Topic: Mercantile and Taxation Laws > Secured Transactions > R.A. No. 11057 or the Personal Property Security Act > Definitions and Scope

Republic Act No. 11057: Overview

The Republic Act No. 11057, commonly known as the Personal Property Security Act (PPSA), was signed into law on August 17, 2018. The primary purpose of this legislation is to improve access to credit, particularly for small and medium enterprises (SMEs), by establishing a clear, efficient, and modern framework for secured transactions involving personal property. It simplifies and broadens the types of personal property that can serve as collateral, moving away from traditional security interests based solely on real property or certain high-value movable assets.

This law is a significant development in Philippine mercantile and taxation law, as it aligns with international standards for secured transactions, providing better mechanisms for security, enforcement, and public registration of security interests in personal property.

1. Definitions and Key Terms

Personal Property: Under R.A. No. 11057, "personal property" refers broadly to any tangible or intangible movable asset, excluding land. Examples include inventory, equipment, receivables, intellectual property, and even future property, which allows for flexibility in using a wide range of assets as collateral.

Security Interest: A "security interest" is defined as an interest in personal property that secures payment or performance of an obligation. This interest gives the secured party (usually a lender) priority over unsecured creditors if the debtor defaults.

Secured Transaction: A "secured transaction" is a credit transaction where the debtor grants the creditor a security interest in personal property to secure payment or performance of an obligation. The secured transaction is perfected by agreement and registration, ensuring enforceability against third parties.

Secured Party: The "secured party" is typically the lender, creditor, or any person in whose favor a security interest is created.

Debtor: The "debtor" is the party who owns the personal property and grants a security interest in that property to secure an obligation.

Collateral: Collateral refers to personal property that is subject to a security interest. Under the PPSA, a wide array of assets may qualify as collateral, including inventory, accounts receivable, movable property, and intellectual property.

Registry: The PPSA mandates the creation of a centralized Registry for security interests in personal property. This is managed by the Land Registration Authority (LRA) and is publicly accessible, providing transparency and facilitating secured transactions by allowing creditors to check existing security interests in specific assets.

2. Scope of R.A. No. 11057

R.A. No. 11057 applies broadly to secured transactions involving personal property within the Philippines, with particular provisions regarding its applicability, limitations, and inclusions. Below are the key elements defining its scope:

A. Applicable Transactions:

The law governs all transactions that establish a security interest in personal property.
It includes both consumer and commercial transactions, providing a framework that applies to individuals and businesses alike.
The PPSA covers interests in future assets, meaning that a security interest can be granted in property that the debtor does not yet own but may acquire in the future.

B. Types of Collateral:

The law is designed to cover a wide range of collateral, including:
- Tangible Personal Property: Movable physical assets like machinery, equipment, vehicles, livestock, crops, and inventory.
- Intangible Personal Property: Assets like receivables, intellectual property, deposit accounts, negotiable instruments, securities, and contracts.
- Proceeds: Any property acquired through the sale, lease, or disposition of collateral.
Collateral can include after-acquired property, allowing for a more flexible and comprehensive security arrangement.

C. Priority of Security Interests:

Priority is generally determined by the order of registration of the security interest in the Registry, or by perfection if registration is not required.
The law follows a first-to-file-or-perfect rule, which allows secured creditors to determine their ranking in a liquidation event.
Certain secured interests, such as purchase-money security interests (PMSI), have special priority rules.

D. Excluded Transactions:

The following are generally outside the scope of the PPSA:

Real Property Transactions: Mortgages and liens on land or immovable property are excluded.
Wage Assignments: Assignments of wages or salary are excluded from the scope.
Bank Deposits: Claims to specific deposits in financial institutions not used as collateral in a secured transaction.
Interests in Insurance Policies: Unless otherwise agreed upon, insurance policies and annuities are excluded.
Set-Off Rights: The right to set off or offset debts between parties in a mutual debt situation.

3. Core Components of the Personal Property Security Framework

A. Creation of Security Interests

A security interest is created through a security agreement between the debtor and secured party.
The agreement must:
- Be in writing,
- Clearly describe the collateral,
- Identify the obligation secured by the interest.

B. Perfection of Security Interests

Perfection makes the security interest legally enforceable against third parties. This can be achieved by:
- Registration in the PPSA Registry,
- Possession of the collateral (in some cases),
- Control of the collateral for certain types of intangible property like deposit accounts or investment property.
Perfection is essential for priority over other creditors and for ensuring enforceability.

C. Registry and Public Notice

The establishment of a centralized electronic registry managed by the LRA provides transparency and minimizes the risk of hidden liens.
The registry enables secured parties to publicly file notices of security interests, providing a constructive notice to other creditors or potential buyers.

D. Enforcement of Security Interests

In the event of a default, secured parties can enforce their security interest by:
- Taking possession of the collateral,
- Selling or leasing the collateral,
- Collecting on receivables or debts owed to the debtor.
The law also allows for extra-judicial enforcement, meaning that, under certain conditions, the secured party may enforce the security interest without going through a lengthy court process.

4. Benefits and Implications of the PPSA

The PPSA brings several advantages and implications for creditors, debtors, and the Philippine economy:

Enhanced Access to Credit: By broadening the types of property eligible as collateral, SMEs and individuals have better access to credit, even if they lack traditional collateral like real property.
Improved Lending Environment: Lenders benefit from a streamlined, transparent, and enforceable system for secured transactions, reducing credit risk.
Economic Growth: The law is expected to foster economic growth by encouraging entrepreneurial activities and investments, as businesses can leverage a broader array of assets to obtain financing.
Alignment with International Standards: The PPSA aligns Philippine law with international frameworks like the UNCITRAL Model Law on Secured Transactions, promoting cross-border lending and attracting foreign investment.

5. Conclusion

The Personal Property Security Act under R.A. No. 11057 is a transformative law in the Philippine financial and commercial landscape, designed to improve credit accessibility, especially for SMEs. Its modern and comprehensive framework provides flexibility, transparency, and security for parties engaging in secured transactions involving personal property. By embracing a broader scope of collateral, clear registration requirements, and streamlined enforcement mechanisms, the PPSA strengthens the foundation for credit expansion and economic development in the Philippines.