SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES 2010 January 2010 Investment Climate Advisory Services I World Bank Group With funding from FIAS, the multi-donor investment climate advisory service in partnership with SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 1 © 2010 INTERNATIONAL FINANCE CORPORATION 2121 Pennsylvania Avenue, NW, Washington DC 20433 All rights reserved Manufactured in the United States of America First Printing: January 2010 This information, while based on sources that IFC considers reliable, is not guaranteed as to accuracy and does not purport to be complete. This information shall not be construed, implicitly or explicitly, as containing any investment recommendations and, accordingly, IFC is not registered under the U.S. Investment Advisers Act of 1940. This information does not constitute an offer of or on behalf of IFC to purchase or sell any of the enterprises mentioned, nor should it be considered as investment advice. 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Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. The International Finance Corporation encourages dissemination of its work and will normally grant permission to reproduce portions of the work promptly. For permission to photocopy or reprint any part of this work, please send a request with complete information to the Copyright Clearance Center Inc., 222 Rosewood Drive, Danvers, MA 01923, USA; telephone: 978-750-8400; fax: 978-750-4470; Internet: www.copyright.com. About the Investment Climate Advisory Services of the World Bank Group The Investment Climate Advisory Services of the World Bank Group helps governments implement reforms to improve their business environment, and encourage and retain investment, thus fostering competitive markets, growth and job creation. Funding is provided by the World Bank Group (IFC, MIGA, and the World Bank) and over fifteen donor partners working through the multi-donor FIAS platform. The pictures on the cover were taken by (from left to right) Dominic Sansoni (World Bank), Yosef Hadar (World Bank pictures 2 and 5), Curt Carnemark (World Bank), Shehzad Noorani (World Bank), and Eric Miller (World Bank). 2 Acknowledgments The publication of this book was made possible due to the generous support of: The State Secretariat for Economic Affairs of the Government of Switzerland (SECO) and the Government of the Netherlands under the Partnership Program (NIPP) between the Netherlands Ministry for Development Cooperation and the International Finance Corporation. The preparation of this Toolkit was led by Alejandro Alvarez de la Campa, from the World Bank Group. The content of the book was developed jointly with Everett T. Wohlers (World Bank), Yair Baranes (World Bank) and Sevi Simavi, International Finance Corporation (IFC). The authors are indebted to the following individuals for their excellent suggestions and thoughtful contributions to improve the content of the Toolkit: Spiros V. Bazinas, UNCITRAL Nicholas Budd, World Bank Margarete O. Biallas, IFC Dobromir Christow, World Bank Santiago Croci, World Bank Ronald C. C. Cuming, University of Saskatchewan Frederique Dahan, EBRD Alejandro Garro, Columbia University Numa de Magalhaes, World Bank Margaret Miller, World Bank Hung Ngovandan, IFC Raha Shahid-Saless, World Bank Peter D. Sheerin, IFC Murat Sultanov, IFC Mahesh Uttamchandani, World Bank John Wille, World Bank This book was edited by the internal editing services of the World Bank Group (GSDTI). Corporate Visions was in charge of the production. SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 3 Table of Contents Introduction: Purpose and Use of Toolkit 5 Chapter 1: Economic Rationale 6 Chapter 2: Diagnostic in Preparation for Project 14 A. Existing Lending Practices (Using Movable Property as Security) 14 B. Legal System, Legislative Practice and Customs 18 C. Baseline Legal and Economic Data 19 D. Level of Support for and Understanding of Proposed Reform 21 E. Capacities of Executive Agencies of Government, End Users and Courts 21 F. Unique Limitations or Capabilities of Client Country 22 Chapter 3: Project Design and Management 23 A. Objectives 23 B. Timeline, Actions and Deliverables 23 C. Risk Management 23 D. Budget and Resource Allocation 23 E. Staffing Plan and Task Allocation 28 Chapter 4: Implementation 29 A. Consensus Building and Client Input to Reform Process 29 1. Identify and Develop at Least One Strong Champion for Reform 29 2. Identify Stakeholder Groups and Leaders 30 3. Form Advisory Committee or Working Group 31 B. Development of the Law 31 1. Analysis and Mapping of the Existing Legal Environment 31 2. Building the New Secured Transactions Legal Regime 39 C. Design, Placement and Implementation of Registry 61 1. Information Gathering and Analysis 61 2. Registry Best Practices 65 3. Business Model 71 4. Development of Design and Specifications 75 5. Staffing, Housing and Equipping the Registry 79 6. Operating Budget Estimate 80 7. Implementation Timeline 82 8. Legacy Data Conversion 82 9. Procurements 84 10. Testing and Acceptance 85 11. Start-up Management 86 D. Public Awareness Building and Training 87 1. Information Gathering and Analysis 87 2. Public Awareness 88 3. Training 90 Chapter 5: Monitoring and Evaluation 98 A. What to Measure? 98 B. Tracking Impact through Indicators 99 1. Output Indicators 99 2. Outcome Indicator 100 3. Impact Indicators 102 C. When to Measure? 105 D. How to Measure? Monitoring Tools and Data Collection 106 4 Annex 1: Diagnostic Survey – Baseline Data 108 Annex 2: Model Survey to Assess Registry Capacity 116 Annex 3: Doing Business Methodology for the Legal Rights Index 122 Annex 4: Model Memorandum of Understanding with Government to Reform Secured Transactions Regimes 124 Annex 5: The World Bank Principles for Effective Insolvency and Creditors Rights Systems (Revised 2005) 129 Annex 6: Example of Regulation for Registry Procedures 133 Annex 7: Example of Terms of Reference for Registry IT System 137 Annex 8: Impact of Secured Lending in Gender Financing 141 Annex 9: Bibliography 150 Figures and Tables Figures Figure 1: Firms’ Access to Credit around the World 6 Figure 2: Why Are Firms Not Able to Get Credit 7 Figure 3: Better Secured Transactions Laws = More Credit and Fewer Defaults 8 Figure 4: Negative Effect of Super Priorities on Credit 36 Figure 5: Perfection Requirements 44 Figure 6: Basic Program Logic Model 98 Tables Table 1: Jurisdictions with Modern Secured Transactions Have More Favorable Credit Policies for Borrowers 9 Table 2: Target Audience to Gather Information/Data at the Diagnostic Stage 15 Table 3: Project Timeline 25 Table 4: Common Risks in the Implementation of Secured Transactions Projects and Mitigation Factors 25-26 Table 5: Illustrative Budget for Implementing Secured Transactions Projects in Emerging Markets 26-28 Table 6: Team Members’ Responsibilities 28 Table 7: Examples of Counterparts and Champions in Secured Transactions Reform Projects 30 Table 8: List of Countries Which Allow Out of Court Enforcement 52 Table 9: Priority Conditions and Transition Rules of the Reformed Law 58 Table 10: Payment Method Options 77 Table 11: Examples of Events to be Plotted in Timeline 83 Table 12: Planning for Public Awareness 89 Table 13: Media Tools and Modes of Delivery 90 Table 14: Output Indicators for Secured Transactions and Collateral Registries Projects 99 Table 15: Outcome Indicators for Secured Transactions and Collateral Registries Projects 100,101,102 Table 16: Impact Indicators for Secured Transactions and Collateral Registries Projects 103 Table 17: Monitoring Tools and Frequency of Data Collection 106 SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 5 Introduction: Purpose and Use of Toolkit The main objective of this Toolkit is to provide technical advice and guidance to World Bank Group staff, donor institutions, government officials and other practitioners on the implementation of secured transactions law and institutional reforms in emerging market countries. However, the Toolkit has not been designed to eliminate the need for in-person expert advice for governments that undertake to introduce a secured transactions system. It is necessary to take into account the factors that are unique to each jurisdiction. The content of the Toolkit will guide the reader through the various stages of the project cycle (identification, diagnostic, solution design, implementation, and monitoring and evaluation) involved in the introduction of secured transactions reforms. The recommendations presented in the Toolkit are based on IFC’s experience in the secured transactions area, the contributions of a number of experts in this field, existing literature, reform experience in a number of emerging market countries and the existing best practices in jurisdictions with advanced secured transactions systems. While the Toolkit does not cover all aspects of secured transactions reform, it addresses the most important elements of such reform. The Toolkit does not address secured financing systems involving immovable property as collateral. Chapter 1 contains a brief discussion of the economic rationale for modern secured transactions systems. Chapter 2 describes the main elements that a proper diagnostic study of the state of secured transactions in a country should contain. Chapter 3 provides an overview of project management techniques required to support the full project cycle. One of the most important parts of the Toolkit, Chapter 4, which deals with the implementation of the reform, includes sections on building consensus for the reform, developing and enacting the necessary laws and regulations, designing and implementing a secured transactions registry, building local awareness and conducting secured transactions training. Chapter 5 of the Toolkit elaborates in detail the monitoring and evaluation strategy that should be employed following the implementation of the project to assess the effect and impact of reforms. Finally, the Toolkit contains a number of annexes that include tools available to develop the different phases of the project as well as technical information. 6 chapter 1: Economic Rationale Chapter 1: Economic Rationale in the developing world is half the number of those firms operating in countries of the Organization for Economic Cooperation and Development (OECD).1 See Figure 1. Access to Finance Is Crucial for Private Sector Growth but Insufficient Collateral Is among Remains a Major Constraint in the the Top Reasons for Difficulty in Developing World Accessing Finance It is well accepted that access to credit is crucial for economic Firm-level surveys conducted by the World Bank in growth and is the engine for private sector development. developing countries help explain why obtaining finance Removing barriers to a wide range of financial services can is difficult. A common trend among the firms is that unleash private enterprise productivity and help reduce the credit applications are rejected mostly due to insufficient size of the informal sector. While access to credit varies collateral, i.e. unacceptable or unsuitable collateral. from one jurisdiction to another, constrained access to In many cases, business owners did not even bother finance remains among the top three limitations on private applying for loans, because they were certain that they sector growth in the developing world. More than half could not meet the collateral requirements often requested of private firms in emerging markets have no access to by banks.2 See Figure 2. credit. This percentage is even higher and reaches up to 80 percent in Middle East and sub-Saharan Africa. An in-depth analysis indicates that unavailability of The number of firms that use loans to finance investments collateral is frequently not the problem; rather, it is the Figure 1: Firms’ Access to Credit around the World Access to a Line of Credit or Loans from Financial Use of Bank Loans to Finance Investments (% of Firms) Institution (% of Firms) 60.0 25.0 23.4 51.2 50.8 22.4 50.0 45.8 20.0 40.0 17.0 16.8 16.0 15.0 13.2 30.0 27.0 23.3 9.8 10.0 20.0 10.0 5.0 0.0 0.0 Eastern Europe & Central Asia South Asia Latin America & Caribbean Middle East & North Africa Sub-Saharan East Asia & Pacific OECD South Asia MENA Latin America & Caribbean Eastern Europe & Central Asia Sub-Saharan Africa Source: World Bank Enterprise Surveys Global Database 1. See World Bank Group Enterprise Surveys. 2. See “Reforming Collateral Laws to Expand Access to Finance” Fleisig, Safavian, De La Pena, 2006. SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I jANUARY 2010 7 Figure 2: Why Are Firms Not Able to Get Credit ?3 Credit Application Rejected - Insufficient Collateral Did Not Apply: Collateral Requirements too High 80% 35% 70% 30% 60% 25% 50% 20% 40% 15% 30% 20% 10% 10% 5% 0% 0% Africa East Asia ECA Latin America South Asia Africa East Asia ECA Latin America South Asia Source: World Bank Enterprise Surveys Global Database inability to utilize valuable assets as collateral. While in US $400 billion. The industry has grown by 12 percent the developing world 78 percent of the capital stock of annually over the past 10 years.7 a business enterprise is typically in movable assets such as machinery, equipment, or receivables and only 22 percent is in immovable property, financial institutions One of the Ways to Increase Access are reluctant to accept movable property as collateral. to Credit Lies in Reforming Secured Banks heavily prefer land and real estate as collateral.4 By contrast, in the United States, movable property makes Transactions Laws and Registries up about 60 percent of enterprises’ capital stock5 and Providing legal structures through which movable assets in lenders consider such assets to be excellent sources of emerging markets can be effectively used as collateral will collateral; movables account for around 70 percent of significantly improve access to finance by those firms that small-business financing.6 The asset-based lending industry need it the most. Even in the most advanced jurisdictions in the United States has been growing rapidly since the where reliable credit information and a wide range of mid-1970s, and the volume of movable asset lending financial products are available, only the largest and best has increased 40-fold over 30 years, reaching a total of 3. Unlocking Dead Capital. Safavian, Fleising, Steinbuks, March 2006, The World Bank Group Private Sector Development Vice Presidency, View Point Note Number 307. 4. Id. 1 at 9. 5. Ibid at 7. 6. Apart from consignment sales by producers and floor-plan financing for large-ticket items such as vehicles and equipment and seasonal borrowers such as agricultural producers, banks and commercial finance institutions will normally offer inventory finance reluctantly and far prefer receivables- based loans.Therefore, inventory is not the preferred type of movable asset and bankers would normally consider it riskier than other assets such as receivables. 7. Commercial Finance Association, Annual Asset Based Lending and Factoring Surveys, June 2008. 8 chapter 1: Economic Rationale Figure 3: Better Secured Transactions Laws = More Credit and Fewer Defaults Note: Relationships are statistically significant at the 1 percent level. Private credit analysis controls for country income, growth, and enforcement. Access to loans analysis controls for income per capita. Source: WBG, “Doing Business 2005.” connected businesses can obtain unsecured loans. The • Decreasing the cost of credit: In industrial countries, rest have to offer collateral. A sound legal and institutional borrowers with collateral get nine times the level of infrastructure is critical to maximize the economic potential credit given their cash flow compared to borrowers of movable assets so that they can be used as collateral.8 without collateral. They also benefit from longer repayment periods (11 times longer) and significantly Well-functioning secured transactions systems enable lower interest rates (50 percent lower).10 businesses to use their assets as security to generate capital—from the farmer pledging his cows as collateral Further economic analysis suggests that small and medium- for a tractor loan, to the seller of goods or services pledging sized businesses in countries that have stronger secured the cash flow from customer accounts as collateral for transactions laws and registries have greater access to business expansion. Modern secured transactions systems credit, better ratings of financial system stability, lower also contribute to private sector development by: rates of non-performing loans, and a lower cost of credit. The end result is higher productivity and more growth. (See • Increasing the level of credit: In countries where Figure 3. Note, however, that the term “collateral” in the security interests are perfected and there is a chart refers to both immovable and movable property.) predictable priority system for creditors in cases of loan default, credit to the private sector as This conclusion is also supported by empirical studies a percentage of gross domestic product (GDP) conducted with financial institutions in OECD and averages 60 percent compared with only 30 to emerging market countries on the role of collateral in the 32 percent on average for countries without these overall credit decision and risk management process. creditor protections.9 Prevailing lending practices in a diverse group of countries 8. Doing Business, 2005. 9. Safavian, Mehnaz, Heywood Fleisig and Jevgenijs Steinbuks, 2006. “Unlocking Dead Capital: How Reforming Collateral Laws Improves Access to Finance.” Private Sector Development Viewpoint, No. 307, World Bank, March 2006. 10. Chaves, Rodrigo, Nuria de la Pena and Heywood Fleisig, 2004. “Secured Transactions Reform: Early Results from Romania.” CEAL Issues Brief, Center for Economic Analysis of Law, September 2004. SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 9 reveal that, while their primary focus is on the capacity to covered by the collateral) in reformed or modern systems repay the loan, availability of collateral is also a condition and unreformed systems as shown in Table 1. precedent to lending.11 Additional evidence shows that countries that have Anecdotal Evidence of the Value of introduced new or reformed secured transactions systems Reform (legal framework and registries) have achieved a higher degree of development of their credit systems by increasing In addition to the foregoing empirical evidence of the the effective use of movable collateral to secure credit.12 impact of secured transactions reform, there are a number This is the case in most OECD countries and emerging of success stories from reforms in recent years. Two good market countries such as Bosnia and Herzegovina and examples of such successes are the following cases: Romania (see the Romania example in case 2 of this chapter). Proof of this is the analysis of collateral coverage ratios (or the percentage of the total loan that will be Table 1: Jurisdictions with Modern Secured Transactions Have More Favorable Credit Policies for Borrowers LOAN-TO-VALUE RATIOS (LTVs)13 EMERGING MARKETS TYPE OF COLLATERAL OECD Friendly/Reformed Difficult/Unreformed Between 60-80% (cities) IMMOVABLE PROPERTY Up to 90% Up to 80% 30-60% (rural areas) MOVABLE PROPERTY Vehicles Up to 100% Between 70 and 100% Between 60 and 85% From 60 to 80%. Most Equipment Up to 80% Up to 80% times no value (secondary collateral) No value (secondary Accounts Receivable Up to 80% Up to 50% collateral) No value (secondary No value (secondary Inventory Up to 50% collateral) collateral) Source: International Finance Corporation 11. See “How to Expand Credit to SMEs – Creative Solutions to the Puzzle of Collateral Lending”, Alvarez de la Campa, Alejandro. IFC Smart Lessons, Washington D.C. 2007. 12. See “Emerging Collateral Practices in Countries with Reformed and Unreformed Secured Transaction Frameworks”, International Finance Corporation, December 2006. 13. The collateral coverage ratio is defined as collateral value/loan; its inverse, the loan to value (LTV) ratio is defined as loan/collateral value. 10 chapter 1: Economic Rationale Case 1: Impact of Secured Transactions Reform in Slovakia14 When Prime Minister Mikuláš Dzurinda first took office in 1998, the Government of Slovakia sought help from the World Bank, the European Bank for Reconstruction and Development (EBRD), and other international organizations to stabilize the business environment through institutional and legislative reforms. The Government sought to restructure the economy to make Slovakia eligible for membership in the United Nations and the European Union. Secured Transaction Legal Framework. In the late 1990s, Slovakia was on the verge of an economic crisis. The National Bank was plagued with inexperienced staff and poor IT systems. The Meˇ c ier government (1994–98) had employed unsustainable macroeconomic policies that privatized some public entities and overspent on infrastructure projects. National debt was 60 percent of GDP. In 2000, the EBRD listed Slovakia as an “unreformed” country. The Dzurinda government introduced a reform package that included a bankruptcy regime, corporate governance rules and a framework for secured transactions. The latter reform included: • Provision for both movable and immovable assets to be used as collateral • Reduction of formalities, including abolition of a requirement for notarized documents • Establishment of creditor priority immediately upon registration, with information available instantly • Abolition of the super-priority of tax liens—tax authorities must now register their claims alongside other secured creditors • Enforcement made more efficient by the Law on Auctions, making timely sale of collateral possible Electronic registries: As part of these reforms, two registries were created. The Chamber of Notaries handles movable assets, which, according to users, can be registered in minutes at any local office through an electronic terminal for as little as 30. Immovable assets are registered at the Land Cadastre. This technology is available to all users, not just banks. Impact: According to government statistics, successes of the reforms include: • Annual registrations increased from 7,508 in 2003 to 31,968 in 2007, a per annum increase of over 50 percent. • The time needed to foreclose on a mortgage decreased from 560 days to 45 days. • Slovakia was named the top reformer in the World Bank’s ”Doing Business 2005.” Remaining challenges. Despite the support that the World Bank and other institutions gave to the reforms, it became difficult to keep policy makers focused on implementing and monitoring secured transactions reform. Also, the registry has had some technical difficulties that are common to new IT systems, due in part to limited human capacity of the Chamber of Notaries. 14. See “Secured Transactions Reform and Access to Credit”, Edited by Frederique Dahan and John Simpson. Elgar Financial Law Series, 2009. SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 11 Case 2: Impact of Secured Transactions Reform in Romania15 Since the fall of the Soviet bloc, Romania has sought to reform its commercial landscape. A team from the World Bank was charged with overhauling secured transactions legislation to enable a more robust business environment. Secured transaction legal framework: Though a Commercial Code and a Civil Code existed, they were rarely used during the Communist period because business transactions involved state-owned enterprises. In the early 1990s, after the collapse of the Communist regime, a period of “wild capitalism” ensued, causing banks to be very cautious in their lending practices. The only form of secured lending that was used was the mortgage of land, because priority and enforcement of all other forms of security were uncertain, cumbersome and impractical. The Romanian parliament passed Title VI on Legal Treatment of Security Interests in Personal Property in May 1999. Highlights of the legislation include: • Simplified documents and registration process for secured transactions • Elimination of the state as a “privileged creditor” • Expansion of the types of assets that can be used as collateral, including goods that may be created or acquired in the future (such as crops from a year-end harvest) Electronic archive of security interests in personal property: Title VI provided for the creation of an archive for the registration of collateral, administered and regulated by a department in the Ministry of Justice. The archive contains information on the parties to a transaction and the collateral used to secure individual loans. Intake of registrations is through the offices of members of a consortium of private registrars who have electronic access to the registry database to add registrations and changes. The registry software automatically assigns a sequential registration number and the date or time of registration to each registration record. The public has access to the registry via the Internet and may search the database for information. Information retrieved in a search can establish priority among competing security interests according to the time of registration. Impact: According to government statistics, impacts of Title VI in its first seven years include: • An increase in registrations from 65,227 in 2000 to 536,067 in 2006, for an average per annum increase of almost 60 percent. • The development by banks of a variety of new lending products, which has caused credit to become cheaper and more efficient. • Many foreign companies and international agencies have secured investments with assets located in Romania. These include the EBRD, several Austrian banks and companies, and several Dutch companies. Remaining challenges: As of 2006, only six legal entities were authorized as registrars entitled to enter registrations into the database, and two of those are government agencies. Initially there were more private sector registrars, but many were removed when they could not meet the requirements of the law. There are lingering concerns about enforcement upon default. Though the law provides for enforcement, creditors find it difficult to recover and dispose of collateral 15. See “Secured Transactions Reform and Access to Credit”, Edited by Frederique Dahan and John Simpson. Elgar Financial Law Series, 2009. 12 chapter 1: Economic Rationale Small and New Businesses Benefit Asset-based lenders frequently look beyond financial statements to determine how much money they are the Most, but So Do Women prepared to advance at and after closing. Asset-based Entrepreneurs lenders’ primary focus is on collateral and liquidity, with leverage and cash flow being secondary considerations. Asset-based loans secured by movable assets Typically, asset-based lenderss provide borrowers with disproportionately benefit small enterprises and new more liquidity and fewer financial covenants. Asset- businesses. Asset-based lenders often advance funds when based borrowers usually have higher financial leverage traditional sources are not available. Asset-based lending, and marginal cash flows. The cost of asset-based loans is as practiced by non-bank financial institutions (NBFI), influenced by the credit risk and collateral associated with differs from traditional bank lending because NBFI’s the transaction. serve borrowers with risk characteristics that typically fall The amount of credit depends on the type of business outside a bank’s comfort level. The NBFI business model and the content and quality of the collateral. The lender is considerably different from that of commercial banks. If provides funds secured by the assets of the borrower. the growth of NBFIs outside of industrialized countries is to The collateral can include accounts receivable, inventory, be encouraged, we need to take into account the different raw materials and work in process, machinery, vehicles, methods, pricing, capitalization and refinancing structures intellectual property rights or other assets where value of these businesses and how the law can be tailored can be determined. The secured lender may establish a to their particular needs. Such lenders are familiar with revolving credit facility where the borrower provides a various types of businesses and are responsive to client pool of collateral that the lender translates into operating needs. As a result, small companies can usually get more cash or working capital. The lender agrees to grant a line cash more quickly than they could from a traditional bank of credit up to a maximum amount, which is secured by loan. This makes asset-based financing a feasible option a borrowing base made up of inventory, receivables and for rapidly growing, cash-strapped companies for short- cash. A certain amount is advanced when the inventory term cash needs. Also, asset-based lenders and factors is purchased (usually not more than 50 percent of the offer an array of services, including accounts receivable purchase price), a bit more is advanced when the inventory processing, collections and invoicing. is converted to a receivable (usually not more than 80 percent of face value), and when the receivable is paid and funds arrive in the lock-box account, the credit line balance is paid down and the credit line is available for Box 1: Benefit to Women of Secured redrawing against additional inventory and the remaining Transaction Reforms assets in the borrowing base. In Sri Lanka women commonly hold their wealth It is important to note that secured transactions reform in gold jewelry. This is accepted by formal banks can increase the accessibility of credit to women, and in as security for loans.16 particular to women entrepreneurs (see Box 1). Enabling In Tanzania, Sero Lease and Finance, a women’s movable assets—such as machinery, book debts, jewelry, leasing and finance company, provides loans and other household objects—to be used as collateral can to women to purchase equipment for their benefit all businesses. But opening up this type of financing businesses, using the equipment as security has the potential to be of particular benefit to land-poor through leasing agreements. Sero has more than women, enabling them to circumvent their lack of titled 10,000 exclusively female clients.17 land in a number of countries and use the assets they do have to unlock access to formal credit markets. 