Topic: Control in the Perfection of Security Interests under the Personal Property Security Act (R.A. No. 11057)

I. Overview of R.A. No. 11057 - The Personal Property Security Act

R.A. No. 11057, also known as the Personal Property Security Act (PPSA), was enacted in the Philippines to modernize the country's framework for securing transactions with personal property as collateral. The Act facilitates the use of movable assets as collateral, making it easier for businesses, especially SMEs, to access credit. The Act covers the perfection, priority, and enforcement of security interests over personal property.

Perfection of a security interest is critical under R.A. No. 11057 because it establishes the secured party’s rights against third parties. Among the methods of perfection, control is a specific method applicable to certain types of collateral, such as deposit accounts, electronic securities, and investment properties. Control as a method of perfection gives priority to the secured party who has control over the collateral.

II. Perfection of Security Interests by Control

The concept of "control" under the PPSA is a unique way to perfect a security interest that confers special rights and advantages to the secured party. Perfection by control is typically associated with certain types of intangible or electronic collateral where the secured party must have a level of dominion or exclusive access over the property.

A. Definition of Control

Under the PPSA, a secured party has "control" over specific types of collateral when they have exclusive authority to direct the disposition of the collateral or otherwise restrict the debtor’s ability to deal with it without the secured party’s consent. Control signifies an elevated level of security for the secured party, providing them with a superior right to the collateral, especially in cases of conflicting claims.

B. Types of Collateral Perfection by Control Applies To

The PPSA explicitly provides that control as a method of perfection applies to the following types of collateral:

Deposit Accounts
Investment Property (e.g., stocks, bonds, and other financial instruments)
Electronic Securities and Similar Intangible Assets

Each type has specific provisions under which a security interest may be perfected by control.

III. Methods and Requirements for Establishing Control

The PPSA and its Implementing Rules and Regulations (IRR) provide detailed guidelines on how control over various types of collateral can be established.

A. Control over Deposit Accounts

To perfect a security interest in a deposit account by control, the secured party must satisfy one of the following conditions:

Control Agreement: The debtor, the secured party, and the depository bank enter into an agreement where the bank agrees to follow the instructions of the secured party regarding the disposition of funds in the account without further consent from the debtor.
Secured Party as the Account Holder: The secured party is listed as the owner of the deposit account, giving them inherent authority over the account.
Bank as the Secured Party: If the depository bank is also the secured party, control is established by default since the bank inherently has authority over the account.

These arrangements provide the secured party with direct or indirect control over the deposit account, effectively allowing them to restrict the debtor’s access or use of the account funds.

B. Control over Investment Property

A security interest in investment property can be perfected by control if:

Securities Account Control Agreement: Similar to deposit accounts, a tripartite agreement is entered into by the debtor, secured party, and securities intermediary (broker or depository), allowing the secured party to direct the securities intermediary regarding the disposition of the securities without requiring further debtor consent.
Delivery of Certificated Securities: If the investment property consists of certificated securities, control can be achieved by physically delivering the certificate to the secured party with proper endorsement or transfer.
Registration in the Name of the Secured Party: The security interest can also be perfected by control if the investment property (such as shares or bonds) is registered in the name of the secured party, effectively transferring authority over the investment.

C. Control over Electronic Securities and Similar Intangibles

For electronic securities and other intangible assets, perfection by control typically involves the secured party obtaining the exclusive right to instruct or control the disposition of the securities. This can often be arranged through agreements with entities that hold or manage the electronic records, similar to control agreements with depositories or intermediaries in cases of investment property.

IV. Legal Effects and Priority of Control in Security Interests

Perfecting a security interest by control gives the secured party significant advantages over other creditors:

Priority: A security interest perfected by control has priority over security interests perfected by other methods, such as registration. This priority ensures that the secured party with control is first in line to claim the collateral in the event of debtor default or bankruptcy.
Protection against Competing Claims: Since the PPSA provides that control gives the secured party priority, other creditors or parties with competing claims are subordinate to the interest of the party with control, provided the control agreement or arrangement is valid and enforceable.
Enhanced Enforcement Rights: By having control, a secured party can more readily enforce their rights in case of default, as they often have direct access or authority to dispose of the collateral without needing to take further legal action.

V. Practical Considerations for Secured Parties and Debtors

A. Advantages for Secured Parties

For lenders or creditors, perfecting by control is a preferred method because it provides a stronger security position. They gain prioritized access to the collateral, which is essential in the case of insolvency or default. It also simplifies enforcement since control allows for direct management or liquidation of the collateral.

B. Implications for Debtors

While control agreements secure financing by offering lenders added protection, they limit the debtor’s access to, or use of, the collateral. Debtors need to consider the impact on liquidity, as the secured party’s control may restrict their ability to manage or utilize assets, especially if these assets are essential to their business operations.

C. Control Agreements as Binding Instruments

Since control agreements play a crucial role in establishing control, they must be crafted with legal precision. The agreement should clearly outline the rights and obligations of all parties involved, including any limitations on the debtor’s access to the collateral, specific powers of the secured party, and conditions for enforcement.

VI. Conclusion

The concept of control in the perfection of security interests under R.A. No. 11057 offers a robust mechanism for securing transactions involving certain types of personal property. By achieving control, secured parties can ensure that their interests take precedence over others, providing them with a more enforceable claim in cases of debtor default. Control agreements are central to this process, necessitating careful legal drafting to ensure they meet statutory requirements and effectively secure the creditor's interest. For both creditors and debtors, understanding the implications of control is essential for navigating the secured transactions landscape under the Personal Property Security Act.