7)      Then there is the so-called “Retention of Collateral by Secured Creditor”. Simply, this allows for the secured creditor after default to “propose to the debtor and grantor to take all or part of the collateral in total or partial satisfaction of the secured obligation”. This is actually an old practice known as dacion en pago or dation in payment. Too, it will be observed from paragraphs 4 and 5 that the old rule prohibiting the automatic appropriation by the creditor of things “given by way of pledge or mortgage” known as “pactum commissorium” (Article 2088, New Civil Code) had been done away with by the PPSA. Yet again, given that there is an independent act (ie., the debtor’s acceptance of the proposal) this may not really constitute as pactum commissorium based on jurisprudence, after all.

8)     Lastly, the implementation of the PPSA shall be conditioned upon the Registry being established and operational. As of this writing, the Registry has not yet been established and is not yet operational, hence the PPSA has yet to be implemented.

But it will be. Soon. So it pays to get acquainted with this new law before that happens.

(The author is the senior partner of ET Reyes III & Associates- a law firm based in Iloilo City. He is a litigation attorney, a law professor and a law book author. His website is etriiilaw.com).