16. See M. S. Pal, 1997. Women Entrepreneurs and the Need for Financial Sector Reform. Economic Reform Today, Number Two. 17. See A. Ellis, et al. 2008. Doing Business: Women in Africa. World Bank, Washington, DC. SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 13 The impact on the households of women who gain access supervisory or regulatory authority, usually central banks. to credit to enable them to start or grow their businesses is likely to be profound. When poor women (rather than Effective secured transactions laws are a crucial component men) are the direct beneficiaries of credit, its impact on of a healthy financial sector and business climate. They the various measures of household welfare (such as school make it possible for banks and NBFI’s to provide the enrolment rates18) is greater. For a more in depth analysis working capital that enables entrepreneurs to expand of the gender impact of secured lending, see Annex 8. their business activities so they do not have to rely on the slow accumulation of retained earnings. Businesses in emerging markets are severely underleveraged, which is Secured Transactions Systems one of the chief reasons for their very slow rate of growth Mitigate the Impact of a Financial and development and their overly conservative business plans in comparison to SME’s in OECD countries. Crisis The current financial crisis and the Asian financial crisis The development of financial market infrastructure point out the vulnerability of financial systems in which promotes financial stability19 and access to finance. It is sources of credit are concentrated in the banking system imperative to support development of sound and efficient and not diversified.20 The G2221 report on International financial infrastructure to strengthen financial stability and Financial Crises of October 1998 highlights the enhance access to financial services. A sound financial importance of establishing secured transactions systems infrastructure includes secured transactions systems, and movable collateral registries to mitigate the impact payment systems, remittances, insolvency regimes, credit of future financial crises: “Recent experience shows that information reporting, interbank lending and central bank financial systems which are heavily dependent on banks support. can experience financial instability of a magnitude that can Well-designed secured transactions systems contribute to generate macroeconomic difficulties . . . . Effective debtor- robust financial systems by promoting credit diversification, creditor regime laws [including a framework for secured allowing NBFI’s to provide credit (reducing the dependence transactions] create a legal framework that allows loans on bank credit) and to rely less on real estate collateral. to be extended at lower interest rates at less risk while Financial institutions (FIs) benefit from these systems by: facilitating the diversification of credit risk and fostering (i) being able to diversify their portfolios by accepting non-bank financial intermediation. Reduced dependence movables, including more liquid assets such as receivables on bank credit lessens the economic impact of a banking or investment instruments; (ii) having access to information crisis on the real economy. . . .” on existing security interests in movable assets and their The Bank for International Settlements (BIS), through its priorities; (iii) strengthening their risk management policies, Working Group on International Financial Crises, has by making more informed credit decisions on collateral identified the need for effective debtor-creditor regimes lending; and (iv) making possible better reporting and secured transactions systems as a key policy to mechanisms on collateralized lending practices to the prevent crises and limit their scope.22 18. See Mark Pitt and Shahidur Khandker. 1998. “The Impact of Group-Based Credit Programs on Poor Households in Bangladesh: Does the Gender of Participants Matter?” Journal of Political Economy 106: 958–96. 19. See “The Unfolding Crisis: Implications for Financial Systems and Their Oversight”. World Bank, Financial Systems and Development Economics, Washington D.C. October 2008. 20. See Law and Policy Reform at the ADB Vol. II, 2000 Edition”, Asian Development Bank, December 2000. 21. The Group of 22 (G22) or Willard Group was created by the leaders of APEC in 1997. The intention was to convene a number of meetings between finance ministers and central bank governors to make proposals on reform of the global financial system. The Group of 22 comprised members of the G8 and 14 other countries. It first met in 1998 in Washington D.C. to consider the stability of the international financial system and capital markets. The Group of 22 was replaced by the Group of 20 (G-20), which exists today. 22. Report on the Working Group on International Financial Crises, BIS, October 1998. 14 chapter 2: Diagnostic in Preparation for Project Chapter 2: Diagnostic in IFC has developed a comprehensive survey that can be used to collect the necessary information when doing Preparation for Project diagnostics and to collect baseline data. Although this chapter does not describe in detail all the elements The preparation and diagnosis set the stage for the contained in the survey, it describes important areas to be beginning of the project. This phase focuses heavily on the covered during the data collection process. See Annex 1 collection of information about the existing situation in the for the complete IFC Diagnostic Survey. jurisdiction with regard to secured transactions systems and the availability of commercial credit, but it also addresses important related economic and legal issues. This is an A. Existing Lending Practices important phase as it sets the basis for designing future interventions as well as the type and extent of reform. (Using Movable Property as An assessment of an existing legal, social, economic and Security) institutional environment is a precondition to any successful The existing lending practices in the jurisdiction are an reform of secured transactions system in any jurisdiction. important determinant of the approach to any new system The process will include at least one visit to the jurisdiction, for securing credit with movable property. Depending on and generally research and writing at the home station. the complexity and degree of sophistication of the lending The recommended staffing for a diagnostic mission will scenario, the team will need to identify which areas of include a secured transactions expert (or separate legal the process will need more attention in order to eventually and registry experts), a project leader and, if feasible, introduce secured transactions reforms. The reform team a financial sector expert, a measurement and evaluation will need to identify the existing shortcomings in asset- (M&E) expert, a local lawyer, a local IT expert and a local based lending by meeting with different stakeholders and administrative support person. The secured transactions analyzing the existing legal framework governing the expert should be versed in related legal reforms such as financial sector. insolvency, enforcement or commercial law, as well as in the structural design and implementation of a secured In order to get a comprehensive picture of the lending transactions registry. Depending on the jurisdiction, a practices in the country, the team should conduct a mission may last between one and two weeks. Factors that detailed survey among all financial institutions (FIs) and may determine the length of the mission include the structure other key public and private sector representatives. (See of the government in terms of the level of decentralization, Annex 1 for a detailed model survey.) However, if the the number of existing registries for movables, the existence survey proves difficult, or if the results of the survey are of secured transactions legislation, the size of the credit not satisfactory, individual meetings or interviews may market, political support for reform and local capacity to be conducted during the field visit to collect all relevant handle a sustainable reform. information about lending practices. The mission of the diagnostic assessment is to collect the As a general practice, the reform team will need to meet information that is needed to determine the approaches with FIs, including banks (local and foreign), NBFIs, and to legal and functional reforms and to develop the private sector representatives. (See Table 2.) It is important project plan. Following the collection of information, the to meet all active players, as foreign banks often have diagnostic team will analyze it and produce a report with approaches to lending that are different from local banks, recommendations. This chapter of the Toolkit provides a and the same is true for banks and NBFIs in general. Only description of the areas that need to be assessed and by looking at the existing practices is it possible to reliably interviews to be conducted, as well as preparation of the assess the lending practices in the jurisdiction. Meetings report. with government representatives from the Ministry of Finance, Central Bank and Collateral and Credit Registries Table 2 provides a sample of possible stakeholders that are also essential to get different perspectives. could provide valuable information that may bear on the approach to and planning for secured transactions Specific attention during the data collection should be reform. given to the following: SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 15 Table 2: Target Audience to Gather Information/Data at the Diagnostic Stage Public Sector Ministry of Finance/Economy Ministry of Justice Central Bank/Superintendency of Banks Ministry of Commerce Existing public registries (business registry, collateral registries, vehicle registry, leasing registry, ship/plane registry, land registry, credit registry) Members of the Judiciary (Commercial Court judges) Bailiffs or execution agencies Public notaries Legislators, members of parliamentary economic commissions Private Sector Banks (foreign and local) Microfinance institutions Leasing companies Sellers on credit (car dealers, equipment dealers) Law firms Borrowers (SMEs, multinationals, entrepreneurs) Bankers association, credit bureau Bar associations/ law societies Business associations and Chambers of Commerce Farmers associations Other Donor organizations (bilateral and multilateral donors) Academia (law, business and economics faculty) 1. Lending Decision-Making Factors: The majority of influences the eventual approval of a credit application. financial institutions worldwide use the Five Cs (capacity, For loans of any material size (be it in relation to the capital character, capital, collateral, and conditions) methodology of the enterprise or in absolute terms as defined by the or an adaptation of it as part of their credit evaluation institution), collateral is typically considered a condition process. However, these are just general methodologies precedent, not just an evaluation criterion.25 Finally, it is that might not be used in every jurisdiction. Though collateral important to gather information from FIs on loan-to-value is often described as secondary to character23 and ratios for both immovable and movable collateral, terms capacity24 during the evaluation process, it very frequently for mortgages, loans, interest rates, etc. 23. The character of a creditor refers to the willingness of a company to repay based on past credit repayment history of the business and the principal business owners together with an analysis of business and personal stability (e.g. length of time in business, length of time at residence, etc.). 24. The capacity of a creditor usually refers to the analysis of the enterprise’s capacity to repay the loan. Qualitative indicators include an evaluation of management capacity whereas quantitative indicators include inventory turnover, profitability, cash flow analysis, debt service coverage ratios, etc. 25. See “Emerging Collateral Practices in Countries with Reformed and Unreformed Secured Transactions Frameworks”, International Finance Corporation, December 2006. 16 chapter 2: Diagnostic in Preparation for Project Therefore, the team must analyze the factors that affect such as requirements for risk provision for loans, credit risk lending decisions in order to be prepared to explain mitigation techniques (including the use of collateral), and how FIs should adapt some of their practices to the future rules requiring banks to lend to SMEs or to make loans to secured transactions system. Specific lending practices in the agricultural or other specific strategic sectors. a jurisdiction are important to consider, but change and innovation with the introduction of new systems mean that 3. Types of assets accepted as collateral: It is important some of those practices will need to be adjusted. One to determine the types of assets that are used as collateral of the key aspects of a project is to convince FIs that, in under existing law. In most cases, before the introduction order to reach the goal of expanded credit facilities for of secured transactions reforms, the types of movable assets SMEs, they must make substantial changes in their existing that are accepted as collateral are very limited. In most practices – changes that will benefit both FIs and their unreformed jurisdictions, the use of immovable property customers. The principal purpose of examining existing as collateral is the dominant type of secured lending, practices is to be in a position to explain the required though in a number of jurisdictions, movable assets such changes. as vehicles, machinery and equipment may be used, often to supplement interests in immovables, as well as personal Another important factor in lending decisions is the use guarantees from directors and principal shareholders. of credit scoring models. In emerging markets, use of In many countries where bank liquidity is low and local judgmental scoring models to evaluate a business’ credit currency funding costs are high, local banks may obtain application is increasing, though it is not widespread. funding from international banks that restrict the type of While scoring models are a useful supplementary measure on-lending that may be offered, e.g., short-term, secured, when assessing risk, they are not a substitute for security pre-export finance transactions. These types of refinancing in the form of interests in debtors’ property. Where used, restrictions present both limitations and opportunities scoring models generally utilize data from the business’ for economies that have adopted reasonable secured balance sheet and income statements. They rarely include transaction regimes, but they need to be identified. It is significant credit information on the business or business important to compare and contrast what the existing laws owner aside from the business’ history with the FI. Whether permit as collateral and what the actual collateral lending or not credit scoring is available, FIs in emerging markets practices of the FIs are. The diagnostic should also identify tend to rely on an internal risk evaluation that considers classes of movable assets that are prohibited by law from the business’ history with the FI in the operation of its credit being used as security for obligations or that are exempted and deposit accounts over an extended period of time from seizure in enforcement of an obligation upon default (e.g. greater than three years), as well as other factors by the debtor; i.e. things deemed by law to be necessities such as the type of loan and the FI’s appetite for risk. for survival, such as one vehicle per household or beasts of burden of farmers. See Chapter 4 on the legal framework In light of the objective of enhancement of lending secured and Annex 1 for more details on the types of collateral that by movables, it is useful to diagnose the capacity of local can be used as security. banks to audit and monitor a borrowing base consisting of inventory and receivables and for marking various types 4. Existing institutional infrastructure: An important of inventory collateral to market. Do local banks have supportive element of the financial sector is the institutional teams charged with this responsibility, are there internal infrastructure, such as credit information systems or policies requiring periodic on-site visits to clients by the collateral registries. It is particularly important to determine FI; and are the rights to conduct visits included in the loan whether the country already has one or more collateral agreements? registries for classes of movable assets. If a collateral registry or an asset registry (such as a vehicle registry) 2. Banking regulations and prudential norms: When already exists, the team will need to collect and assess conducting the diagnostic, it is important to review the in detail the characteristics of the registry such as (i) the existing banking regulations and prudential norms, nature and organization of the registry; (ii) its utilization normally issued by the Central Bank or Superintendency of information and communication technology; (iii) the of Banks. These norms and regulations might have a existing data set; (iv) the operational aspects of the tremendous impact on the lending practices of banks registry; (v) the level or levels of the government at which it and NBFIs. The diagnostic should also examine factors operates, (vi) ease of public access to the database, and SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 17 (vii) the staffing, management and other important aspects included in the survey of collateral registries. (See Annex 2 Box 2: Secured Transactions Registries and for the detailed survey to assess the capacity of an existing Credit Information Systems (Credit Bureaus) movable collateral registry.) It is also important to determine the extent of actual utilization of these various facilities for Where one or more private or public credit various asset classes; some may exist but barely be used reporting organizations (credit bureaus) exist (see Box 2). Finally, it is important to determine whether in the jurisdiction, the diagnosis should involve non-utilization is due to informal structuring methods, such examination of their structure (whether they are as retention of title to the assets by the lender or supplier, public or private), their coverage, the type of use of special purpose companies, deposit of pledged information included (positive and/or negative) in goods in bank-controlled warehouses, etc. their records, who has access to this information, and the current practices of FIs in using and 5. Seizure and disposition of collateral and distribution of providing data to them.26 proceeds: The reason security is taken by a credit grantor is to provide an alternative source of repayment in the event There are potential synergies between secured the debtor fails to meet his or her contractual obligations transactions and credit information systems that to discharge the debt. A jurisdiction can have the most may be beneficially developed. For example, modern law possible dealing with creation, registration, credit bureaus may want access to information and priorities, but unless it provides for an efficient and in secured transactions registries in bulk form or effective system for enforcement, the entire raison d’être with a dedicated on-line connection, because of secured financing is defeated and secured financing such information is generally relevant to their will not occur other than on a very limited scale. In clients. Therefore, the needs of credit information many jurisdictions, court-ordered foreclosure is costly and systems for data in particular forms should be inefficient. Measures designed to protect the interests of assessed. Another example is the potential for debtors often result in creditors not granting secured credit sharing of technology assets and facilities by because they realize that the market value of the collateral a credit bureau and the secured transactions will have depreciated dramatically during the long period registry. If the existing infrastructure of a credit it takes to get the collateral sold pursuant to a court order. information system has excess capacity, it may In addition, court proceedings are generally costly with be possible to share some of the facilities or the result that there is likely to be little left for the secured technology resources, with resulting cost savings. creditor after the enforcement costs have been deducted Such sharing of facilities and assets is planned or from the meager proceeds of sale of the collateral. adopted for the secured transactions registries in Nepal and Sri Lanka, for example. It is clear that legal obstacles to the enforcement of security interests in collateral in case of default can be a very important barrier to the effective use of movable property Seizure of collateral is just a first phase in enforcing a as security. It is essential to analyze the laws governing security interest in movable property. Once the asset has enforcement of security interests and the actual practices been recovered, the collateral must be sold in the secondary of creditors in enforcing against collateral. In this context market. This step often results in low recovery of proceeds it is necessary to determine the extent and effectiveness of to be applied to the discharge of secured loans. Some of participation by the judicial system and other government the more common reasons for this are mandatory legal actors in seizure, disposition and distribution of the procedures that involve delays (and attendant depreciation proceeds of disposition. The legal limitations on the in the value of the collateral), lack of demand for specific methods of disposition of collateral, e.g., sale at auction or types of assets in the market, cultural reluctance to buy private sale, and the rules for distribution of the proceeds repossessed assets, lack of infrastructure for selling the of disposition must be identified and analyzed. 26. See the latest version of the Doing Business Report for information on Credit Bureaus and coverage. 18 chapter 2: Diagnostic in Preparation for Project assets in auctions and lack of knowledge within the FI successfully modeled their laws on laws of states with a about how to sell the assets. All of these aspects should be different legal tradition. For example, Albania and Bosnia considered and addressed in the diagnostic. and Herzegovina (civil code states) modeled their laws on the law of Canada (a common law state). The conceptual basis of modern secured transactions systems is such that B. Legal System, Legislative it can accommodate any legal system. Moreover, some Practice and Customs states have signed or ratified relevant conventions, such as the United Nations Convention on the Assignment of The legal system of a country (common law, civil law Receivables in International Trade and the Cape Town or other) provides the structure within which secured Convention of International Interests in Mobile Equipment transactions occur. However, legal tradition and principles and the associated Aircraft Protocol that are based on need not constitute a barrier to the introduction of modern modern secured transactions concepts and structures. secured transactions systems. Various approaches have The team doing the diagnostic should work with a local been implemented to allow jurisdictions with different legal lawyer who has good knowledge of secured transactions systems to modernize their systems and increase the use of or, at the least, of the local commercial law framework. movable property as collateral. Jurisdictions with civil law, The diagnostic team should compile and analyze all common law, or other legal systems have implemented the laws related to secured transactions and identify the successful modern systems of secured transactions. States shortcomings, the gaps in the legislation and the issues with different legal traditions have successfully implemented that the current legal framework presents. Box 3 provides the recommendations of the UNCITRAL Guide on Secured a very comprehensive list of all the laws that could be Transactions. Further, states with one legal tradition have Box 3: Laws to Collect and Analyze The diagnostic team should collect and analyze, when available, the relevant parts of laws governing the following areas and other laws that may affect creditors’ rights: • Creditors’ rights against movable property • Statutory rights against movable property, such as taxes and claims for wages and social insurance (National Provident Fund) from employers • Leasing of movable property • Factoring law • Bankruptcy or insolvency law • Commercial law • Sales law • Negotiable instruments law (including negotiable bonds) and negotiable documents of title (warehouse receipts and bills of lading) • Code of Civil Procedure, including enforcement of judgments • Fixtures and accessions law • Real and personal or movable property law(s) • Motor vehicle registration law • Banking law • Securitization law (to the extent that secured transactions law applies to the outright transfer of receivables) • Intellectual property law • Assignment of receivables law • Privileges (in civil law jurisdictions) SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 19 examined for the diagnostic.27 As we will see in detail be later compared with data taken after the completion of later on, it is critical to analyze some of these laws, while the project. others are less important and in most cases would not have any conflicting clauses with the secured transactions Important baseline legal and economic data include, but law. are not limited to, data on the following: The following aspects of the existing secured transactions • The credit market system should be evaluated: • The legal framework • The secured transactions registry or other registries • Scope: the types of legal structures that can be used where interests in certain classes of movable property to secure obligations (e.g. pledge, mortgage, etc.); may be registered; e.g. motor vehicle registry, public the types of movable property that may be used as notary, leased asset registry, clerk of court or recorder security; and the types of debtors who may give • Judicial precedent affecting rights in movable security in movable property. property as security • Creation: the legal requirements for giving and • Operation of enforcement institutions taking a right against movable property to secure an Annex 1 provides a description of the data that should obligation to the party who takes the right. be collected through surveys or interviews. The diagnostic • Priority: the rules that determine the relative rights team should discuss with its government counterpart the among conflicting claims against movable property. indicators that should be tracked to analyze the impact • Publicity: the means of making a claim against and the methodologies to be used to collect the data. movable property transparent to third parties, commonly provided by registration in a public With regard to the overall framework for secured registry, by taking possession or control of the transactions and the sophistication of the systems, movable property, by direct notice, or by other the World Bank Group (WBG) has developed useful means. diagnostic tools that are available to collect initial data on • Enforcement: the process for enforcing a claim a specific secured transactions system in a given country. against movable property when the debtor defaults Existing tools include (i) the Indicator on Getting Credit of on the secured obligation. the Doing Business Report, in particular the Legal Rights • The diagnostic team should also look at the Index, and (ii) the “Insolvency and Creditors Rights Report implementation chapter (Chapter 4) of this Toolkit to on Observance of Standards and Codes” (ICR ROSC). IFC, ensure that all of the necessary information for the through its advisory services projects to implement reforms implementation team is gathered. on secured transactions systems, carefully coordinates the diagnostic work with these existing tools. C. Baseline Legal and Economic The WBG Doing Business Report’s Legal Rights Index (part Data of the “getting credit indicator) measures the degree to which collateral and bankruptcy laws facilitate lending.28 Documentation of the success of a secured transactions The Doing Business Report benchmarks 18329 countries project will depend on the quality of data collected at the on the strength of the specific features of their collateral outset of the project, throughout the duration of it and over laws. To measure the strength of collateral laws, the Doing the years following completio. During the diagnostic stage, Business Report uses a specific methodology (see Annex the team will need to gather “Baseline Economic Data”. 3 for detailed methodology). Box 4 provides a description These data relate to structural and economic indicators, of the criteria used to create the index. and are collected before the reform. Baseline data will 27. See “Reforming Collateral Laws to Expand Access to Finance”, Fleisig, Safavian and de la Peña, The World Bank 2006. 28. http://www.doingbusiness.org 29. As of September 2009. 20 chapter 2: Diagnostic in Preparation for Project It is important to understand the use of this Doing Business legislative change and, within the parameters of the Indicator and that the mere inclusion of language in the methodology, helps in measuring the impact of these legislation to garner Doing Business points does not by changes on lending by financial institutions to the private itself constitute a comprehensive and meaningful secured sector. As with any indicator, it is an important and useful transactions reform. The Legal Rights Index’s objective tool for diagnostics, but not a replacement of a broader is to analyze the correlation between lending flexibility analysis of aspects to be considered when reforming and specific legal provisions and to benchmark different secured transactions systems. jurisdictions. The Indicator is useful to inform and track Box 4: Features of Collateral and Bankruptcy Laws Analyzed in the Doing Business Legal Rights Index The index ranges from 0 to 10, with higher scores indicating collateral and bankruptcy laws that are better designed to expand access to credit. The strength of legal rights index includes eight aspects related to legal rights in collateral law and 2 aspects in bankruptcy law. A score of 1 is assigned for each of the following features of the laws: 1. Any business may use movable assets as collateral while keeping possession of the assets, and any financial institution may accept such assets as collateral. 