5. Personal Property Security (RA 11057)

E. Personal Property Security Act (R.A. No. 11057)

[R.A. No. 11057](/6230537f86c0472aad61f4d08bd13f19?pvs=25)

PERSONAL PROPERTY SECURITY ACT

Notes on provisions under Personal Property Security Act (PPSA) or R.A. No. 11057 superseding the rules governing foreclosure of chattel mortgage under The Chattel Mortgage Law (Act No. 1508)

This Act was enacted to promote economic activity by increasing access to least cost credit by establishing a unified and modern legal framework for securing obligations with personal property. (R.A. 11057, Section 2)

This Act shall apply to all transactions of any form that secures an obligation with movable collateral, except interests in aircraft subject to R.A. No. 9497 and interests in ships subject to P.D. No. 1521. (R.A 11057, Section 4)

KINDS OF AGREEMENT

• Commodity Contract –

A commodity futures contract, an option on a commodity futures contract, a commodity option, or another contract if the contract or option is:

• Traded on or subject to the rules of board of trade, that has been designated as a contract market for such a contract; or
• Traded on a foreign commodity board of trade, exchange or market, and is carried on the books of a commodity intermediary for a commodity customer;
• Control agreement –

• Security interest - 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.

PARTIES UNDER THIS ACT

• Grantor
• The person who grants a security interest in collateral to secure its own obligation or that of another person;
• A buyer or other transferee of a collateral that acquires its right subject to security interest;
• A transferor in an outright transfer of an accounts receivable; or
• A lessee of goods under an operating lease for a period of not less than one (1) year.
• Secured creditor
• A person that has a security interest.
• NOTE: For the purposes of registration and priority only, it includes:
• A buyer of accounts receivable and
• A lessor of goods under an operating lease for not less than one (1) year.

Pactum Commissorium

A stipulation for automatic vesting of title over the security in the creditor in case of debtor’s default.

The creditor cannot automatically appropriate the things given by way of pledge or mortgage; under the Personal Property Security Act, a secured creditor may dispose of collateral after default in accordance with the Act, including its commercial-reasonableness requirement.

Historically, Article 2088 of NCC prohibited the creditor from appropriating the things given by way of pledge or mortgage, or from disposing of them; any stipulation to the contrary was null and void. Article 2088 was repealed by Republic Act No. 11057. Under Sec. 50 of that Act, a secured creditor may dispose of collateral after default, subject to the Act’s requirements, including commercial reasonableness.

NOTE: Articles 2088 and 2141 of Republic Act No. 386, otherwise known as the “Civil Code of the Philippines,” was repealed by Republic Act No. 11057, otherwise known as the “Personal Property Security Act.” Previously, the creditor has no right to appropriate to himself the things given by way of pledge or mortgage or dispose of them because he or she is permitted only to recover credit from the proceeds of the sale of the property at a public auction through a public officer in the manner prescribed in Sec. 14 of Act No. 1508.

Continuance of Security Interest

A security interest shall continue in collateral notwithstanding sale, lease, license, exchange, or other disposition of the collateral, except as otherwise provided in Section 21 of this Act, or agreed upon by the parties. (R.A. 11057, Section 9)

Any party who obtains in the ordinary course of business, any movable property containing a security interest shall take the same free of such security interest provided he was in good faith. No such good faith shall exist if the security interest in the movable property was registered prior to his obtaining the property. (R.A. 11057, Section 21)

Right to Disclosure of Information from Secured Creditor

The secured creditor must provide to the grantor at its request:

• The current amount of the unpaid secured obligation; and
• A list of assets currently subject to a security interest. [R.A. 11057, Section 37(a)]

XPNs:

• After default, the person entitled to redeem has waived in writing the right to redeem;
• The collateral is sold or otherwise disposed of, acquired or collected by the secured creditor or until the conclusion of an agreement by the secured creditor for that purpose; and
• The secured creditor has retained the collateral. (Ibid)

Commercial Reasonableness

In disposing of collateral, the secured creditor shall act in a commercially reasonable manner. (R.A. 11057, Section 50)

A disposition is commercially reasonable if the secured creditor disposes of the collateral in conformity with commercial practices among dealers in that type of property. (Ibid)

NOTE: A disposition is not commercially unreasonable merely because a better price could have been obtained by disposition at a different time or by a different method from the time and method selected by the secured creditor. (Ibid)

If a method of disposition of collateral has been approved in any legal proceeding, it is conclusively commercially reasonable. (Ibid)

Rights of Buyers and Other Third Parties

• If a secured creditor sells the collateral (in accordance with the discussion above)

The buyer shall acquire the grantor’s right in the asset free of the rights of any secured creditor or lien holder

• If a secured creditor leases or licenses the collateral (in accordance with the discussion above)

The lessee or licensee shall be entitled to the benefit of the lease or license during its term.

• If a secured creditor sells, leases or licenses the collateral not in compliance with this Chapter, the buyer, lessee or licensee of the collateral shall acquire the rights or benefits described in subsections (a) and (b) of this section: Provided, That it had no knowledge of a violation of this Chapter that materially prejudiced the rights of the grantor or another person. (R.A. 11057, Section 53)

Prior Interest

A security interest created or provided for by an agreement or other transaction that was made or entered into before the effectivity of this Act and that has not been terminated before the effectivity of this Act, but excludes a security interest that is renewed or extended by a security agreement or other transaction made or entered into on or after the effectivity of this Act.