2. The law allows a business to grant a nonpossessory security right in a single category of revolving movable assets (such as accounts receivable or inventory) without requiring a specific description of the secured assets. 3. The law allows a business to grant a nonpossessory security right in substantially all of its assets, without requiring a specific description of the secured assets. 4. A security right may extend to future30 or after-acquired assets and may extend automatically to the products, proceeds, or replacements of the original assets. 5. General description of debts and obligations is permitted in collateral agreements and in registration documents, so that all types of obligations and debts can be secured by stating a maximum rather than a specific amount between the parties. 6. A collateral registry is in operation that is unified geographically and by asset type and that is indexed by the name of the grantor of a security right. 7. Secured creditors are paid first (for example, before general tax claims and employee claims) when a debtor defaults outside an insolvency procedure. 8. Secured creditors are paid first (for example, before general tax claims and employee claims) when a business is liquidated.31 9. Secured creditors are not subject to an automatic stay or moratorium on enforcement procedures when a debtor enters a court-supervised reorganization procedure.32 10. The law allows parties to agree in a collateral agreement that the lender may enforce its security right out of court. 30. Future in this context can also be understood as a broader category which includes assets that do not yet exist or that may be produced from existing assets. 31. The issue of absolute priority for creditors is a contested one, and there is not enough consensus among practitioners to consider this point a best practice. The legal section of the toolkit provides different alternatives to approach this issue. The UNCITRAL Legislative Guide recommends that states limit privileged claims, but that where the state maintains such claims, they should be specified in the secured transactions law if they arise outside insolvency, or in the insolvency law if they arise in insolvency. 32. The issue of stay of secured creditors when insolvency proceedings have started is viewed differently by a number of institutions. UNCITRAL in its Secured Transactions and Insolvency Guides states that secured creditors are subject to stays (with different requirements and results depending on whether there is liquidation or reorganization), but the value of the security right is protected and secured creditors can seek relief (e.g. the lifting of the stay). SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 21 D. Level of Support for and lending practices will not be experienced for a long period of time. However, where bankers are aware of banking Understanding of Proposed practices in other jurisdictions that have modern secured Reform transactions systems, it is likely that new practices will be more easily and favorably adopted.33 It is important to provide in the diagnostic report an assessment of the political environment, as it is likely to affect support for reform of secured transactions. E. Capacities of Executive This information should be gathered primarily through Agencies of Government, End interviews of (1) officials from institutions such as the central bank, the ministries of the government and the Users and Courts legislative branch, and (2) representatives of the private In most cases, the analysis of institutional capacity will sector and professional organizations (such as law involve four questions: societies, bar associations or business organizations or associations). Even when the reform process is driven by 1. Are there competent institutions to host and run a the government counterpart (which should always be the modern registry? case), it is of particular importance that the counterpart and 2. Are the end users sophisticated enough to effectively all stakeholders clearly understand what the reform entails use a secured transactions system? and the benefits that the reform might have in the financial 3. Is the judiciary equipped to deal with priority sector. It is recommended that the diagnostic team conduct and enforcement issues under a modern secured a workshop for stakeholders to acquaint them with the transactions law? experiences of other countries that have undertaken reform 4. Is there an authority or body of government officials in this area, showing the systems that were implemented capable of enforcing rights against movable property, and the impact of reform. This may be more effective in such as execution officers or bailiffs? making the counterpart and stakeholders aware of the importance and benefits of the reform than just discussing Existing registry systems: The diagnostic should include it in a meeting. It would also be important to point out that an assessment of the extent to which the existing other policy measures may be necessary to reap all the institutional infrastructure can be used in the design of benefits of a secured transactions reform. For example, a modern registry. The team should examine existing inventory and receivables finance will be stimulated registration procedures and facilities. This includes the if the central bank provides a discounting window for use of information technology and human resources, refinancing of short-term secured loans or (either in tandem administration, methodology of storing and retrieving or in the alternative) reduces reserve requirements and data and security measures. In case there are no existing capital limitations on secured loans that are packaged registry institutions suitable to undertake the running of the and sold. Such measures stimulate not only direct loans registry, the consultant should determine whether there is but also bank-to-bank exchanges with regional banks that a government institution capable of operating a modern have relationships with SMEs throughout the country. secured transactions registry. It would be very important when analyzing the current registry and technology The diagnostic phase must include an assessment of the infrastructure to look also at existing e-government likely success of reforming secured transactions. While initiatives or reforms of other registries (i.e. the company this is necessarily speculative, interviews with members registry). That could determine the need to coordinate and of the financial and business communities can provide perhaps benefit from those other initiatives. If there are no information on which this assessment can be based. viable government institutions, the team may check into the For example, in jurisdictions where the banking sector existence of appropriate private sector institutions that may is conservative and regards movable property as poor be viable as an outsourced operator of the registry. Such security, it is likely that any impact of reform on bank institutions may include, for example, an experienced 33.“A Manual for Creating & Implementing Secured Financing Systems”, Yair Baranes and Ronald C.C. Cuming, 2006. 22 chapter 2: Diagnostic in Preparation for Project private sector credit bureau if it is adequately organized and has a reputation as a trusted third party. F. Unique Limitations or Level of sophistication of the users: The end users of the Capabilities of Client Country system will be FIs that accept movables, manufacturers Apart from the aforementioned gaps or needs, the team and wholesalers that finance the inventories of their should also be able to identify other potential limitations customers, and retailers of durable goods that finance that might affect the successful implementation of secured their customers. The diagnostic should identify the degree transactions reform. By identifying these deficiencies, the to which existing FIs accept movable collateral or would team will be able to propose solutions that mitigate or be willing to accept it in their future lending if the reform cope with these problems. The following constitute just a is implemented. It should further examine the extent to sample of issues that need to be taken into account: which manufacturers, wholesalers and retailers finance their customers and secure the purchase price with the • Very poor telecommunications and IT infrastructure in goods sold. the country resulting in high costs of access, limited access and unreliable service The judiciary: While reform of secured transactions • High degree of political decentralization, which systems does not change the judicial system, aspects of makes it difficult for a single government institution to the design of a secured transactions system are influenced manage a secured transactions reform and a unified by the efficiency of the court system and the quality of centralized registry judges’ decisions. The diagnostic should address the • Limited financial resources of the government speed at which applications to the courts are handled and counterpart to sustain the reform after the completion enforcement orders are executed. Significant uncertainty of the project or delay in court rulings and in enforcement of orders • Limited skills of the government counterpart to increases the level of risk in granting credit and reduces the implement the reform and manage the secured willingness of creditors to rely on security in movables. transactions registry • Lack of awareness by the project’s stakeholders Execution office: If the jurisdiction is one in which self- about benefits of an effective secured transactions help enforcement is not permitted under the existing law, system it is important for the analysis to focus on the enforcement • Cultural norms with regard to lending, such as cultural administration (execution office) to determine whether it is reticence to repossess property if a secured obligation efficient and cost-effective. Identification of the limitations is breached, or reluctance to buy repossessed assets of the existing system can provide information that will be from defaulted loans used in the design of a system that does not have these • Inability to definitively identify a borrower due to limitations. such shortcomings as nonexistent or inadequately functioning national identification system or a poorly functioning or decentralized business registry SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 23 Chapter 3: Project Design and transactions law is unpredictable because it depends on the discretion of the parliament and often on the cabinet Management and individual executive agencies as well. The duration of other tasks (like the diagnostic or awareness campaign) that are under the direct control of the team implementing A. Objectives the reforms are easier to determine. Some tasks, such as awareness building, will last for almost the whole duration The first necessary step in a successful project is to state of the project. Monitoring and evaluation will extend even its objectives clearly. Project objectives are “concise beyond the end of the project. statements that reflect the results expected from the projects, and constraints within which the project will be managed. In addition, objectives should include statements that C. Risk Management document the value and the short-term and long-term benefits of the project to the client.”34 Every project is likely to encounter obstacles or face risks that could determine the success or failure of the project. Therefore, the objectives of a project will depend on Therefore, the team should devise a plan that provides for the type of secured-transactions reform that we want (i) identification of risks early in the process, (ii) mitigation to introduce. Generally, when implementing secured- of those risks, (iii) taking contingent action to minimize transactions reform, the objectives should be to improve the seriousness of the risk once it has occurred, and (iv) and expand asset-based lending in the country by adjusting the strategy if necessary.35 facilitating access to finance to private sector firms using movable assets as collateral. Clearly, the team will need When implementing secured transactions projects, it is to determine the type of indicators that will be used to possible to encounter general risks that are common to achieve this objective, as noted in the previous section many projects of this nature, like political risks or financial about baseline indicators. risks, but there are also risks that are more specific to secured transactions, which could be considered as technical risks. Table 4 provides an overview of some of B. Timeline, Actions and most common risks in secured transactions projects and Deliverables how to mitigate those risks partially or completely. As part of the project management effort, the team leader of the project will need to plan from the beginning what D. Budget and Resource the major actions and deliverables will be, as well as the Allocation timing for the project. Box 5 lists some of the deliverables that a fully fledged secured transactions reform project It is difficult to determine how much the implementation should include. Specific projects might have just a few of a secured transactions project will cost. Factors that of these deliverables, so the planning will need to be are unique to the country where the project is being adjusted accordingly. implemented can cause considerable differences in the costs of project components. Such factors might include: With regard to the timeline, it is difficult to foresee the (i) the costs of registry software and hardware; (ii) the duration of a project that involves implementing all of existence of technology capacity within the counterpart or the activities of a fully fledged reform. However, Table 3 a central government facility; (iii) the cost of local consulting presents an example of a reasonable timeline. or legal services; (iv) the need for a strong awareness campaign; (v) the cost of office space if the counterpart is It is difficult to determine how long a task will take. For not providing it; (vi) the cost of Internet and communications; example, the time required for enactment of the secured 34. Kepner-Tregoe, IFC Project Management. 35. See “KT Project Management”, International Finance Corporation, 2007. 24 chapter 3: Project Design and Management Box 5: Major Actions and Deliverables in Implementing a Secured Transactions Reform 1. Identification Phase • Official request from client to provide support in secured transactions reform. 2. Project Preparation or Initial Scoping • Analysis of the request and decision whether to intervene or not • Secure funding for diagnostic • Organization of a team and plans for the diagnostic field visit 3. Diagnostic Phase • Field visit and interviews • Survey, collection of baseline data • Preparation of a report with recommendations for reform 4. Implementation Phase • Secure funding for implementation of reforms • Identify government counterpart to sponsor law reform and registry development • Sign cooperation agreement or memorandum of understanding (MOU) with counterpart or client • Put together implementation team • Create a working group composed of representatives of different stakeholders to work on the implementation of the project • Conduct as many field visits as needed • Prepare draft legislation (including appropriate implementing decree and/or regulations), vet it with a working group and deliver to government counterpart for introduction to adoption processes • Provide ongoing technical support at the law adoption stage and until the law is enacted • Determine organizational and physical placement and configuration of registry • Determine number and types of procurements to be done, such as application software, hardware, office equipment, Internet service provider (ISP), data center services, IT maintenance, and office space • Design and develop specifications for procurement of software for the registry • Conduct awareness-raising events • Develop job descriptions and selection standards for registry staff • Conduct training for registry staff and other stakeholders such as creditors or users, judges, execution officers, government officials and private sector • Design or procure the software for the registry • Produce a manual of procedures for the operation of the registry and a user guide for end users • Test and deploy registry technology system 5. Official Start of the Registry and IFC’s Exit • Registry officially inaugurated • IFC closes the project 6. Monitoring and Evaluation and Follow-up • Impact assessment reports at least every six months after the completion of the project, done by registry staff with guidance from the donor institution • Periodic follow-up from IFC officers with client or counterpart SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 25 Table 3: Project Timeline TASKS YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5   1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12     1. Project Identification                                                                             2. Project Preparation/ Initial Scoping                                                                             3. Full-Fledged Diagnostic with Recommendations                                                                             4. Implementation                                                                             4.1. Consensus Building                                                                             4.2. Development/drafting of the Law and Enactment                                                                             4.3. Development of the Regulations, By-laws                                                                             4.4. Design, Placement and Implementation of Registry                                                                             4.5. Public Awareness Building                                                                             4.6. Training of Registry staff                                                                             4.7. Training of Users 5. Testing Period of Newly Implemented Systems                                                                             6. Monitoring and Evaluation                                                                             7. Project Completion and Exit                                                                             Table 4: Common Risks in the Implementation of Secured Transactions Projects and Mitigation Factors Risk Mitigating factors • Get involved and work with senior technical officials and not just the high-level 1. Change in government political appointees. counterpart • Build consensus among other ministries or government institutions (central bank) that could continue supporting the project. • Gain access to decision makers to present case if possible. Often, access to a 2. Final decisions on law reform are made at a higher level than trusted lawyer to whom the government will turn for advice will help to move things the government participants in forward. reform discussions, resulting in • If direct access cannot be obtained, make case in detailed written report to decision uninformed rejection of key best makers. practice concepts. • If decisions are critical to success, use threat of loss of financial support for project. • Develop electronic registry function for those parts of country that have infrastructure, 3. Country’s technology infrastructure is weaker than which will likely include most FIs. initially assessed in the diagnostic • Identify and utilize alternative means of access in regions that do not have sufficient phase and can affect the proper infrastructure. Means may include fax by user, use of government field offices that functioning of a modern electronic have technology capacity (Web, e-mail, fax, etc.), paper shipped by air or surface registry. to registry, and other means suited to situation. 4. Reform conflicts with project of other donor, e.g. development • Negotiate with other donor to resolve conflict. of new civil code. Other donor • If negotiation fails, identify and use political power to force reforms through over other attempts to scuttle secured donor’s objections. transaction reforms 26 chapter 3: Project Design and Management Table 4: Common Risks in the Implementation of Secured Transactions Projects and Mitigation Factors (continued) Risk Mitigating factors 5. Government officials oppose • If possible, find a reform-driven government champion to support reforms. electronic registry because there • If no reform-driven champion is available, condition funding on acceptance is an interest to maintain the status quo and non-transparent practices. of registry reforms. 6. Key stakeholders resist reform Identify all stakeholder groups and their positions during the diagnostic. after it has begun, risking political Use public awareness activities to shape stakeholder opinions. defeat of the reform or non-use of Engage all stakeholder in reform process as participants in working group. the system if adopted. (vii) accessibility and availability of a mission office and costs of the components. This approach permits a budget staff to support operational staff and consultants; and (viii) to adjust to the particular context of the jurisdiction. For the need to hire international consultants due to the lack example, if reform of the legal framework is not needed of local secured transactions knowledge or the need for for a specific project, cost of legal reform can be left out reforming the legal framework. of the budgeting process. An estimated budget for implementing secured transactions Table 5 is an example of a project budget based on IFC’s can be developed by breaking the total project into its experiences with secured transactions projects. It illustrates different components and determining the cost of each. The budgeting by phases of the project cycle. It is important overall budget can then be developed by aggregating the to secure, if possible, all of the funding at the beginning Table 5: Illustrative Budget for Implementing Secured Transactions Projects in Emerging Markets Estimate Cost Sequencing Project Component Activities Cost Elements in US$ 1st Phase: 1. Initial - Detailed analysis of secured - Local and/or international $80,000 Diagnostic diagnostic / transactions in the country consultants and their travel and Design scoping - Surveys expenses and fees - Focus groups - Survey experts (fees) - Meetings with stakeholders - Expenses for meetings and - Diagnostic report with focus groups recommendations 2. Secured - Analysis of existing legal - Local legal experts (fees) $40,000 transactions legal framework - International legal experts and framework - Meetings with legislators, their travel expenses and fees members of parliament 2nd Phase: 3. Consensus - Workshop for stakeholders - Workshops and events Implementa- building and - Creation of working group - Conferences and seminars tion and awareness raising36 - Organization of events - Press conferences and press releases 36. The cost of many of these Public Relations (PR) tools will be cover by PR agencies or newspapers. Once the project has produced results, there will be articles in the local press, and perhaps in radio or TV. Most of the expenses are related to the organization of workshops, conferences, production of brochures, in the initial phases of the project. SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 27 Table 5: Illustrative Budget for Implementing Secured Transactions Projects in Emerging Markets (continued) Sequencing Project Component Activities Cost Elements Estimate Cost in US$ Monitoring - Public relations campaign, - TV & radio broadcasts $50,000 and advertising - Articles in newspapers Evaluation - Posters and brochures - Publications - Etc. 4. Drafting or - Develop drafts $60,000 amending law - Vet drafts with working group and decree or of stakeholders regulations 5. Creation Develop registry design International consultants and $50,000 of Secured concept and performance their travel expenses and fees transactions registry specifications Development or acquisition Software acquisition or $100,000 and modification of registry development costs application software Equipment for the operation - Hardware (servers, system $90,00039 of the registry (software and software, PCs, printer, phone, hardware)37 etc) - Internet connection38 - Other office material, furniture 6. Training of - Training of end users (FIs) - International trainers and their $80,000 registry staff and - Training of registry staff travel expenses and fees other stakeholders - Local/international trainers - Logistics and costs for training facilities - Study tour for registry staff 7. Monitoring and - Initial baseline surveys (at the - Databases for tracking $50,000 evaluation beginning of the project) indicators - Monitoring through program - Data and M&E experts fees records, surveys and travel expenses - TA/ training to counterpart and registry staff on how to track indicators TOTAL ESTIMATED PROJECT COST $600,000 37. Ideally, the equipment for the registry should be paid by the counterpart if possible. Experience shows that a counterpart that provides for these with its own funds will be: (i) more committed to the reforms, as they are putting their own resources into the project; (ii) much more capable of maintaining the system in the future once the technical and financial assistance is completed. 38. As with the previous item, ideally, the counterpart should bear the costs for this. However, if this is not possible, the project could finance the Internet connection for at least the first 6 months or first year of the project. 39. This should normally be borne by the counterpart, but in some cases IBRD or other donors may be able to assume it. Care should be taken to ensure that commitment is made from a source that is capable of such funding before committing to proceed. In some circumstances, it may be feasible to use a software-as-a-service provider to run the application software on shared servers. If that option were used, the annual cost would be on the order of US$15,000 and may require a subsidy for the first one or two years until revenues reach a self-sustaining level. 28 chapter 3: Project Design and Management of the project to avoid the risk of not having funding to should be based in the country where the project is implement all the phases. Most budgets are funded by being implemented a single allocation for the duration of the project. It is • An international secured transactions legal expert important to note that the budget presented here does • A local lawyer with good knowledge of the existing not include overhead and the salaries and benefits of the commercial law framework implementing team, though it includes the cost of external • An international registry expert (who may be the consultants. It is also recommended that some of the costs international secured transactions legal expert) of the project be borne by the client/counterpart, in • A local IT expert particular those related to the registry equipment (hardware • An international financial sector or banking expert and software). with specialized secured transactions knowledge • A communications expert, usually local • Monitoring and Evaluation (M&E) expert E.Staffing Plan and Task • A local administrative support staff Allocation Not all of the team members should be working full time on the project. Normally, there will be a core team composed The staffing of a secured transactions reform project will of the task manager and legal and registry experts, while be a mixture of local and international staff. A reasonable other members (M&E expert, banking expert, etc.) of the team might include all or some of the following: team will be consulted for specific periods of time, or • A task manager (can either be a local expert or assigned specific tasks at different stages of the project. an international expert). Ideally, the task manager Table 6 provides a picture of what the staffing needs would be like at each stage of the project. Table 6: Team Members’ Responsibilities TASK TEAM MEMBER 1. Project Identification Task manager, local on-the-ground team 2. Project Preparation/Initial Scoping Task manager, international secured transactions legal expert, local lawyer, international registry expert, local IT expert, financial sector expert, M&E expert, local administrative 3. Full-Fledged Diagnostic with Recommendations support person 4. Implementation 4.1. Consensus building Task manager with ad hoc support from specialists Task manager, international secured transactions legal expert, 4.2. Development/drafting of the law and enactment local lawyer Task manager , international secured transactions legal expert, 4.3. Development of decree and/or regulations international registry expert, local lawyer 4.4. Design, placement and implementation of registry Task manager, international registry expert, local IT expert 4.5. Public awareness building Task manager, communications expert Task manager, international secured transactions legal expert, 4.6. Training international registry expert, international financial sector (banking) expert, local IT expert 5. Testing Period of Newly Implemented Systems Task manager, international registry expert, local IT expert 6. Monitoring and Evaluation Task manager, M&E expert 7. Project Completion and Exit Task manager SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 29 Chapter 4: Implementation and private sectors who invest in the process and drive it forward.41 Typical candidates for the role of champion for a secured A. Consensus Building and transactions project commonly include the Ministry of Client Input to Reform Process Justice, Ministry of Commerce, Ministry of Economic Development, Ministry of Finance and the Central Bank. 1. Identify and Develop at Least In some cases, the choice of the counterpart might not be entirely up to the team, but might be determined by One Strong Champion for Reform demand from the counterpart, existing legislation or the mandate of any of these institutions. The local champion will be the key driver of the project. The local champion must be the one who pushes the reform The team’s government counterpart is most commonly the forward and not the task manager or the project team. If the driver of the reform and therefore the natural champion. local champion is not convinced of the reform’s value and However, in some cases a private or public institution (e.g. does not support it 100 percent, the implementation and the Bankers Association or the Central Bank) that is truly the overall success of the project will be at risk. Therefore, interested in introducing secured transactions reform as it is critical for the success of the project to secure the part of its own strategy could also be a key driver of the support of a strong local champion in the design phase. reform, although these institutions would not replace the If there is no support from the champion, it would be role of the champion but rather support the reform process better to drop the project than to proceed without support. and strengthen the overall reform process. There is no ideal local champion when implementing a secured transactions reform, but there are some basic Before implementation commences, the team and the characteristics to look for in the local champion: government counterpart should sign a cooperation agreement or an MOU to ensure commitment. The • Strong political clout better of these alternatives is the cooperation agreement, • The ability to make decisions and implement them because it binds the two parties with respect to the • Good understanding of the credit market obligations stipulated in it, thereby assuring certainty of • Conceptual understanding of secured transactions the government’s commitment. This is even more critical and its potential benefits when there is a co-financing arrangement in which the • Financial resources that could be devoted to the counterpart, for example, is financing part of the reform project if needed project (usually the IT component related to the secured • Support of other stakeholders transactions registry). Where a binding cooperation agreement is not feasible, the MOU alternative may be As stated in the Public-Private Dialogue Handbook,40 there used. The MOU is a non-binding agreement between are certain principles that need to be considered with two or more parties to execute a joint project. It sets out regard to champions, i.e. backing the right champions the responsibilities that each party must fulfill in order to and not depending on a single strong champion after the achieve the desired results. See Annex 4 for an example initial design phase. What is clear is that it is difficult to of an MOU. sustain dialogue without champions from both the public 40. See “Public-Private Dialogue Handbook: A Toolkit for Business Environment Reformers,” DFID, WB, IFC, OECD, 2006. 41. See “Charter of Good Practice in Using Public Private Dialogue for Private Sector Development”, DFID, WB, IFC, OECD, 2006. 30 chapter 4: Implementation Table 7: Examples of Counterparts and Champions in Secured Transactions Reform Projects Country Champion Counterpart Nepal Credit Bureau Ministry of Finance/Registrar Cambodia Ministry of Commerce Ministry of Commerce Vietnam Ministry of Justice and National NRAST Registration Agency for Secured Transactions (NRAST) Bosnia Herzegovina Ministry of Justice Deputy Minister of Justice Albania Ministry of Finance Minister of Finance Georgia National Agency for Property Registry NAPR (NAPR) China Peoples’ Bank of China Peoples’ Bank of China Table 7 contains brief references for the various choices fundamental to shaping and implementing reform. of local champions that were pursued in different countries for the implementation of secured transactions reforms. In a secured transactions project42, the stakeholders may include, among others: 2. Identify Stakeholder Groups and • The Ministry of Justice Leaders • The Ministry of Finance/Economy • The Ministry of Commerce Creating a strong stakeholder or leader group is a critical • Ministry of Industry and Trade step towards introducing a sustainable and long term • Social insurance agency or National Provident support for the reform. Therefore, the team should identify Fund the key stakeholders in the early stages of the project, • The Ministry of Labor make sure that all stakeholders understand the benefits of • The tax or revenue authority a secured transactions system, and secure their support for • The Central Bank or superintendency of banks introducing the reform. • The Judiciary, and particularly commercial court judges According to IFC’s “Guide to Stakeholder Engagement • Banks and Reform Promotion,” a stakeholder is an individual, • Non-bank financial institutions community, or group that has something to gain or lose from • Bankers Association/Leasing Association the outcomes of a reform program or activity. Stakeholders • Private sector firms may impede reform or actively promote it—they influence • Notaries change or fight for the status quo. The term “stakeholder” • Public registries also includes audiences who are indirectly affected by the • The Chamber of Commerce and other business reform. In any reform project, identifying and analyzing organizations the needs and concerns of different stakeholders is • Law firms and/or Bar Association 42. There might be other stakeholders. This is not a comprehensive list of all possible stakeholders. For more detailed information about how to conduct a stakeholders analysis please see “Strategic Communications for Business Environment Reforms: A Guide to Stakeholder Engagement and Reform Promotion”, IFC 2007. SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 31 • NGOs and international organizations, including agreement, the registration process, determination of the other donors relative priorities among conflicting claims to collateral • Representatives of academia (local university or and the enforcement of such claims. country expert) The risk of non-repayment is one of the key factors in 3. Form Advisory Committee or a creditors’ determination whether to advance credit or not. A well-designed legal system based on sound Working Group public policies can reduce that risk, thereby encouraging creditors to provide credit under reasonable credit costs to Once the main stakeholders have been identified, the the borrowers. However, there are examples of initiatives team may form an advisory committee or working group taken by a number of countries where a reform to secured to monitor the project. This committee or group should be transactions law resulted in additional barriers to access organized during the design phase and should include credit. Some of these resulted from inadequate legal reform the main stakeholders and champions. It can serve as a in terms of secured transactions law or related legislation. management and monitoring tool, support adoption of the (Examples include Poland, where the law required filing law and the regulations, and help to resolve issues that of hard-copy security agreements, and Madagascar, require high-level decisions. Although it is not a requirement where the leasing law required filing of four copies of the to create this group, it can be very useful in jurisdictions registration documents.) with turf battles between ministries, a complex political situation or a broad spectrum of stakeholders. Members of Section B of this chapter discusses the various components the working group or advisory committee should include of modern legal systems that are designed to facilitate the technical counterpart staff, the project team, and other access to credit secured with movable property. technical experts such as local lawyers, banking experts, IT experts, etc. Modern and traditional systems: Modern secured transactions law was born in the United States and the The working group or advisory committee should adopt introduction of article 9 in the Uniform Commercial Code an action plan with clearly defined activities and resultant was a departure from traditional common law. However, outputs and outcomes. It should include the timeframe for modern secured transactions laws are adaptable to the completion of each activity. The example provided in any system whether based on the common law, the a previous section (Box 5) could serve as a model for the civil law or any other law system. Some states with milestones required in a detailed action plan. The working undeveloped commercial law systems regard this area of group or advisory committee should meet periodically reform as a product of developed nations and therefore either in person (which might not always be possible for too advanced or complicated. However, these systems all members) or by conference call to report progress and have been implemented successfully in both developed discuss issues. and developing jurisdictions (e.g. USA, Canada, New Zealand, Albania, Romania, Bosnia and Herzegovina, Slovakia, Vietnam, China, Bulgaria and Cambodia). B. Development of the Law While a modern secured transactions system is important 1. Analysis and Mapping of the to any legal system regardless of its legal tradition, the Existing Legal Environment approach to this reform must take into account the existing local conditions and customary practice. In addition to the main differences included in Box 6, challenges arising 1.1. The Existing Legal Tradition from different practices may include the following: General considerations: The foundation of any modern Legal environment—form over substance: Modern secured transactions system is the legal basis upon secured financing legislation typically determines its which it is designed, constructed and operated. The application based on the substance or economic rationale legal framework determines all elements of the secured underlying of the transaction (USA, Albania), as opposed transactions regime, including execution of the security to legislation where the name or form of the transaction determines whether it is a secured financing transaction or 32 chapter 4: Implementation not (OHADA Uniform Act on Secured Transactions).43 approach has proven very effective (e.g. The International Registry of Security Interests on Mobile Equipment, Use of notaries: The mandatory use of notaries is more Romania, Cambodia and Bosnia and Herzegovina). pervasive in civil law jurisdictions with undeveloped secured financing systems, where they play a central Debtor classification—juridical persons versus individuals: role in the execution of security agreements and In some jurisdictions there are separate registries for registration procedures (e.g. Tajikistan and Indonesia). security in property of juridical persons (companies) Other jurisdictions have abolished the mandatory role of and security in property of individuals. For example, in notaries to reduce the cost and time for the creation of the Peoples Republic of China, security in the movable security interests without compromising the legal validity property of individuals is registered with the public notary, of the transactions (e.g. Romania and Bosnia and whereas security in the movable property of juridical Herzegovina). persons is in registries wof the Administration of Industry and Commerce. In some jurisdictions, natural persons Fragmentation: One of the deficiencies that can render (including sole proprietorships) may not use their movable secured financing systems unsustainable is multiple sources assets as collateral. These are jurisdictions in which security of information regarding claims against the same movable interests are registered in the Company Registry (i.e, UK’s property. This can happen when the information on claims Company Register and “Registres de Commerce et du against movables is not centralized, i.e. registration is Credit Mobilier” in Morocco, Mali, Madagascar, Burkina fragmented among different registries for sub-national Faso, Togo, Chad, etc.). The recommended practice is to jurisdictions or among registries at different levels of create a single depository of security interests for all types government. The better practice is to centralize all secured of legal and natural persons. transactions information in one place (with respect to movable property). With modern computerization, this Box 6: Main Differences between Jurisdictions with Undeveloped Commercial Law and those with Developed Commercial Law with Respect to Secured Financing Jurisdictions with undeveloped commercial law generally: 1. Adhere to strict legal forms such as the pledge or mortgage and their related formalities; 2. Require possession of collateral by the creditor (if possessory pledge is the only form of security); 3. Require traditional document registration (for example, the notarized credit agreement); 4. Require specific description of property subject to an interest and preclude use of future property and changeable property as security; and 5. Protect debtors in enforcement to the point that enforcement becomes excessively costly and unlikely to succeed in timely manner. 43. The OHADA Uniform Act on Secured Transactions is currently being revised so this example might not be valid in a near future if the reform is successful. SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 33 1.2. Recognized International recommending adoption. Though it is not a model law per se, the Annex to UNCITRAL Legislative Guide, mentioned Standards in Secured Transactions earlier, provides detailed guidance on each type of Legal Frameworks provision that should be included in a law, as well as commentary on the advantages and disadvantages of The central concepts of modern secured transactions alternative approaches. have been incorporated into a number of international principles and guidelines. Two of these guidelines have been endorsed by a number of countries and multilateral 1.3. Existing Pertinent Legislation organizations and are valuable guidelines for secured financing reform: General considerations: Modern secured transactions law does not exist in a vacuum. Nor does it redefine all • The World Bank Principles for Effective Insolvency aspects of law relating to the relationships it encompasses. and Creditor Rights Systems, revised 2005 (see It functions in the context of, for example, basic property Annex 5)44 law, obligations law, bankruptcy law, negotiable • The United Nations Commission on International instrument law and other areas of the law related to Trade Law (UNCITRAL) Legislative Guide on Secured commercial relationships. Therefore, the existing laws must Transactions, 2007,45 and the annex thereto be examined in order to ensure a functional relationship with the reformed secured transactions law. Any conflict The principles and recommendations contained in these between the existing law and the new regime will have documents should be used when advising governments to be addressed either by amendment to the former or on secured transactions reforms. UNCITRAL’s Legislative by other means. When it is determined that amendments Guide is a comprehensive resource that can be used by to the existing law are impossible or impracticable, the practitioners and government officials in the reform of the international and local legal experts should assess other legal framework for secured transactions. Annex I of the options. For example, decrees or regulations may be UNCITRAL Guide, which includes the terminology and the used to provide interpretation to provisions in the main recommendations of the Guide, is a useful framework for legislation. It will be necessary before making such a secured transactions law that can be adjusted to the decisions to determine what the relevant rules of statutory needs and circumstances of each jurisdiction. construction are in the jurisdiction and what the relative In addition to the internationally recognized principles levels of authority are between different types of legislation; and guidelines, a number of multilateral donors and i.e. whether a special law may pre-empt conflicting organizations have drafted model laws and guides on provisions of the Civil Code or other special laws. secured transactions that have served as a base for some Legislation and area of impact: The following examples of the principles recognized as international standards by include legislation that typically exists in a jurisdiction UNCITRAL and the World Bank Group. Such model laws before a reform to its secured transactions law takes place. and guides include the European Bank for Reconstruction There may be other laws that bear on secured transactions and Development Model Law on Secured Transactions reform, so it is necessary to identify all relevant laws (2004) and the Organization of American States Model before beginning the reform. The examples illustrate the Inter-American Law on Secured Transactions (2002). interactions and potential issues that may arise between a Some of these were created to serve as a guide rather reformed law and existing legislation: than a final form of legislation to be adopted, so it is necessary to evaluate the suitability of each provision 1. Sales law: Under the law of some jurisdictions, when in light of the local needs and legal environment before a seller repossesses movable property sold under a title- 44. See http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/LAWANDJUSTICE/GILD/0,,contentMDK:20196839~menuPK:146205~pag ePK:64065425~piPK:162156~theSitePK:215006,00.html 45. See http://www.uncitral.org/uncitral/en/uncitral_texts/security.html 34 chapter 4: Implementation retention sales agreement, the contract is deemed to have applied to financial and long-term operating leases been terminated and the seller is required to return to the (see Box 7).This has been accomplished in some recent buyer any refundable portion of the purchase price paid leasing laws, such as in Yemen and Jordan, by providing up to the time of the repossession. A reformed secured in the leasing law that the lessor’s priority against third transactions regime should include conditional sales parties who may buy or take security in the leased goods contracts in its scope. From a functional standpoint, a is established by registration in the secured transactions conditional sale is a secured transaction, and therefore, (collateral) registry. However, the more efficient approach the seller and the buyer are respectively the secured is to include financial and long-term operating leases creditor and the debtor both with respect to the relationship in its priority and registration provisions of the secured between the parties and with respect to determining transactions law if that is practicable. priority against third-party interests in the property. 3. Codes (e.g. civil or commercial codes): Some 2. Leasing law: In some jurisdictions, financial leasing jurisdictions have codes that contain all commercial legal is treated as a secured transaction and, consequently, provisions. In many of these codes, the means of securing is regulated by secured transactions law. However, obligations with movable property is the pledge, wherein other jurisdictions have special laws governing financial the creditor’s priority depends on possession of the property leasing. Re-characterizing financial leases as secured by the creditor or a third party. Further, codes often transactions may not be necessary or possible in some address the use of obligations, e.g. accounts receivable, jurisdictions. However, it is important to ensure that the as collateral. Therefore, codes must be examined and, rights of financial lessors are subject to the same publicity when necessary, amended or supplemented as part of the and priority rules as other rights arising out of other reform in these jurisdictions. secured transactions. Even though operating leases are not otherwise treated as a secured transaction, property 4. Land law: Examination of existing land law is also held by a lessee under a long-term operating lease is not important, since it may provide that any movable property distinguishable from owned property to an uninformed affixed to immovable property is considered part of the third party. Consequently, the requirements for publicity immovable property. A conflict may exist between the and priority of the secured transactions law should be secured transactions law and land law (see Box 8). Box 7: Example of Leasing Law and Secured Transaction Law Provisions Leasing Law : A lessor has the right to repossess the property from the lessee or anyone to whom possession may have been transferred if the lessee does not perform his obligation. Secured transactions Law: A buyer of property takes free from any pre-existing right against the property if that right is not publicized before the buyer acquires the property. While a secured creditor must publicize its interest in the collateral in order to maintain its priority against a buyer under the secured transactions law, a lessor has no such obligation under the leasing law. With respect to a buyer of the property from the debtor or lessee, there is no possibility to distinguish between property that is owned subject to a security interest and property that is held under a lease. So if the buyer buys leased property, he has no way to know of the lease if it is not publicized, so he will take it subject to the lessor’s interest if the leasing law governs publicity and priority. Therefore, the publicity and priority rules of the secured transactions law should be applied to property held under a financial lease or long-term operating lease. 46. A purchase-money security interest is taken in goods to secure: a) the purchase price of the goods if financed by the seller, or b) the value given by a third party financer to enable the acquisition of the goods. SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 35 Consequently, the provisions of the land law dealing with fixtures that are attached to a property must also be Box 8: Practical Example of conflicting considered as part of the law reform. provisions 5. Laws creating security rights: Security rights created Assume that Alfa Bank holds a registered mortgage by operation of the law (liens or privileges), and not on on Grocer’s store. Grocer then buys a furnace for the basis of an agreement between parties, are designed his store from Acme Heating on credit, and Acme to protect the public interest in specific cases where it is takes and registers a purchase-money security not practical to require agreement as the basis for the interest46 in the furnace, which is at that point a property right. Some jurisdictions provide in their laws simple movable. Grocer then installs (affixes) the for the creation of liens in favor of individuals or public furnace in his store. institutions. Since these specialized types of legislation Land law: A registered mortgage in the Land implement specific public policies, such as protecting tax Registry has priority over any right which is not revenues (as in the case of tax liens) or social justice (as registered in the Land Registry. Items that are in the case of a labor law providing for a lien against affixed to real estate are deemed to be part of property of an employer in default on its wage payment the real estate. obligations), they may contradict other public policies, such as increasing access to finance (see Box 9). This Secured transactions law: A purchase-money may result in such legislation giving unlimited priorities to security interest in movable property registered in liens over a secured creditor’s rights. Legislation creating the secured transactions Registry has priority over liens and priorities to liens must be examined as part of any right in the movable property which is not the law reform. registered in the secured transactions registry. The optimal solution to this situation is to harmonize the Because these two laws are not harmonized, Alfa secured transactions law and the laws under which liens Bank can claim priority based on the Land Law, are created. The laws that provide for liens should, if while Acme Heating can claim priority based possible, be amended to provide that lien holders or on the secured transactions Law. One common the responsible government agency, e.g. the Ministry of solution is to harmonize the laws to permit the Labor in the case of liens for wages, are governed by priority of the purchase-money security interest in the publicity and priority rules of the secured transactions the furnace to continue as against interests in the law. Ideally, all lien holders, including the government land, provided it is recorded in the Land Registry with regard to tax claims and employment wages, should before or within a fixed short period after the follow the registration rule and register security interests in furnace becomes affixed. the secured transactions registry. This solution is often hard to sell to the jurisdiction because tax or labor law enforcers generally deem the existing super-priority of liens to be essential to enforcement of the obligations secured by Box 9: Practical Example of Provisions Creating the liens. However, there are two persuasive arguments Liens with Priorities that can be used to overcome such resistance. First, a Tax law: The state has an automatic lien against World Bank Doing Business study has shown that such a taxpayer when the taxpayer defaults on his super-priority liens cause a significant decrease in access income tax payment. This lien has a priority over to credit because of the increased risk they represent to any other right against the taxpayer’s property lenders, and therefore reduce over-all tax collections and whether or not this lien is registered. employment (see Figure 4 below). In addition, economic empirical evidence validates the assumption that, where Labor law: An employee, whose employer is in there is no absolute priority rule, there is a lower recovery default in payment of wages, has an automatic rate and a higher risk for creditors. According to this lien against the property of the employer that evidence, “7 percent of the estate is lost to the senior has priority over any other right in the employer’s creditor, on average, because of violations of absolute property, without registration. priority. The correlation between priority and recovery 36 CHAPTER 4: IMPLEMENTATION Figure 4: Negative Effect of Super Priorities on Credit Credit to the Private Sector as a share of GDP 60.0% 32.3% 29.9% Two or more claimant groups One claimant groups has Secured creditor has absolute have super priority super-priority priority Country where Source: World Bank Doing Business Project database. Note: the relationship between private credit and priority status of secured creditors is statistically significant when controlling for country size, income level, enforcement, legal origin and regions. is .528.”47 Second, publicity by registration gives lien If the existing law providing for super-priority of liens holders leverage over lien debtors because the debtors cannot be amended, mitigation can include a provision will be unable to secure credit from lenders once the lien in the secured transactions law for permissive registration is published unless it is quantifiable. of liens in the registry, along with incentives for the lien holder or responsible government agency to register, e.g. However, if it proves infeasible to obtain agreement of a provision that a secured creditor who enforces its security the government to forego the absolute super-priority interest must give notice to the lien holder or responsible of liens and to participate in the priority system of the government agency if its lien has been registered when secured transactions law, the risk to financers caused by the secured creditor commences enforcement. The potential super-priority liens should be mitigated to the enforcement provisions of the law could further provide extent possible in the course of law reform. The form of that commencement of enforcement of a security interest mitigation may depend on whether or not the existing law cuts off assertion of unregistered liens, so that a secured that provides for the super-priority can be amended in the lender will not be put at further risk by going through the course of the reform. enforcement process only to be dispossessed of the seized If the political or legal situation permits the existing law collateral or its proceeds just short of distribution of the that provides for the super-priority of liens to be amended, proceeds under the secured transactions law. Finally, the it should be amended to limit the lien’s priority to a risk to secured creditors can be mitigated by a provision specified period of arrears or to a monetary amount, e.g. in the law that a lien holder must proceed against the arrearages for the last three months up to a maximum of unsecured assets of a lien debtor before proceeding $X per person. against assets that are secured by a registered security 47. See “Debt Enforcement around the World”, Djankov, Hart, McLiesh and Shleifer. Journal of Political Economy, 2008. SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 37 interest or that are in the possession of the secured creditor, in jurisdictions that adopted them. One example is the unless the lien was registered before notice of the security Convention on International Interests in Mobile Equipment interest was registered or possession of the assets was (Cape Town, 2001). This convention includes separate taken by the secured creditor. protocols for each of three different types of mobile equipment (rolling stock, aircraft and space objects) In cases where a local government will not agree to either governing security interests and providing for priority to full participation of lien holders in the secured transactions be established by registration in an international public law’s priority scheme or mitigating measures, the reform registry for the type of mobile equipment. A jurisdiction should still go forward. The benefits of the reform may be that is a signatory to a protocol and undertakes to reform less than optimal, but will be greater than having no reform its secured transactions system must consider the relevant at all. The debtor’s tax or social security obligations can provisions of each ratified protocol. The reason is that always be generally assessed by the creditor who then when a protocol is ratified by the jurisdiction, it becomes can insist on additional security to cover these potential part of the law of that jurisdiction. A reformed secured preferential rights as well as the credit advanced.48 transactions law must be consistent with provisions of ratified international conventions, in particular when it 6. Contract law: Contract laws usually include provisions comes to priorities and publicity of rights (see Box 10). dealing with transactions involving movable property. These may include e.g. lending for use or consignment 9. Bankruptcy law: In theory, bankruptcy law deals with agreements. The right to hold, use or sell movable the process of enforcing existing rights of creditors in case property belonging to another person may affect the of liquidation or dealing with all creditors’ claims as part owner’s freedom to exercise his full ownership rights. Since of reorganization of the bankrupt entity. However, in some security interests in property are generally given by owners jurisdictions, bankruptcy legislation is more than procedural of property, creditors need to know about such limitations. and sometimes touches upon existing relative priorities of Contract law should, therefore, be examined as part of the bankrupt’s creditors. In some jurisdictions bankruptcy secured transactions law reform. In many cases, it may be legislation and secured transactions legislation are under possible to bring such agreements into the registration and the jurisdiction of two different levels of government or priority schema of the secured transactions law. they are inconsistent with each other because of a lack of coordination in their reforms. Consequently, there is 7. Property law: The extent to which the laws governing a risk of inconsistent approach in terms of priority rules property generally recognize exceptions to the principle as well as in terms of enforcement of security interests of nemo dat qui non habet (He who hath not cannot (see Box 11). Therefore, bankruptcy legislation must be give) is important to the reform. If a person in possession considered and, if necessary, amended in the course of a of property that is subject to an interest held by another secured transactions reform to ensure it is consistent with person has the power to “pass good title” to a good faith the policies underlying secured transactions law reform. purchaser, the priority regime of a secured transactions This can mean in general, the following: system would be rendered largely ineffective. Such provisions in the property law must be addressed during (a) Priority provisions of secured creditors are generally the secured transactions reform to ensure an integrated consistent between the two laws.49 and comprehensive priority schema results. (b) Protection of the secured creditors’ rights during 8. International Conventions: A few international bankruptcy proceedings,50 including during conventions deal with property rights and their enforcement reorgan-ization or liquidation proceedings, is 48. The US tax service has priority over all security interests registered after the tax lien is registered and over any advances and any security interests that attach under an after-acquired property clause of a security agreement for which notice was registered before the tax lien was registered. The point is that, once the lien is registered, the secured creditor cannot rely on an after-acquired property clause or tack later advances. 49. The formulation of the UNCITRAL Guide on Secured Transactions is more concrete, i.e. “Insolvency law generally respects: (a) the effectiveness of a security interests under secured transactions law, except to the extent the security agreement is subject to avoidance; and (b) the priority of secured creditors under secured transactions law, except to the extent privileged claims are recognized that should be set out clearly in the law.” 38 chapter 4: Implementation maintained to the extent possible, e.g., preservation of the collateral’s value and recourse of the creditor Box 10: Example of a Possible Provision in to relief. Domestic Law This example illustrates potential conflict between priority “This law shall not apply to a transaction governed provisions in each of the legal texts mentioned earlier. It by an international convention or treaty to which is therefore important to ensure that relative priorities are (name of country) is a party that governs the consistent or at least known so that creditors are able to creation, publication, priority, or enforcement of assess the risk of advancing credit. a security interest, except to the extent that the convention or treaty does not address a matter 10. Enforcement Law (Code of Civil Procedure): All that is addressed by this Law.” jurisdictions with legislation dealing with creditor-debtor relationships must address the enforcement of creditors’ rights against defaulting debtors. However, execution laws often include provisions that make them ineffective in enforcing a creditor’s rights against movable property (see Box 12). As a result, in these jurisdictions, movable Box 11: Practical Example of Possible Conflict property becomes less attractive as security. A well between Secured Transactions and Bankruptcy designed reform of secured transactions law involving Laws movable property should either include reform of the Secured transactions law: A secured creditor enforcement law or provide in the secured transactions who has registered has priority in the collateral law a separate enforcement process that makes use of over unsecured creditors. self-help when possible and calls for expedited judicial enforcement when self-help is not an option. Bankruptcy law: If the security interest of the creditor was registered within a certain period Mapping existing legislation: Once the legislation is before initiation of the bankruptcy proceeding, it collected, analyzed and examined in the context of the does not have priority over unsecured creditors. required reform, it should be mapped to the relevant provisions of modern secured transactions laws. This approach has a number of practical advantages: • The mapping will assist in assessing the extent of the Box 12: Possible Problematic Enforcement Law reform needed. Provisions • It will assist in deciding on one of two methods “The judgment officer must notify the debtor 7 of reform: (i) enacting new secured transactions days before seizure of the collateral.” legislation with harmonization of related legislation; or (ii) reforming existing legislation by amendment. “The court must stop enforcement proceedings if • It provides a simple and clear reference for the extent the debtor appeals against the initiation of the of the reform required on existing legislation. proceedings.” • It assists law reformers to understand modern secured transactions law and its components. • It allows for a continuous and updated procedure of reform taking into account any intervening amendments to related legislation during the period of the reform. 50. Reference to the UNCITRAL Legislative Guide on Insolvency Law and the WB Guide on insolvency law. SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 39 • It leaves local jurisdictions with an organized • Mapping of pertinent provisions to modern secured methodology and infrastructure to monitor any further transaction law law reform necessary in the context of secured • Setting out the objective of the reform financing reform. • Determining public policies underlying priorities among conflicting claims 2. Building the New Secured • Determining the type of registry that can be implemented Transactions Legal Regime • Determining the type of enforcement mechanism that can be implemented 2.1. Legal Reform: New Legislation or • Determining the necessary substantive changes to Reform to Existing Legislation the legal framework • Determining whether to introduce new secured Following the mapping of the existing legislation, the transactions legislation or to amend existing laws process of reforming the law may start. Reforming the existing legal system should start with a statement of the objective of the reform; that is, to develop and support 2.2. Necessary Components for a New adoption of a legal and institutional framework to support Secured Transactions Legal Regime a best-practice secured transactions regime that will Following the determination as to the type of reform that increase access to credit in the jurisdiction. The next step will follow, it is important to ensure that the fundamental is the analysis of the substantive changes to and new components of modern secured transactions law are features of the legal framework that are required. This included in the reformed law. The following discussion may involve (i) assessment of the existing credit-granting focuses on the required elements of any new secured practices, (ii) identification of possible new credit vehicles transactions law if it is to be effective. The discussion the reformed law should include, (iii) evaluation of public accounts for the elements of modern secured transactions policies for existing priority rules and whether they require law and describes the drafting techniques to ensure these reform, (iv) determination of the characteristics of a new components fit within the domestic legal environment. registry institution suitable for the particular jurisdiction, and (v) identification of necessary improvements to the process of enforcement of property rights. 2.2.1. Scope of the Law Following the analysis of the necessary substantive changes A modern secured transactions regime increases access and additions, the team must decide whether they can to finance by reducing the risk of lending. It does so by best be adopted as new comprehensive legislation on permitting a creditor to take an interest in the movable secured transactions or as changes to existing legislation assets of the debtor, with certainty of the creditor’s priority without the need to enact a new law. As mentioned in the assets and assurance of enforceability of the interest earlier, the mapping of the existing legislation described in case of default by the debtor. The features of the previously will help the team make this decision. Another secured transactions law that are necessary to success of factor in that decision is resistance in some jurisdictions the regime are: to changes to the Civil Code or Civil Procedure Code for political reasons or because the codes are revered • The simple creation of an enforceable interest in by legal professionals and the judiciary. Consequently, movable assets by agreement between the creditor enactment of special legislation for secured transactions is and the debtor often the simpler and more successful reform. On the other • A comprehensive scheme for determining the relative hand, some jurisdictions may already have a progressive priority of competing interests in the assets that secured transactions law, and an effective reform may includes all relevant types of interests that may affect be accomplished by amendments to existing legislation the creditor’s rights without the need for new legislation. • Provision for publicity of interests in the secured assets, which includes, in addition to alternate means In summary, the final determination on the reform can be of publicity, a public registry in which all claimants of made only after: interests in assets may give notice of their interests 40 chapter 4: Implementation Box 13: UNCITRAL’s Recommendations for the Scope of a Secured Transactions Law A secured transactions law should apply to all rights in movable assets created by agreement that secure payment or other performance of an obligation, regardless of the form of the transaction, the type of the movable asset, the status of the grantor or secured creditor or the nature of the secured obligation. The law should apply to: (a) Security rights in all types of movable asset, tangible or intangible, present or future, including inventory, equipment and other tangible assets, contractual and non-contractual receivables, contractual non-monetary claims, negotiable instruments, negotiable documents, rights to payment of funds credited to a bank account, rights to receive the proceeds under an independent undertaking and intellectual property; (b) Security rights created or acquired by all legal and natural persons, including consumers, without, however, affecting rights under consumer-protection legislation; (c) Security rights securing all types of obligation, present or future, determined or determinable, including fluctuating obligations and obligations described in a generic way; and (d) All property rights created contractually to secure the payment or other performance of an obligation, including transfers of title to tangible assets for security purposes or assignments of receivables for security purposes, the various forms of retention-of-title sales and financial leases The law should not apply to: (a) Aircraft, railway rolling stock, space objects, ships, as well as other categories of mobile equipment in so far as such asset is covered by a national law or an international agreement to which the state enacting legislation based on these recommendations (herein referred to as “the State” or “this State”) is a party and the matters covered by this law are addressed in that national law or international agreement; (b) Intellectual property in so far as the provisions of the law are inconsistent with national law or international agreements, to which the State is a party, relating to intellectual property; (c) Securities; (d) Payment rights arising under or from financial contracts governed by netting agreements, except a receivable owed on the termination of all outstanding transactions; and (e) Payment rights arising under or from foreign exchange transactions. The law should not apply to immovable property except insofar as its application to fixtures may affect rights in the immovable property to which a fixture may be affixed. Source: UNCITRAL’s Legislative Guide on Secured Transactions SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 41 • A simple and speedy enforcement process tradition because lawyers, judges and other professionals who deal with business transactions look at the form, not There are several dimensions to comprehensiveness of the the substance of the transaction. law, and it is important that the law address all of them. Another approach is to provide in the law a list of • The types of parties, particularly debtors, to which transactions that are subject to the law as a whole or the law applies must include natural and juridical to the requirements for publicity and priority provisions in persons, in any capacity or legal status, wherever the law. This approach is simple to implement because located in the jurisdiction. the transactions are listed in the scope provision without • The types of movable assets to which the law applies the need to examine each claim in terms of its substance. must include tangibles and intangibles , present and However, it is also more risky, as new forms of secured future, including their products and proceeds. transactions involving movable property may be created. • The types of obligations that may be secured must If the reformed law failed to predict and include these include pre-existing, present and future obligations, transactions in the list of transactions included in the whether monetary or other performance. law, the result may be “hidden” rights that the law does • The forms of transaction must include all legal forms not require to be published as condition for priority, in which an obligation is secured by movable assets, increasing thereby the risk of relying on movable property. as well as other transactions in which a creditor may To mitigate this risk, it may be possible to add to the list be deceived about the ownership of the assets if a catch-all provision for any other transaction where the the transaction is not publicized, e.g. an operating effect is to secure an obligation with movable assets. For lease or the sale of accounts receivable and secured example, in Vietnam and Bosnia and Herzegovina, the sales contracts. counterpart insisted on listing legal forms, but accepted • A single system must cover the entire jurisdiction. a catch-all clause to accommodate future legal forms that may evolve. UNCITRAL’s Legislative Guide on Secured Transactions includes a very comprehensive and clear recommendation on what the scope of the law should be (see Box 13). 2.2.2. Creation of security interests The more comprehensive and the more inclusive the law A security interest is the most common property right in the is, the lower the creditor’s risk is. One way to make the context of secured transactions law. It is usually the right of law comprehensive and inclusive that is used in legal a creditor to seize and dispose of the property (collateral) systems of a number of jurisdictions is often referred to of the debtor in case the debtor fails to perform its primary as the “substantive approach.” That is, the applicability obligation. of secured transactions law is based on the substance (operational effect), not the legal form, of a transaction. Creation of security interests under modern secured Such an approach can be implemented by providing that, transactions law requires an agreement between the “Unless provided otherwise in this law, this law applies to creditor and the debtor. For the security interest to become any transaction in which a civil or commercial obligation enforceable against the collateral (commonly known as is secured by an interest in movable property.” attachment to the collateral), three conditions must be satisfied in any sequence, as follow: In those jurisdictions with modern secured financing systems, such a provision is likely to be understood and 1. Debtor has a right in the collateral: A security implemented with little difficulty. Other jurisdictions, on interest can be created only when the debtor has an the other hand, rely to a large extent on the form of the alienable right in the collateral. The most common transaction. A pledge of assets is governed by the pledge right here is ownership of or title to the collateral, but law, a mortgage by the mortgage law, a sale with retained it may alternatively be a leasehold right or a license title by the sales law, etc. A transaction in which movable or right to use the collateral. What constitutes an assets are used as security that does not fit a specific alienable right in property is determined by the legal form is not recognized, and mischaracterization of a property law of the jurisdiction in which the system is transaction may cause it to fail. The substantive approach to be implemented. is more difficult to implement in jurisdictions with such a 42 chapter 4: Implementation 2. The security agreement: There must be a written of a security interest, the better approach is to exclude security agreement (i.e., an enforceable contract) registration from the prerequisites for the creation of a whereby a debtor agrees to grant a security interest security interest. in movable property to a creditor to guarantee performance of an obligation. In this context, If the reform is done in a jurisdiction that insists on “written” means the agreement must be manifested publication as a condition for the creation of the right, it is in a tangible form that can be reduced to a readable important to ensure that there is no requirement in the law document or documents. So long as that requirement that registration must be preceded by the signing of the is met, the parties have autonomy to decide for security agreement. The reason is that a creditor will often themselves whether or not to employ traditional want to establish its priority by registration, and only then formalities. For example, the agreement could be determine what level of secured credit can be advanced. a hand-scribed and notarized document, or it could consist of an exchange of e-mail messages that 2.2.3. Priority of security interests establish the intent of the parties to be bound to an agreement.51 While the simple type of agreement The general rule: Priority (or preference, as used in some described here is the ideal, there may be jurisdictions civil law jurisdictions) of claims, such as security interests in which notaries are so integral to the legal culture in property, determines the sequence in which competing that it is unavoidable to provide in the law for hand- claims to the collateral will be satisfied from the proceeds scribed ink signatures and some degree of notary of its disposition when the debtor defaults on one or intervention, e.g. preparation of the agreement or more of the claims. The higher the priority of a security affixing a notarial verification of the signature. In interest is in relation to other claims, the more likely the such cases, the law should be drafted to limit the secured obligation is to be covered by the proceeds of the burden imposed by such formalities, e.g. closely disposition of the collateral. circumscribe the role of the notary and set the fee for An effective priority system is based on two main required notarial acts at an affordable level. components: (i) a clear public policy underlying each 3. The creditor gives value: The creditor must give value priority; and (ii) a clear set of rules regulating the order to the debtor. The value can consist of a binding of priorities to facilitate the implementation of these public undertaking to advance credit in the future, or, more policies. Public policies that support the priority scheme commonly, it can be the actual advancement of credit must be determined before the beginning of the law at the time the security agreement is entered into. reform, so will be a given during the reform. Some jurisdictions will be predisposed to assume that The general priority rule used in modern secured registration of the security agreement will be required as transactions systems is based on notice. A creditor who a condition of creation of the security interest because publicizes the existence or potential existence of its security their tradition requires registration as the “constitutional interest has priority over other persons who thereafter act” that creates any contractual right. However, in most acquire rights in the collateral or who thereafter publicize modern systems, registration is relevant only in the context the existence of their interests. Often this rule is referred of priority issues that arise when third person claims are to as the “first to register rule”. There are two common made against the collateral. Under these systems, the ways in which the rule is implemented in jurisdictions role of registration is to provide a method by which third where secured transactions law is a new concept, either parties can become aware of the existence of the interest. of which is acceptable, depending on the circumstances While some jurisdictions with modern systems of secured of the jurisdiction. financing require registration as condition for creation 51. While some modern secured transactions laws allow for creation of security interest by the creditor’s possession of the collateral without an agreement, the better practice is to provide in legislation that a security agreement be available as evidence of the existence and terms of a relationship between the parties. SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 43 Alternative 1: In some jurisdictions, registration is not While the requirements of perfection are clear, the use of the only way to provide notice. Those jurisdictions the term itself may, in some jurisdictions, create confusion. provide for alternative forms of notice, specifically The reason is that lack of perfection may be understood to possession and control. Priority is accorded to the first mean “without legal validity.” Consequently “un-perfected secured creditor or other claimant who gives notice security interest” may be understood to mean an invalid by registration, possession or control. The means of security interest that cannot be enforced against the debtor. notice will often depend on the type of property that Because of this potential for confusion, some jurisdictions constitutes the collateral. The general rules for the type use other terms such as “crystallization,” “completion,” of notice required are: (i) notice of an interest in cash “maturation” or “confirmed in full” for the same purpose, other than proceeds or in negotiable instruments must while others simply refer to making the security interest be by possession; (ii) notice of an interest in a deposit effective against third parties. account or immaterialized securities must be by control; and (iii) notice of an interest in any other type of movable For jurisdictions that adopt Alternative 1 above, the utility property may be by registration, possession or, in some of the “perfection” concept is a refinement of the general cases, control. The rationale for this alternative is that priority rule to facilitate the use of registration as the means it gives secured creditors greater flexibility and avoids of notice. The priority rule using the concept is: “Priority is the cost and time required to register in cases where determined by the first to either register or perfect.” That is, notice by possession or control is sufficient to alert third parties (see Box 14). Alternative 2: In other jurisdictions where an efficient computerized registry system essentially eliminates the time and cost burdens of registration, the law provides Box 14 : Example for General Priority Rule for notice only by registration (except for specific under Alternative 1 classes of property where possession or control may Priority is measured from the earlier to occur of be the only viable means of perfection, e.g. possession registration of a notice or perfection by other for cash or negotiable instruments, or control for deposit means, provided that there is no time thereafter accounts or immaterialized securities). The rationale for when a registered notice is not effective or this alternative is that it is much simpler to prove date perfection does not exist. of notice by registration than by possession52 (see Box 15). A note on “perfection”: The term “perfection” is a product of North American secured transactions law and refers to the optimization of a creditor’s rights in collateral against Box 15: Example for General Priority Rule third parties, whether other creditors, purchasers or lien under Alternative 2 holders. Perfection requires both attachment of the security interest to the collateral and notice (publicizing) of the “Subject to the special priority provisions of security interest by a permissible means. As noted above, this law, priorities among conflicting claims the means may include registration, possession, control are determined by the chronological order of and automatic perfection, as in the case of perfection registration of a notice in the registry, as provided in proceeds of collateral that is subject to a perfected in this law.” security interest. Figure 5 (see p. 44) diagram presents the requirements for perfection graphically. 52. In some jurisdictions with advanced commercial laws, registration is permitted as an alternative to possession to perfect a security interest in cash or negotiable instruments, though those laws provide that registration is a “weaker” method of perfection than is possession in those cases. In jurisdictions where secured transactions law is a new concept, adding complex priority rules for determining priority among “weaker” and “stronger” means of perfection may be an unnecessary distraction, so it is not recommended. 44 chapter 4: Implementation Figure 5: Perfection Requirements Perfection and Means of Attachment perfection Signed & Value given by & Debtor rights in or or or Registration Possession Control Automatic agreement secured party collateral if a creditor registers before the security interest attaches, interest in the same collateral, whether by registration, and then later takes all steps to cause the interest to attach possession or control, the first creditor has priority because to the collateral, its priority relates back to the time of it registered before the competing creditor registered or notice (registration). If, in the gap between the creditor’s otherwise perfected its interest. For jurisdictions that registration of a notice and attachment of its security adopt Alternative 2, it is important for the law to permit interest, a competing creditor takes and perfects a security registration of notice before the security interest is created, Box 16: Example of Priority Rule as It Applies under Both Alternatives 1 and 2 On June 1, Borrower applies for a loan from Bank A secured by Borrower’s delivery truck. Bank A’s loan officer gets Borrower’s consent to register a notice to secure Bank A’s priority until due diligence can be completed and the loan agreement can be signed. The loan officer does a search of the registry for prior competing interests and, finding none, registers the notice identifying Borrower’s delivery truck. On June 4, Borrower applies for a loan from Bank B secured by Borrower’s delivery truck. Bank B’s loan officer decides to make the loan without due diligence and without searching the registry. Bank B’s loan officer makes the security agreement with Borrower identifying the delivery truck as the collateral, advances the loan amount to Borrower, and registers a notice in the registry identifying the delivery truck. Since all three requisites for attachment (agreement, value given, and debtor rights in collateral) are complete, Bank B’s security interest in the delivery truck is perfected. On June 8, Bank A notifies Borrower that it will make the loan secured by the delivery truck. Borrower signs the security agreement giving Bank A a security interest in the delivery truck. Bank A advances the loan amount to Borrower. Bank A’s security interest is then perfected because all three requisites for attachment have been completed. On August 1, Borrower defaults on one or both of the loans, and the lender commences enforcement. The value of the delivery truck is insufficient to satisfy both loan balances, so priority must be determined. Bank A has priority because it registered before Bank B perfected, notwithstanding that Bank B perfected its interest before Bank A’s security interest was perfected. SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 45 and that priority relates back to the time of registration if the security interest is then created. See examples of both Box 17: Example of Priority Rule Showing alternatives in Boxes 16 and 17. Differences between Alternatives 1 and 2 Under either alternative above, there is automatic perfection On May 1, Bank A lends to Borrower under a in the proceeds upon disposition of the collateral if there is security agreement providing for a security interest a perfected security interest in the collateral at the time of in Borrower’s painting. Borrower delivers the disposition. If the proceeds are identifiable cash proceeds, painting to A’s warehouse on May 2. or if the proceeds are goods that are described by the registered notice’s description of the original collateral, On June 1, Bank B lends to Borrower under a e.g. replacement inventory, perfection continues in the security agrement providing for a security interest proceeds without further action. If the proceeds are goods in the same painting and registers a notice on the that are not described by the description of the collateral in same day. the registered notice, the law should provide that perfection lapses within a specified short period after the proceeds On September 1, Borrower defaults on one or are received by the debtor unless the registered notice is both of the loans. Priority will differ, depending amended to add a description of the proceeds. Similarly, on whether Alternative 1 or Alternative 2 has been perfection continues in the products of collateral that is incorporated into the law, as follows: described in a registered notice, e.g. offspring of livestock Alternative 1: Bank A has priority because its or carcasses of animals after slaughter. interest was perfected on May 2 when it took Special priorities: There are three main policy reasons possession of the collateral. The rationale for for certain exceptions to the general priority rule provided Alternative 1 as illustrated here is that Bank A made above, as follows: its interest transparent when it took possession; i.e. Borrower could not produce the painting as • Enable a debtor to utilize multiple credit sources, viable collateral to later lenders because Borrower • Protect certain classes of unsecured creditors, such as did not possess it. employees, and • Enable the conduct of ordinary business transactions Alternative 2: Bank B has priority because it that the general rule would preclude. registered notice of its interest and Bank A did not. Possession of the painting by Bank A did The following are the special priority rules that should be not perfect its security interest because the only included in a priority scheme of any reformed secured permissible form of notice is registration. The transactions law. rationale for Alternative 2 as illustrated here is that registration provides absolute proof of the time of 1. Purchase-money security interest priority, whereas there may be no clear proof of The priority rule: A purchase-money security interest the time that possession was taken. Therefore, the (hereinafter: PMSI) is a security interest in goods that risk of fact issues in litigation of priority between are purchased with the credit advanced by the creditor. competing interests is substantially reduced under A PMSI has priority over an earlier-registered security Alternative 2. interest, provided that notice of the PMSI is registered before or within a brief period specified by the law (e.g. five days) after the debtor obtains possession of With respect to a PMSI in inventory of a merchant or the collateral53 (see Box 18). A lessor’s interest under in livestock of a producer, many reformed jurisdictions a lease of goods is treated as a PMSI for priority add a requirement for the PMSI creditor to provide purposes. direct written notice to a secured creditor whose security 53. Reforms in some jurisdictions accord a purchase money priority in inventory only if the registration precedes possession by the debtor, whereas the brief post-possession registration period is permitted for other classes of goods. However, the distinction should be considered in the context of the jurisdiction. If speedy registration is available via the Internet, and if registration before possession is necessary to preclude manipulation by the debtor, it may be warranted to accord PMSI protection only if registration pre-dates possession with respect to all classes of goods. 46 chapter 4: Implementation interest covers the same class of inventory or livestock and secure priority as against buyers. The decision as the purchase money collateral. The reason is that between the two positions in the reform will be based inventory and livestock generally secure a floor plan on an analysis of the culture and informal lending or line of credit where the amount of the obligation practices in the jurisdiction. changes frequently. The creditor secured by the interest in the whole class of inventory or livestock cannot be The policy: The policy behind the PMSI rule is to avoid expected to constantly monitor the registry for new monopoly of one creditor over credit sources of its PMSIs that may impair the creditor’s position, so the borrower. PMSI creditor should give notice directly. Explanation: When a secured creditor registers notice With respect to a PMSI in consumer goods, there is a of a security interest in a class of the debtor’s property, division among reformed jurisdictions as to how priority the general priority rule would give that secured creditor is established for security interests with regard to other priority over property of that class that is later acquired creditors and buyers of the goods from the consumer. with credit supplied by another creditor, even if the The first position is to treat security interests in consumer second creditor takes a security interest in the specific goods under the same rules that apply to other goods, later-acquired property and registers it. The general i.e. to perfect the security interest by registration of a rule, then, makes it virtually impossible for a creditor to notice, and to accord priority according to the “first rely on a security interest in the goods acquired with to register” rule. The second position is to provide in the credit if there is a prior registered security interest the reform that the only security interest that may be in the class of goods. Consequently, the debtor has taken in consumer goods, excluding motor vehicles, no access to credit from sources other than the original is a PMSI. This position sometimes is adopted in creditor who has the security interest in the entire class societies where there is a significant risk of unscrupulous of collateral. The debtor will have to return to the first lenders who may take advantage of unsophisticated creditor, who may refuse to provide further credit or may individual borrowers by taking a security interest in all agree to provide further credit only under unacceptable of a borrower’s household goods, and then seizing conditions. The PMSI rule is designed to break this them when the borrower cannot meet the onerous monopoly situation by granting the second creditor repayment terms of the loan. If this position is taken priority with respect to the specific property purchased in the reform, there is no need to provide notice of with the credit provided by the second creditor (see the PMSI to other potential creditors, since they cannot Box 18). Examples of creditors that finance acquisition take a security interest in the goods. The reformed law of property include financial institutions such as banks, can, then, provide that perfection is automatic, without leasing companies, and sellers on credit. registration, as against other creditors and lien holders. 2. Production-money security interest The law permits the PMSI creditor to register a notice to perfect against a person who buys the secured goods The priority rule: Secured transactions reform, from the borrower if the creditor wishes to give notice particularly in jurisdictions where agriculture or animal husbandry is a significant economic factor, sometimes includes a priority against prior perfected security interests for financers of the means of production of crops or animals subject to the prior security interest. Box 18: Example of a Purchase-Money Security The means of production generally include such things Interest Rule as veterinary care, medicines and feed for animals, “A PMSI in an asset, notice of which is registered, or seed, fertilizer, insecticides, herbicides and fuel has priority over a security interest in the same for the growing of crops. In the most common case, asset, notice of which was earlier registered, the provider of the means of production finances its provided that notice of the PMSI was registered purchase by the producer (debtor) and takes a security before (or within [X] days after) the debtor takes interest, known as a production-money security interest, possession of the collateral.” in the animals or crops produced. If a notice of the production-money security interest is registered before SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 47 the means of production are provided or within a over security interests, even if those security interests short period thereafter, as specified by the law, the are registered or otherwise perfected before the production-money security interest has priority over government or legally protected claim arises. The best a prior perfected security interest in the animals or solution is to permit those claims to be registered and crops generally, except for a purchase-money security to secure their priority on the same basis as for security interest. interests, giving certainty of priority to all participants in the priority schema. However, political considerations The policy: A financial institution that provides a loan in some jurisdictions may preclude bringing those or operating line to an agricultural or animal producer claims into the priority schema, so special priority secured by the crops or animals relies on the value rules protecting the rights of at least some classes of of the crops or animals produced, so it is to the prior government or governmentally protected claims may creditor’s advantage to have the means of production need to be retained in the legal framework. provided to enable successful production. The provider of the means of production would be less likely to The policy and the priority rules—(i) Employees (labor finance the producer if it did not have the priority, so it wages): Protection of some degree of employee is often deemed to be a necessary measure to enable compensation and benefits may be justified on several production. grounds. When a borrower is also an employer and is in arrears in payment of salaries, the employees Though the concept is known to have been applied are creditors of their employer. For the most part the only in the context of agriculture and animal husbandry, unpaid salaries are unsecured obligations. Under the it may be applicable in other contexts as well. One general rule, they are subordinate to security interests example may be in the production of intellectual in their employer’s property. However, employees do property, e.g. a commercially valuable software not have sufficient bargaining power to require an program. If a software company needs financing to employer to enter into a security agreement to secure produce a specific program for which there will be unpaid wages and are not likely to be sufficiently a commercial market, the production-money concept sophisticated to register their rights against subsequent may apply to a loan made specifically to pay the costs creditors. In any event, registration would not protect of production of the program; i.e. if the financer of the them from an earlier registered security interests. production of the program registers notice of its security Consequently, it may be necessary to include a special interest in the program, it would have priority in the rule to protect employees’ right to unpaid wages, program as against a prior perfected security interest salaries, and benefits. This protection is provided, not in all movable assets of the debtor. only on equitable basis, but also to give employees incentive to remain in their work place even when their 3. Government and other legally protected claims salaries are not fully paid on time. Such protection will The situation: To reduce the risk of lending to an be within specific limits on the amount or period of acceptable level, a secured creditor must have back wages/salaries and benefits, in order to permit confidence in the collateral on which the creditor relies. secured creditors to quantify the priority claims of That confidence requires that the secured creditor have the employees. In many jurisdictions, the priority of notice of all claims against the collateral that may impair employee claims is provided in the labor or employment the secured creditor’s priority, and those claims include law, and it is only necessary to ensure that the secured public claims such as tax and labor claims. In the transactions law accommodates the priority. If the secured creditor’s perfect world, such claims that arise labor/employment law or other law does not protect after the secured creditor registers its security interest employees, the secured transactions law may include would be subordinate to the right of secured creditors, such protections if it is determined that there is such a and there are well-established economic arguments for need in the jurisdiction. that to be the case, as described in Figure 4, supra. However, in many jurisdictions, government claims The policy and the priority rules—(ii) Tax claims: When a person does not fulfill his public obligations, such such as taxes and other legally protected claims such as the obligation to pay taxes when they are due or as wages and judgment execution orders have priority to remit taxes (and other source deductions) collected 48 chapter 4: Implementation on behalf of the government, the jurisdiction to which may have to be included in the legal framework, even the obligation is owed becomes an unsecured creditor if not in the secured transactions law itself. of the taxpayer – the obligor. If some or all of the property of the obligor is subject to a perfected security The policy and the priority rules—(iii) Judgment creditors: interest, the tax claim would, under the general rule, Modern secured-financing laws may address priority of be subordinate to the security interest with respect to conflicting claims of secured creditors and judgment the secured property. In order to protect against loss creditors in different ways. In some jurisdictions of income to the budget of the jurisdiction to which the a judgment creditor who causes property to be obligation is owed, the laws of some jurisdictions give seized under a writ of execution (or other judgment priority to public claims for taxes, even against security enforcement process) has priority over an unperfected interests that arose and were registered or otherwise security interest in the seized property, but not over perfected before a tax delinquency occurred. While a perfected security interest. Other jurisdictions give such a super-priority may intuitively seem beneficial to priority of even unperfected security interests over the government, the argument for it fails under more judgment enforcement. Yet others do not address the detailed examination. As noted in Figure 4, supra., issue at all, often resulting in execution against assets such super-priorities dramatically reduce the amount that are covered by a perfected security interest. The of lending and, hence, the amount of business done first case, where execution has priority over unperfected and business taxes collected. Further, if the government security interests but not over perfected security interests, participates in the priority schema used for security is the preferred option. In jurisdictions that adopt the interests, it acquires leverage over the taxpayer that it preferred option, the law may provide that a judgment does not otherwise have. That is, the government can creditor may register a judgment lien against the register a notice of delinquency immediately upon the property of the judgment debtor to secure priority of taxpayer’s failure to pay, thereby making it impossible the judgment pending execution against the property for the taxpayer to get a secured loan until it pays or as an alternative to priority resulting from seizure the delinquent tax. Despite the logic against super- under execution process, as is the case in several priority for tax claims, it may be politically impossible to Canadian provinces. The inclusion of such a provision overcome the traditional preference for them, and they should be considered in light of the legal framework for enforcement of judgments, including the civil procedure and enforcement laws, and the availability of a suitable registry. If a modern electronic registry for secured transactions is available, the inclusion of such Box 19: Examples of Provisions Regarding protection for judgment creditors may be warranted if the Government or Governmentally Protected enforcement process for judgments is so slow that there Claimants is a long gap between the judgment and execution. On “A registered government or governmentally the other hand, if the judgment enforcement process is protected claim has priority over any security quick, there may be no need to provide for registration interest for which a notice is registered after the of judgment liens. registration of the government or governmentally Explanation: While the optimal way to handle conflicting protected claim”. priorities between security interests and government An employee has priority over any claim on the or legally protected claims is to bring the latter into property of his employer to the extent of 6 months the priority schema for secured transactions, that may unpaid salaries”. not be politically feasible in all cases. In those cases where such claims cannot be brought into the secured A government or governmentally protected transactions priority schema, the risk of loss of the claimant must proceed first against the unsecured collateral to the government or legally protected claim assets of a debtor before proceeding against should be mitigated by the law to the extent possible, property that is subject to a perfected security so as to make the risk quantifiable. Such mitigating interest. measures may include, among others: (i) limitations on time; (ii) limitation on amounts; (iii) permissive registration SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 49 of government or legally protected claims, with provision existence of the security interest is not relevant. for notice of enforcement proceedings by a secured creditor to be given to the claimholder if the claim is Exception for consent of secured creditor: A buyer, registered; and (iv) requiring that government or legally lessee or licensee of collateral takes its right in the protected claimants proceed against unsecured assets collateral free of a previously perfected the subsequent before proceeding against collateral that is subject to a security interest if the secured creditor consented to the perfected security interest (see Box 19). sale, lease or license free of the security interest. The limitations imposed on government or governmentally Exception for buyer, lessee, or licensee in the ordinary protected claimants provide either notification or a tool course of business: One of the exceptions to the general to quantify or limit the rights protected by the special priority rules. As a result, financial institutions are better able to estimate the net value of the property available to secure their claim. Any credit advanced by the creditor Box 20: Example of a Rule Protecting Both can be secured by the net value of the property. Secured Creditors and Buyers 4. Buyers, lessees, or licensees “Subject to exceptions in this law, a security interest has priority over a right of a purchaser General considerations: An important priority issue or lessee of the collateral, if notice of the security involves the rights and priorities of persons who interest is registered or perfected before the purchase, lease or license property that is already purchase or lease of the collateral. A purchaser or encumbered. When an earlier security interest exists lessee of the collateral has priority over a security against the purchased property, a priority conflict interest that is not registered or perfected before may arise between the earlier established security the purchase or lease of the collateral. A security interest and the right of the buyer, lessee or licensee interest ceases to exist in property that was sold of the property. In some jurisdictions, in the absence or leased in the ordinary course of the seller’s or of a modern secured transactions law and registry, a lessor’s business.” buyer, lessee or licensee may take subject to an earlier security interest, while in others, in some situations the buyer, lessee or licensee takes free of the security interest. This situation presents a risk to either of the parties depending on the priority rules in the specific Box 21: Example of a Provision Regulating the jurisdiction. If the secured creditor loses its right to Priority of a Buyer, Lessee, or Licensee in the a subsequent buyer, lessee or licensee and has no Ordinary Course of Business replacement security, the secured credit is essentially “A buyer, lessee or licensee of property in the unsecured. If, on the other hand, the buyer, lessee or ordinary course of the seller’s, lessor’s or licensor’s licensee loses its right without having the means to learn business takes free of a perfected security interest about the existence of the earlier security interest, the in the property.” buyer, lessee or licensee may hesitate to engage in the sale or leasing transactions at the outset. This problem must be addressed in the reform (see Box 20). Priorities between the right of a buyer, lessee, or Box 22: Example of a provision regulating licensee and a security interest: The general rule of priorities of a buyer of small value goods modern secured transactions laws is that a buyer, lessee or licensee of movable property takes subject “A purchaser who purchases property has priority to a security interest if it has been perfected. If notice over any registered or unregistered security interest of the security interest was not registered or otherwise if the value of this property is less than the value previously perfected, the subsequent buyer, lessee stipulated in the regulations.” or licensee takes free of it. Actual knowledge of the 50 chapter 4: Implementation rule described above is purchase, lease or licensing in • Is the seller, lessor, or licensor in the business of the ordinary course of a seller’s, lessor’s or licensor’s selling, leasing or licensing of goods of the type business. Often borrowers obtain credit secured with sold, leased or licensed? the inventory of their business. When this inventory • Was the price paid the usual price for such a is sold, leased or licensed as part of the ordinary purchase, lease or license? business activity of the seller, lessor or licensor, it is • Was the quantity unusual for such a purchase, lease necessary to ensure the buyers, lessees or licensees or license? are not concerned with the potential existence of a security interest against the right they acquire. The In any event, the buyer’s, lessee’s or licensee’s knowledge business’ ability to generate income to repay the regarding the existence of a perfected security interest creditor depends on its ability to sell, lease or license in the property purchased or leased is not relevant. products to its customers. In order not to disturb such Further, while the security interest in the property will commercial transactions a special priority rule should be limited by the right acquired by the buyer, lessee be included in a reformed secured transactions law; or licensee, it will attach to any proceeds, including that is, a buyer, lessee or licensee who acquires its money or replacements, which are generated from the right in movable property in the ordinary course of the sale, lease or license. seller’s, lessor’s or licensor’s business takes the right free Purchasers of small-value goods for household use in of security interests in it (see Box 21). The sole criterion private sale: Another exception to the “first to register” for this exception is that the sale, lease or license be in rule involves purchasers of small-value property in the ordinary course of the seller’s, lessor’s or licensor’s a private sale.54 This exception does not exist in all business. The determination of what constitutes ordinary jurisdictions that reformed their secured transactions course of business depends on a number of factors laws but has very important practical implications. The such as: exception aims to facilitate transactions where ordinary Box 23: Provisions that a Secured Transactions Law Should Include in Reference to the Registry • Scope – type of legal interests, types of debtor (natural and juridical persons) and geographical coverage • Establish registry – that the registry is the place to register security interests in movable assets, and assign responsibility for its operation • Electronic registration – that the electronic record is the official record • Centralized registry for the whole jurisdiction • Public record – access available without proof of any particular capacity or need • Notice registration – set specific, limited information required for legal sufficiency of notice; no formalities such as signature or notarization • Effectiveness – stated duration of effectiveness or provision for registrant to set duration • Types of notice that may be registered – initial notice, amended notice, termination of effectiveness (also known as discharge), continuation of effectiveness (also known as extension) and objection to registration by debtor • Registry duties and authority – include issuance of regulation • Standards for refusal of registration – limited and objective • Standards for searching – basis on which to search and rules for legal effect 54. A private sale is a sale between two or more persons who do not conduct the sale as part of the seller’s ordinary course of business. SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 51 persons purchase very small value property that is not to provide details to a person nominated in writing likely to have been used as collateral. This usually by the debtor, i.e. the inquiring creditor. The second exists in situations where ordinary persons purchase limitation that may need to be included, either explicitly very small value (usually second hand) property or implicitly, is a limitation of liability of the registry for from another person. The rule gives priority to such errors or omissions. A notice registry does not examine purchasers. In practice, it is likely that conflict with a the content of a notice, so it must not have liability for pre-existing security interest will not occur because of anything more than ensuring that a registered notice has the small value of the property. Further, while the security sufficient information to be indexed in the database, and interest will cease to exist on the property purchased for keeping that information available in the database it will attach to any property, including money, that is without introducing errors into it. generated from the sale (see Box 22). 2.2.5. Enforcement of security interests 2.2.4. Registration of security interests—legal Enforcement of security interests against movable property foundation is the last major component of secured transactions law. Secured transactions law must provide the fundamental Efficient procedure is particularly important in the context legal authority for the secured transactions registry, though of movable property, which in most cases depreciates in some details may be reserved to decrees or regulations value over time. A modern secured transactions system promulgated under the law. Generally, the law should without an efficient enforcement mechanism cannot address the points outlined in Box 23, though in some provide the security creditors seek. The “security” of cases conditions may require that some of them be secured transactions is the assurance of recovering on deferred to an implementing decree or regulation. the outstanding obligation by taking and disposing of the collateral. If the team’s legal expert and its registry expert are not the same person, the legal expert must consult with the registry Enforcement measures in jurisdictions with developing or expert to ensure that the law’s provisions governing the transitional economies are usually provided in specialized registry are consistent with the registry design that the legislation. In many cases, the existing legislation registry expert has found must be adopted to meet the does not provide an efficient and speedy enforcement needs of the jurisdiction. The law should comply to the mechanism. Furthermore, in some jurisdictions where the greatest extent possible with the international best practices law does provide an efficient enforcement mechanism, for registries as those are set out in chapter 4.C.2 infra. implementation by the judiciary and the enforcement agencies is poor. When this occurs, the impact on the Because of the unique nature of notice registration, there availability of credit is significant. Reform of enforcement are a couple of other limitations that the law may need legislation and processes may be necessary. to include, depending on the extrinsic legal framework. First, since the information in a notice is so limited, a This section examines different approaches to enforcement creditor who finds a registration that may include assets of a security interest upon default by the debtor. It does not in which the creditor wishes to take a security interest may address the recovery mechanisms that are used when a need more information about the transaction in order to debtor files for insolvency, which are controlled by the legal decide whether to rely on the remaining equity in the asset framework for insolvency. There are two critical aspects of as security. In that case, the inquiring creditor will need to enforcement: (i) recovering possession or control of the contact the secured creditor who registered the notice to asset by or for the secured creditor, and (ii) disposition of determine the conditions of the loan and the outstanding the asset. balance. Many jurisdictions have bank secrecy acts that The following paragraphs describe the approaches to preclude the secured creditor from disclosing information enforcement that appear in the legal frameworks of some about the loan. It may be necessary, then, to provide in countries and recommendations on what the enforcement the secured transactions law an exception to the general components of a secured transactions law may include in bank secrecy rule for this situation. One common form order to make movable property attractive collateral: of such an exception is a provision requiring the creditor 52 chapter 4: Implementation 1. Extrajudicial recovery of possession agent. In some jurisdictions, the enforcement law allows the parties (the creditor) to the security agreement to There are two ways in which the law may provide take possession of the secured asset upon default of the for a secured creditor to recover the secured asset(s) debtor without court assistance. Under this procedure without resort to judicial process: (i) seizure by either the secured creditor takes the property from the debtor the secured creditor or a specialized agent, and; (ii) without the assistance of the execution office. In order recovery of possession of the asset(s) by award or to maintain public peace, the legislation usually settlement agreement using alternative dispute resolution provides that the person in control of the property must mechanisms (arbitration, mediation, conciliation). consent in writing. While many jurisdictions require that the consent must be given post-default, some (i) Seizure by the secured creditor or other specialized Table 8: List of Countries Which Allow Out of Court Enforcement 1. Albania 17. Bulgaria 33. Iceland 49. Malawi 65. Qatar 81. Swaziland 2. Angola 18. Canada 34. India 50. Malaysia 66. Romania 82. Sweden 3. Antigua and 67. Russian 19. Costa Rica 35. Iran 51. Maldives 83. Switzerland Barbuda Federation 52. Marshall 4. Armenia 20. Croatia 36. Ireland 68. Samoa 84. Tajikistan Islands 5. Australia 21. Dominica 37. Jamaica 53. Micronesia 69. Serbia 85. Tanzania 6. Austria 22. Ethiopia 38. Japan 54. Moldova 70. Sierra Leone 86. Tonga 87. Trinidad and 7. Azerbaijan 23. Fiji 39. Kazakhstan 55. Mongolia 71. Singapore Tobago 8. Bahamas, 24. France 40. Kenya 56. New Zealand 72. Slovakia 88. Uganda The 9. Bahrain 25. Gambia, The 41. Kiribati 57. Nigeria 73. Slovenia 89. Ukraine 90. United 10. Bangladesh 26. Georgia 42. Korea 58. Norway 74. South Africa Kingdom 43. Kirgiz 11. Belgium 27. Germany 59. Pakistan 75. Spain 91. United States Republic 12. Belize 28. Ghana 44. Lao PDR 60. Peru 76. Sri Lanka 92. Uzbekistan 61. Philippines, 77. St. Kitts and 13. Bhutan 29. Guatemala 45. Latvia 93. Vanuatu The Nevis 14. Botswana 30. Guyana 46. Liberia 62. Poland 78. St. Lucia 94. Vietnam 79. St. Vincent 31. Hong Kong, 15. Brazil 47. Luxembourg 63. Portugal and the 95. Zambia China Grenadines 48. Macedonia 16. Brunei 32. Hungary 64. Puerto Rico 80. Suriname 96. Zimbabwe FYR Source: Doing Business 2010 report. SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 53 jurisdictions have provided in their legislation that a consent provided in the security agreement is sufficient. However, such a provision does not guarantee that the Box 24: Different Extrajudicial Models for person in control of the collateral will actually allow Seizing Assets Upon Default the secured creditor to take the collateral when the Different countries have chosen different creditor or its agent attempts to do so. In such case, techniques to seize assets from debtors that have the law should provide that the creditor or its agent incurred in a default. The context of each country may not seize the collateral if to do so would cause will determine what the best way to organize the a breach of the peace. The law should further define seizure of assets is. what constitutes a breach of the peace. When revising a secured transactions law it is desirable to include Public Collection Agents. A number of countries provisions that allow for out of court enforcement as have created public collection agents that explained in this paragraph. See Table 8 for a list of are responsible for seizing the asset with the the countries that, as of June 2009, provide by law for appropriate executory title or judgement. These out of court enforcement when agreed by creditor and public collection agents are usually part of the debtor.55 executive branch (police forces or bailiffs) but not associated with the courts. The courts may The actual repossession of the asset(s) in order to sell it is also have judicial officers responsible for seizing a critical part of the enforcement process. International assets when the enforcement process is done practices on how the asset is repossesed in practice through the judiciary. The approach of using varies and a number of countries have found different public collection agents is very used in former solutions that work more or less well (see Box 24 for Soviet Union countries. examples). Private Collection Agents. Other jurisdictions Notification to debtor about seizure. As mentioned have established organized bodies or private earlier, one of the risks of relying on security in movable enforcement agents that can vary from notaries (in property is that the debtor may move the property to Romania), private enforcement officers (Georgia) another location or hide it before seizure takes place. to bailiffs or huissiers (in France), to receivers In some jurisdictions, enforcement proceedings include (in the UK). These bodies are usually regulated a requirement to notify the debtor about the intention and certified or licensed to avoid abuses, and to seize his or her property. The period for the notice determine the procedure that needs to be used the execution officer must provide may vary depending for the seizure of the asset and the rights of both on the jurisdiction. However, this notification may by parties. abused by the debtor’s moving the property to another location, hiding it or even damaging it before the arrival of the execution authorities. Therefore, an effective modern law should require that notice be given to the debtor before seizure commences, though (ii) Alternative Dispute Resolution Mechanisms. ADR the notice period may be very short, perhaps even on mechanisms have proven to be very effective ways of the same day as the seizure, in order to reduce the risk resolving disputes in a fast, low-cost and non-adversarial of loss of the collateral by the debtor’s moving, hiding way in many countries. The use of such mechanisms or damaging it.56 as mediation, conciliation or arbitration to enforce the payment of debts or seize assets secured as collateral 55. Doing Business 2010. 56. UNCITRAL takes a more debtor-friendly approach in its Guide. While the Guide permits ex-parte proceedings, it sets conditions. First, the debtor must have consented to such proceedings in the security agreement. Second, the secured creditor must have given to the debtor notice of default and its intention to obtain possession of the collateral out of court. And third, at the time of seizure by the secured creditor, the debtor does not object (see recommendation 147). 54 chapter 4: Implementation is limited to those countries which have developed both debtor. This situation should be considered when the legal or regulatory and institutional framework for reforming enforcement laws or procedures. these mechanisms to be effective. For example, if the legal framework does not provide for the execution Expedited or fast-track judicial processes. Whenever of arbitral awards, arbitration is not viable. Likewise, possible, when reforming enforcement procedures, the some countries, e.g. Colombia, have developed legal reformed law should include specific fast-track judicial frameworks for mediation or conciliation in which the procedures for the seizure of movable collateral. As settlement agreement of a conciliation (signed by both mentioned earlier, the rapid devaluation of assets in parties) has the same value as a court order. Others some cases makes expeditious judicial processes a countries that have successfully established ADR critical element. structures to resolve these types of disputes are Serbia, Some jurisdictions have a pre-judgment procedure Bosnia and Herzegovina, Montenegro and Pakistan. by which, upon presentation of proof of the security To be effective the institutional structures for arbitration agreement and an act or omission constituting default and mediation should be in place (i.e, Arbitration/ by the creditor, the court issues an order of seizure Mediation Centers, certified professional mediators/ of the property without the possibility for appeal by arbitrators). When ADR structures are efficient, they may the person in control of the property until after seizure be the most effective way to recover secured assets as is completed. This could be inserted in the law as illustrated in the example (see Box 25). follows: 2. Judicial enforcement mechanisms “When the secured creditor presents to the court When a jurisdiction does not provide for out of court evidence of a security agreement and of default by enforcement, or when a creditor decides to enforce the debtor, the courts shall issue an execution order. its security interest through a judicial procedure, the No appeal is allowed on the execution order before judicial process for recovery of collateral should seizure is completed.” be expeditious enough to permit recovery before The proof may be simply by sworn affidavit of the loss of value of the assets and without undue risk of creditor. This process is recommended, particularly for concealment or surreptitious sale of the assets by the jurisdictions with lengthy court proceedings. Box 25: Banco Caja Social in Colombia: Recovering Assets Through Conciliation57 In 2006, Banco Caja Social (the bank) initiated, on a pilot basis, a conciliation process to recover non- performing loans from clients, in addition to the bank’s established use of collection houses and litigation. After the completion of the pilot, the bank realized that the conciliation mechanisms had produced a much more effective outcome in the recovery of small amount loans than the other two methods. While the effectiveness of recovering assets from non-performing loans through litigations is around 1%, the effectiveness has increased to around 6% using conciliation.58 The time spent by bank staff trying to recover the loan and associated costs has also been reduced by using conciliation. With regard to the effectiveness of conciliation, only around 8% of the conciliation cases between the creditor (Banco Caja Social) and the debtors/clients held (around 9,000) between 2006 and 2008 were not settled. 57. See “Private Sector Approach to Commercial ADR: Commercial ADR Mechanisms in Colombia”, Alejandro Alvarez de la Campa, March 2009. The World Bank Group. 58. Data corresponds to the period of January-May of 2008, Banco Caja Social. SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 55 There are other successful variants of expedited company may not be easily sold through an auction. judicial processes. In some countries, e.g. Georgia, a Some laws even require a minimum number of bids notarized security agreement constitutes an executory for the auction to be valid. Rare assets that have a deed. In these situations, the creditor will be able to small niche market may not be easily sold through an receive a speedy judgment for seizure of the assets. The auction process. It is very important, therefore, for debtor can raise very limited arguments to challenge the law to allow the secured creditor to decide on the the seizure, e.g.: (i) lack of jurisdiction; (ii) lack of method of disposition, whether through private sale or sufficient powers of the complainant; (iii) waiver of the auction, instead of dictating a particular method in the security interest by the secured party; and (iv) extinction law. If not appropriately checked, public auctions are of the secured obligation through payment. Any other sometimes more susceptible to inefficiency and lack of arguments by the debtor can be raised only after the transparency. Whatever methods of disposition are collateral was repossessed so to ensure protection of permitted by law, it is important to ensure that the rights the collateral from mishandling by the debtor. of all known creditors, not only secured creditors, and the rights of the debtor are fully protected by providing 3. Disposition of the secured asset(s) for notice to them and the right to participate in the proceeds of sale based on their priority. Disposition of the seized property by the secured creditor is an important element in efficient enforcement With regard to the pricing of the asset being sold, mechanisms. The secured creditor, rather than a court in some countries, the price of the asset stipulated in enforcement officer, should be permitted to dispose the security agreement will serve as the initial price at of the property because the secured creditor is more auction. However, that value may not be meaningful likely than the enforcement officer to be familiar with at the time of auction because the value is likely to the resale market for the property. The secured creditor have changed between the time of the agreement and is also motivated to sell it for a price that will cover the auction. In some jurisdictions, public assessors are the outstanding obligation. Some laws impose on the responsible for evaluating the price of the asset to set secured creditor an obligation to sell the property for the initial asking price. This method, however, may market value, thereby putting on the secured creditor be subject to abuse and lack of transparency, and is the onus of proving the property was indeed sold for not, therefore, recommended for reforms of the legal its market price. The recommended provision for a framework. The better approach to pricing is to not modern law is to apply a standard of commercial set an arbitrary price and instead to rely on the market, reasonableness to the creditor’s conduct in the i.e. the auction price if auction is used, or the going disposition of the property, putting the burden on the rate for assets that have an established market value. debtor to show that the disposition was not commercially reasonable. Most laws also give the secured creditor 4. Debtor’s protection during enforcement the option to request the assistance of an official to proceedings conduct the disposition, which is generally by auction. The secured creditor may participate in the auction While execution proceedings are designed to allow under certain conditions protecting the interest of the secured creditors to enforce their rights efficiently, debtor and other secured creditors if participation in protection of debtors’ rights should also be included. the auction is commercially reasonable. There are three provisions to protect debtors’ rights that should be included in any reformed execution Varying methods of disposition are practiced in proceedings: different jurisdictions. Public auctions are common in many jurisdictions with both Common and Civil Law (i) Right to appeal against enforcement proceedings: backrounds. Some laws oblige the secured creditor to Debtors against whom enforcement proceedings sell the asset only through a public or private auction, are initiated should be allowed to appeal against while others allow private sales without an auction. the proceedings. The appeal should not delay the Requiring an auction by law can sometimes cause seizure proceedings, but may delay for a limited difficulty in situations where the assets are not easily time the disposition procedure. Examples of such marketable. For example, the assets of a biotech provisions follow: 56 chapter 4: Implementation “A person may appeal to stop enforcement (iii) Debtor’s right of redemption: The debtor may proceedings against his property only after the approach the enforcing creditor at any point and property is seized.”59 offer to pay the outstanding obligation. If such request is made before the property is sold the enforcing “The court may stay disposition of the property if creditor must accept the offer and return the property the debtor appeals the proceeding until a decision to the debtor. The following provisions illustrate the is rendered, unless it is found that the property is operation of this procedure: perishable or otherwise likely to quickly decline in value if not disposed of quickly.” “At any time before the sale of the collateral, the debtor may propose to the enforcing creditor to “The court must render its decision on the appeal not perform the outstanding obligation”. later than eight days after the appeal is submitted.” “The enforcing creditor must accept the debtor’s offer (ii) Right to be notified of the proposed disposition of and return the property to the debtor, if the offer the property: The enforcing creditor must inform the to perform is for the full amount of the outstanding debtor, any other secured creditor who has registered obligation, including the expenses of the creditor in a notice of an interest in the property and any other taking and maintaining the collateral”. person who has presented a claim of an interest in the property, of the proposed disposition. The right to notice usually includes notice of (a) the right of 2.2.6. Transitional provisions the debtor or a junior secured creditor to redeem One set of legal issues that must be addressed as part of the property at any point before its sale, and (b) the any secured transactions law reform is the transition to a place and time of any public sale. Examples of such new law. There are four elements of transition that must be provisions follow: addressed by the new law. Those are: “When the secured creditor obtains possession 1. Effectiveness between the parties and enforcement of of the property he must, within three days after he interests in movables that arose under the prior law gains possession of the property, notify the debtor, 2. Priority of interests that arose under the prior law other secured creditors, holders of other registered (prior interests) as against each other interests, and persons who have presented claims 3. Priority between a prior interest and an interest against the property, that the debtor, other secured created under the new law creditor, or claimant has the right to redeem the 4. Rules governing registration of prior interests during collateral from the secured creditor by performing and after transition the outstanding obligation.” For the first and second elements, the team’s legal expert “The secured creditor may proceed with the can begin with the analysis of prior laws that was done disposition of the property after he notifies the debtor, during the diagnostic phase. For the third and fourth other registered secured creditors, holders of other elements, the legal expert must coordinate with the registry registered interests and persons who have presented expert to determine what is possible in light of priority rules claims against the property.” and registration practices under the prior law. “The secured creditor shall notify the debtor, other Effectiveness of prior interests: The legal expert should registered secured creditors, holders of other examine the relevant prior laws that were identified in the registered interests and persons who have presented diagnostic phase to determine if prior law provides for claims against the property as to the time and place non-possessory security in movable property and, if so, of the sale of the property.” what types of interests are included and what rules govern 59. For example, in Bosnia and Herzegovina appeal by the debtor regarding enforcement can affect the proceedings only after the property is taken away from the debtor. SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 57 their creation and enforcement. Such interests may include non-possessory pledge, mortgage of movables, sale with retained title, etc. Box 26: Example of Provision in a Secured Transactions Law for Validation of Prior Security The reformed law should recognize the validity of rights Interests created under the prior law. The effectiveness and enforceability of the interest as between the parties to the “The effectiveness between the parties of a agreement should continue to be governed by the prior security interest that was created under the prior law (see Box 26). law continues after this law comes into effect, and shall continue to be governed by the prior law.” Priority of prior interests with respect to each other: The legal expert must determine whether the prior law provides for perfection, i.e. effectiveness against third parties, of security interests. In the rare case where there is no way to perfect under prior law, the reformed law can deal quite Box 27: Different Approaches for a Transition simply with prior interests by permitting a creditor to perfect Period for Prior Registrations a prior security interest under the new law on the same basis as for a new security interest. In that case, priority There are two approaches the reformed law can can be determined under the new law after it becomes take to a transition period for prior registrations, effective. If the prior law does not address the issue of each with its own advantages. The first is a effect on third parties, there is no conflict if the new law provision to preserve the original priority date permits perfection and prioritization under its terms. of prior security interests if a notice is registered during a transition period before commencement However, if prior law provides for perfection and of registration of notices under the reformed law. prioritization of security interests, priority between The second is a provision to preserve the original competing security interests, both of which were perfected priority date of prior interests if a notice is registered under the prior law, will not be affected by the new law; during a defined period after commencement of i.e. priority between prior interests will continue to be registration under the new law while allowing governed by the prior law. registration of new interests during the same period in parallel. Under either approach, if notice of Priority of prior interests with respect to interests created a prior interest is registered after the transition under new law: If the prior law provides for perfection period, its priority against interests created under and prioritization of security interests, the legal expert must the new law is from the registration date. The consider what means to provide to secured creditors for first approach precludes the risk of a new security the preservation of priority of their prior interests after the interest registered during the transition period new law becomes effective. The means generally consists being subordinated to a prior security interest that of a transition process whereby a prior perfected security is registered later in the transition period. The interest may be perfected under the new law’s priority second approach permits commencement of schema, while preserving its original priority date. The registration of all types of interests as soon as the rules for the transition process that is used will depend on registry is ready to operate, rather than delaying the situation in the jurisdiction. it while notices of prior interests are registered, The legal expert and the registry expert must consider though it does leave new security interests that are several questions before developing the transition rules registered during the transition period vulnerable that will govern prior security interests. Those questions to later registration during the transition period of include: a notice of a prior interest with an earlier priority date. • What are the means of perfection of security interests 58 chapter 4: Implementation under the prior law? Are security interests perfected possible to transfer the data into the new registry database at the time of creation of the security interest, at the by an automated process and to continue operations with time of registration, or at another time? the original registration date preserved in the system. In • If perfection is by registration, is the prior registration this case, it is not necessary to have secured creditors system centralized or decentralized, and if take any action to preserve their priority against new decentralized, on what basis (geographically, type registrations. of debtor, type of collateral, etc.) and at what level(s) of government? In the more common case where the prior law provides • Is/are the relevant registry(ies) under the prior for perfection by registration in a decentralized system law computerized, and if decentralized, are the or a system that is not conducive to automated migration systems consistent with respect to data elements and to the new registry’s database, the reformed law should organization of data? generally provide for a transition period during which • If the registry(ies) under prior law is/are computerized prior security interests may be registered to preserve their and consistent, does the database include all data priority against security interests created under the new that will be required in the new registry, and if so, is law (see Box 27). the quality of data reliable and in a form that it can Priority between registered security interests will be be automatically mapped to the new database? determined by the date and time when they become • If migration is technically feasible, is migration of data effective as notice to third parties. In the case of security or reregistration of security interests during a transition interests created and registered under the reformed law period more acceptable to the stakeholders? that is the date and time of registration. In the case of If registration under the prior law is centralized in a prior interests, the legal expert should draft the reformed computerized registry, if the data captured include all law’s transition rules in light of the priority rules of the prior of the elements required under the new law, if the data law and the limitations of the registration system that was elements are organized and identified in a fashion that used under the prior law. Those possible conditions and permits them to be mapped into the new database, and possible transition rules for the reformed law are presented if the data have been accurately entered, then it may be in Table 9: Table 9: Priority Conditions and Transition Rules of the Reformed Law Priority Conditions under Prior Law Transition Rule of Reformed Law No registration provided under prior law; perfection If registered in transition period, priority relates back to the date/time of under prior law is upon the security agreement the agreement. If registered after transition period, priority against new becoming effective. interests and registered prior interests is from date/time of registration. If not registered, priority against other unregistered prior security interests is per prior law. Priority under prior law is by registration; automated If registered in transition period, priority is from registration date/time migration of data from prior registry(ies) to new of prior registration under prior law. If registered after transition period, database is not viable. priority is from date/time of registration. If not registered under new law, priority against other unregistered prior security interests is per prior law. Priority under prior law is by registration; automated Provide for migration of prior registration data to new system. Priority of migration of data to the new registry database is prior interests dates from date/time of registration under prior law. viable and elected. SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 59 The operation of transition rules may be illustrated by the following examples: Example 1: Prior Law Provided for Priority by Registration Facts: June 1, 2007, Creditor A registered pledge under prior law June 1, 2008, Creditor B registered pledge under prior law June 1, 2009, reformed law effective, registry commences operation and transition starts June 5, 2009, Creditor B registers transition notice June 10, 2009, Creditor C registers new notice of security interest under reformed law June 15, 2009, Creditor A registers transition notice September 1, 2009, transition period ends October 1, 2009, enforcement commences by A, B or C Priority ranking: First priority to Creditor A dating from June 1, 2007 Second priority to Creditor B dating from June 1, 2008 Third priority to Creditor C dating from June 10, 2009 Example 2: Prior Law Provided for Priority by Registration Facts: June 1, 2007, Creditor A registered pledge under prior law June 1, 2008, Creditor B registered pledge under prior law June 1, 2009, reformed law effective, registry commences operation and transition starts June 10, 2009, Creditor C registers new notice of security interest under reformed law June 15, 2009, Creditor A registers transition notice September 1, 2009, transition period ends September 5, 2009, Creditor B registers transition notice October 1, 2009, enforcement commences by A, B or C Priority ranking: First priority to Creditor A dating from June 1, 2007 Second priority to Creditor C dating from June 10, 2009 Third priority to Creditor B dating from September 5, 2009 Example 3: Prior Law Provided for Priority by Date of Agreement – No Registration Facts: June 1, 2007, Creditor A made pledge agreement under prior law June 1, 2008, Creditor B made pledge agreement under prior law June 1, 2009, reformed law effective, registry commences operation and transition starts June 5, 2009, Creditor B registers transition notice June 10, 2009, Creditor C registers new notice of security interest under reformed law June 15, 2009, Creditor A registers transition notice September 1, 2009, transition period ends October 1, 2009, enforcement commences by A, B or C Priority ranking: First priority to Creditor A, dating from June 1, 2007 Second priority to Creditor B, dating from June 1, 2008 Third priority to Creditor C, dating from June 10, 2009 60 chapter 4: Implementation Registration transition provisions: The reformed law information about the security agreement, and might also should provide for transition of prior interests if the prior law require a statement of the legal authority under which it was provided for effectiveness against third parties (perfection). created, e.g. the pledge law. If the prior law provided for The transition rules may be included in the new law itself, perfection by registration, the rules may require information or the law may defer them to implementing regulations. In such as the registration number, registration date and the any case, the rules should provide a means for identification name of the registry in which registration under the prior law of a transition registration and for capture of information was accomplished. Or, depending on the circumstances, that establishes the priority date of the registration. the rules may require a book and page number of the registration if it was made in a paper-based registry. The first provision will be the transition process. This will include the transition period, if any, and whether it will be A third provision may be required to establish the date before or after the start-up of registration under the reformed on which the registration’s effectiveness will lapse if the law. It may also set out the responsibilities of the registry general rule for new registrations will not work. In the and the parties to prior transactions in getting registration case of registration of transition notices by creditors, the data for prior transactions into the new system. provision could state that the period of effectiveness for prior registrations during the transition period will start The second provision will set out the information on prior on the first day of operation of the registry, or it could transactions that is required in transition registrations. If state that the period will start on the date of the transition prior law provided that perfection was automatic upon registration. In the case of registrations that are moved creation of the security interest under the prior law, the rules by the registry from a prior database en masse, the rule may require a statement of the date and other identifying might retain the effective period from the registration under the prior law, or it might provide for a set period after the start-up of the new registry. There may be other valid options, depending on the situation. The point is that the Box 28: Matters That May Be Included in matter will need to be addressed in cases where the rule Secured Transactions Decree or Regulation for registration of security interests under the reformed law will not work.60 • Time and location of operation of the registry • The manner in which the head of the registry 2.3. Implementing Decree or Regulation discharges his duties and obligations of the Registry • Requirements to complete a registration, including amendment, cancellation, While the secured transactions law provides the legal extension basis for the operation of the registry, it may not have • Requirements to complete a search request sufficient detail to guide the operation of the registry, or it • Search methodology may explicitly defer certain decisions, e.g. the fee structure, • Format of confirmation of registrations and to a lower level of legal authority so as to permit later search results reports adjustments without the need for amending legislation. • Establishment of regular user accounts for The lower level legal authority generally consists of an access control and fee payment implementing decree, a regulation or both, depending • Methods and processes for payment of on the legal system of the jurisdiction. The decree and/ fees or the regulation may provide legal standards and rules • Fees for registry services governing registration and searching, fee structure and levels, and administrative details such as hours and 60. Laws of some jurisdictions deal with rights in movable property that were created in a foreign jurisdiction under its law. However, these provisions are not included in all reforms, and their lack is not serious deficiency. Such provision can assure priority of foreign rights in imported property by registration. The security interest will be recognized if it was created in accordance with the foreign law, and will have priority over a security interest created under local law if it was registered first or within time limit set by local law. SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 61 location (see Box 28). In jurisdictions where both a decree registries, the assessment should examine these registries to and a regulation are used, the decree generally governs determine their potential to be expanded to accommodate the standards and rules for registration, as well as the secured transactions registrations. fee structure and levels, whereas the regulation generally governs the merely administrative matters. If a decree is If there are no existing registry institutions suitable to needed, it is generally promulgated by the prime minister undertake operation of the registry, other government or equivalent, whereas the regulation is usually issued by institutions should be assessed to determine their capabilities the ministry in charge of the registry without higher level for operating or overseeing a modern secured transactions approval. registry. If this approach is necessary, the potential government institutions should be examined initially without Drafting the decree and/or regulations should be done having made a determination of whether the institution that following a decision as to the type of registry that will be is eventually selected will operate the registry (1) as part of used in the jurisdiction. For example, if the registry is fully its existing structure, (2) as a new autonomous entity under electronic without the use of any paper, the decree or the institution, or (3) as the oversight partner in a public- regulation should include provisions describing the manner private partnership where all or parts of the operation are in which information can be submitted to the registry. If for outsourced (see Box 29). example, the registry is not centralized but regional, the decree or regulation will stipulate where a registrant may If there is sufficient capacity in the institution to establish the go to register. registry, the organizational arrangement can be determined based on considerations such as ensuring the registry is not excessively vulnerable to political turnover in the institution C. Design, Placement and and ensuring the registry maintains a necessary degree of independence of operation and finances. It is often Implementation of Registry better, in light of these considerations, to establish it as an autonomous entity under the institution rather than merely 1. Information Gathering and incorporating it into the existing structure. Analysis If there is not sufficient capacity within the government institution, two further determinations must be made before 1.1. Capabilities of Government to pursuing a partnership with an outsourcer. First, the legal and political constraints on outsourcing must be identified. Operate Registry, and Private Sector That is, what kind of private sector participation in registry Alternatives operations is viable? Some governments are unwilling to permit the day-to-day management of a registry to be The obvious place to start an analysis of the question of outsourced, so outsourcing may be limited in such cases placement of the registry is to first determine if there is an to just the IT system’s operation. Other governments, existing registry of interests in movable property or another such as a number of Pacific island countries, are open registry that is well adapted to registration of interests to total outsourcing and even off-shoring if justified by in movables. If there is one, the implementation team the lack of viable domestic options. It is critical to learn should assess the extent to which the existing institutional the government’s policy and views on off-shoring before infrastructure can be used in a reformed secured transactions making the decision on what kind of external sources registry. The assessment should cover existing registration to consider. Second, the capacity of the private sector procedures and facilities, as well as the use of information to handle the IT system’s operation must be evaluated, technology and human resources, administration, types of since there are many developing countries where the IT data retained and security measures. For example, some sector is so underdeveloped that adequate facilities are countries with a French legal system have modernized not available. In such cases, off-shoring may be the only motor vehicles registries where claims against vehicles are viable option. recorded. In other jurisdictions, a creditor may record a claim against a company’s assets in the companies or If outsourcing of day-to-day operations is the best option, the business registry. In jurisdictions that have these or other potential outsourcers must be evaluated. Local institutions 62 chapter 4: Implementation that may be good options generally include the credit From the registry’s perspective, which is concerned with the bureau, provided it has a governmental connection, and ability of the infrastructure to meet the needs of an electronic the central bank. Evaluation of outsourcing candidates registry, the important components are (i) connectivity with includes consideration of organizational factors, technical the Internet, (ii) presence of facilities to support registry factors and the candidate’s reputation as a trusted third hardware, and (iii) availability of people with the right party. Organizational factors include the interest of skill sets to support the technology components. If the management of the institution, stability of management assessment from the end-user perspective reveals that a and ownership, relevance of the institution’s mission purely Internet-based registry is not feasible, the assessment to secured transactions and the institution’s reputation from the registry perspective may examine information and among secured transactions stakeholders. The technical communication technologies available to distributed intake factors are generally the same as those for evaluation of points that will serve users in outlying parts of the country government institutions, as described above. who do not have the capability to use the Internet for one reason or another. The first question is whether the intake points have Internet access. If they do not, then alternate 1.2. Country’s Technology means of transmitting images of paper documents to the Infrastructure and Support Capacity central registry location must be considered. For example, intake points may have the ability to fax paper documents There are two perspectives from which to assess a to the central location, along with payment information. If country’s technology infrastructure and capacity to support there is no means for real-time transmission to the central an Internet-based registry. The first is the perspective of location, it may be necessary to assess the transportation the registry, and the second is the perspective of the end infrastructure to determine the fastest way to move paper user. from the intake points to the central location. If remote Box 29: Typical Government Counterparts and Factors to Consider When Assessing the Capacity of our Counterpart Institutions should be examined to identify interest in taking on the task, competence and stability of management, economic interest in the success of the registry, reputation among stakeholder groupsand legal competence to deal with implementation. The state institutions considered generally fall into four categories: 1. The ministry that deals with commercial, economic and development matters 2. The Ministry of Justice 3. The Ministry of Finance 4. The Central Bank Once the best option among the potential government institutions is identified, it should be enlisted as the government partner for the reform. The next step is to assess its capacity to establish the registry within the institution or as an autonomous entity under its aegis. The following factors need to be considered when assessing the counterpart’s capacity: 1. The resident information technology (IT) capacity is perhaps the most important factor to be considered. That includes an IT facility to house the servers in an appropriate environment, to include climate control, power supply, physical security, back-up capacity, and presence of competent staff to maintain operations on a 24/7 basis. 2. In addition to the IT capacity, the physical facility must be capable of accommodating the staff, though the staff of a modern registry will be very small. SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 63 intake points are found to be necessary, the technology and they are often unwilling to extend it to loan officers to and staff capacity of the different organizations that may permit them to search and register. It may be possible to provide them should be assessed to identify the best option. overcome such resistance by recommending the use of a Those organizational options may include branches of dedicated terminal in the bank for registration use only, the registry itself (e.g. Vietnam), provincial offices of the with other sites blocked from the users. If such approaches ministry in which the registry is located (e.g. Solomon are not accepted, it may be necessary to assess the Islands), provincial offices of another ministry contracted viability of providing only Internet registration, thereby for the service (e.g. Vanuatu), or branch offices of another forcing such banks to change their practices. If such banks entity such as the Post or a bank with which the registry or have political strength to resist at the political level, it may its parent ministry has contracted for the service. be necessary to accommodate them with alternate means of access. From the end user’s perspective, the key question is whether all potential users of the registry’s services have access to the Internet in some fashion. The potential users 1.4. Form of Funding Registry whose needs must be considered include banks, inventory Operations financers such as manufacturers and wholesalers, buyers of farm products, lessor, non-bank financial institutions (NBFI) It is essential that the user community have confidence in and the public at large. It is not absolutely necessary for the continuity of operation of the registry. Therefore, it is all potential users to have Internet access in their places of necessary to determine what form of funding of registry business to meet this standard; they need only have access operations will be the most certain and stable, and what through such avenues as Internet cafes or service providers forms of funding are legally and politically feasible (see If users do not have access across the country, it will be Box 30). If there is sufficient confidence in the projected necessary to provide intake points in outlying regions to which users who do not have access may take paper documents, either for entry as data via the Internet from the intake points or for transmission to the central registry location via fax or some other means. While the intake Box 30: Factors to Be Considered in points discussed in the prior paragraph are provided by Determining the Type of Funding Mechanism government, there are a number of jurisdictions where private sector businesses operate as service providers to • Degree of certainty that revenues will cover registry users that do not have their own means of access or expenses and depreciation that choose to use an intermediary for other reasons. Such • Legal or political barriers to creation of service providers are common in jurisdictions as diverse as special or enterprise funds the United States and Bosnia and Herzegovina. • Difficulty of processes of creating and maintaining special or enterprise funds • Functionality and stability of the government 1.3. Capacity of Potential Users to • History of government in funding operations Utilize Various Levels of Technology with appropriated funds Even if a country has Internet access across its breadth, there are some countries where potential users do not have sufficient technological literacy to make use of the Internet for registration. In such cases, it will be necessary registration volume, and if it is legally permissible to create to determine if it is necessary to accommodate their needs a special or enterprise fund, the better option for funding with adaptations of the registry’s infrastructure, or if it should is to create a separate special or enterprise fund in the be left to those users to find a means to register, such as an Treasury into which fee revenues are deposited and from agent who is Internet capable. which funds can be drawn without appropriation to pay the costs of operation. In some more backward societies, even banks that have Internet access restrict it to the highest levels of management, 64 chapter 4: Implementation If use of a special or enterprise fund is the selected course, 1.5. Payment Methods it will be necessary to arrange for an initial one-time appropriation to fund operations during the start-up period Regular users of the registry will establish payment accounts until revenues are sufficient to cover costs. The amount of with the registry that may be either pre-paid or post-paid the appropriation must be determined by assessing the accounts, with payments made on periodic statements for costs for the period during which revenues will not cover services rendered during the period. Both options could costs of operation. It will also be necessary to provide in be considered when setting up the registry and both have the law that fees can be adjusted over time by regulation advantages and disadvantages in order to assure enough funding and to avoid accruing excessive balances in the fund. It may also be advisable The post-paid accounts option is more convenient for to provide for a spill-over of excess accruals to the general users and easier to administer by the registry. For users, treasury according to a formula that can be applied the convenience is that there is no risk of interruption of automatically at the end of each fiscal year. service in the middle of entering registrations as there would be in a pre-paid system if an unusually high number If there is a high level of doubt about whether the volume of registrations in a statement period (e.g. a month) causes of registrations will be sufficient to fund operations without the balance to hit zero and causes service to be cut off until setting fees prohibitively high, reliance on appropriations a new payment is credited to the account. For the registry, from the general fund may be the lower risk course, post-paid accounts can be administered completely despite the risk of defunding by the legislative body. automatically, with no need for exception processing to If implementation of a special or enterprise fund is not restore interrupted service. Further, post-paid accounts do legally or politically possible, the only option is to rely not require the refund of unused payments if the account on appropriated funding, notwithstanding the risk of owner decides to pull its deposited funds out of the defunding in the future. account. Finally, the software for post-paid accounts is less complex than that for pre-paid accounts. Since users Some jurisdictions, particularly in North America, have of such accounts are by definition recurrent users, the risk found an additional source of revenue, albeit not a large of non-payment is quite low – the software can provide one, in provision of data in bulk to certain types of users. that access to the account will be suspended if an account Those users are generally of two types. The first is data is not paid, so users will have incentive to pay on time. aggregators that provide multi-jurisdictional searching for However, there does remain a small risk that an account clients in a database compiled from regular bulk reports owner will stop using the registry at a time when it has from registries of many jurisdictions. The aggregators often a balance owing, causing the registry to lose the fees get complete transfers of the active database, with frequent for registrations made during the final statement period incremental updates to keep them current. The second (month) of that client’s usage. type is credit reporting institutions, either credit bureaus or more comprehensive business reporting firms such as Dunn If legal or political limitations exist that preclude the use and Bradstreet. In both cases, the registry can charge a of post-paid accounts, the pre-paid option would be the fee based on the cost of production or the commercial preferred one. The principal benefit of pre-paid accounts is value of the database, and thereby supplement revenue that their use eliminates the risk that a client may stop using to keep the costs to other users low, provided that the the registry while it owes fees for its last period of use, and registry’s revenues can be used to support its operations. then refuses to pay. The most obvious drawback of the Provision of bulk data in this fashion may run afoul of pre-paid option is the loss of convenience to users and the competition laws in some countries because it may allow registry as described above for post-paid accounts. But for searching by name of the secured party, thus giving beyond the matter of mere convenience, there is the risk to financial institutions the ability to determine what is in the users of delay due to the account balance hitting zero in loan portfolios of their competitors. So before providing for the middle of entering registrations into the system. bulk data sales, it is necessary to determine if competition laws of the jurisdiction may preclude them. Since regular users will need a means of making periodic payments on their accounts, and since one-time users will need to pay fees in advance of service, the types of payment methods and media used within the country SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 65 must be determined. Questions would include whether 1.7. Legacy Registrations and Data credit card usage is widespread enough to assume that all potential users of the registry would have credit cards. There is a significant problem that often occurs when The level of credit card service fees and any legal rules for starting up a new registry system where there has been a apportioning them should be determined. The existence registration law in existence before the law under which of electronic funds transfer (EFT) capability and its usage in the new registry is authorized. That problem is what to the country should also be examined. There may be other do with existing registrations that will now fall within the options used for payments, e.g. phone cards or debit purview of the new law. It must, therefore, be determined cards, so those should be identified as well if they appear whether there are existing registrations and, if there are, to have any potential as fee payment media. However, where they are located, how they are indexed, what with respect to one-time users who register via the Internet, data elements are in the index, whether the data are in it is necessary that whatever payment method is selected a database, what the technology platform is, whether permits identification of the payor. That is necessary to registrations can be determined to be active, and what the provide some protection against fraudulent registrations by approximate number of them is. This information will be unidentifiable persons, e.g. by someone using an Internet used in determining whether to convert them into entries café to register and pre-paid phone card in a disposable in the new database with a conversion program or to phone for payment. require re-registration during a safe harbor period after implementation of the new registry. In some countries, the most viable means of payment may be to use a local bank to receive payments to a registry account, identify the payor and issue a receipt or deposit 1.8. Capital and Operating Costs of slip. In that case, an effort should be made to identify the the Registry bank or banks with the best distribution of branches and with the ability and willingness to enter payment details There are a number of local factors that will affect either into the registry system in real time. If the banking network capital outlays to start the registry or its continuing operating does not have full Internet capability, the alternate means costs. These factors must be identified and their impacts of communicating payment details to the registry must be determined in order to develop the budget (see Box 31). determined. If alternate means are necessary, it will be important to know what information is provided to payors 2. Registry Best Practices on the receipt or deposit slip; i.e. whether it has a unique number that is entered into the bank’s payment record, Over the past half century of experience with notice and whether the payor is or can be identified in the system registries, first in the West and in more recent years in other and on the receipt/slip by name. parts of the world, a set of generally-accepted principles for such registries has evolved. These best practice principles comprise the standard against which registries 1.6. Projected Registration Volume and should be designed and operated. Over the past ten to Concurrent Users fifteen years it has become possible to better realize the full value of the principles with the use of modern information While modern registry IT systems are generally scalable, and communications technologies. New registries should there is still a need to ensure that the physical configuration make optimal use of those technologies to enable the full of the hardware and the operating system licenses that are application of the best practice principles. Those principles procured are sufficient to handle both the data and the are described in the following paragraphs. number of concurrent users. It is, therefore, necessary to develop projections for the number and size of expected transactions and the maximum number of concurrent users 2.1. Unity or Centralization that might use the system. Information will include (i) the Since the principal function of a registry is to provide to average record size, (ii) projected number of registrations, persons who rely on it sufficient information to decide and (iii) projected distribution of users. whether to deal with movable property, it is important that this information be available from one source. Therefore, 66 chapter 4: Implementation there should be only one database in which information of secured sales contracts and non-possessory liens in is captured and retained, and from which information movables, e.g. tax liens. Liens that are in essence a right of may be retrieved. A unified database provides complete retention need not be included, since they generally enjoy information relating to any registration effected against the priority under the law that is founded on the preservation movable property of a debtor regardless of the location of or enhancement of the value of the collateral. Such rights the debtor or whether the debtor is a juridical person or a of retention include, but are not limited to, mechanic’s natural person. lien, materialman’s lien, agister’s lien, transport lien and bailee’s lien. The registry should provide for registration of all types of relevant interests and include security interests in movables The law governing registration should not exclude certain (including fixtures), financial leases, long-term operating types of movable property from registration, e.g. objects leases, a consignor’s interest in consigned goods, the sale made of gold, which some older laws exclude. There Box 31: Capital and Operating Costs of the Registry 1. Application software: It must be decided whether to buy the application software off the shelf from a regular supplier or to build it locally from scratch. In the long run, the former option is most cost-effective and produces the better results, so should be recommended. But it must be determined if there is a legal or political reason that the purchase option cannot be used, and if there is any other reason that it cannot be used. 2. Procurement options and limitations: Assuming that the purchase option is used, local procurement requirements that may apply must be examined to see what kinds of costs are involved and what limitations there may be on bidding processes and eligible bidders. Hardware procurement processes must also be examined to determine the limitations on eligible bidders that may foreclose selection of the least expensive supplier. Because many emerging-economy countries have substantial import duties that increase the price of both software and hardware, it must be determined if such import duties exist, what their impact is, and whether the client is eligible for an exemption from the duty and whether that exemption can be used by the suppliers of the software and hardware. 3. Operating costs: Operating cost factors that must be investigated include the costs of labor and IT support for the registry, as well as associated costs for housing the registry office. Potential for mitigating these costs by sharing them with other applications that are run on the same platform or in the same facility should be explored. For example, in Azerbaijan, facilities, firewall, domain server, e-mail server and physical security measures will be shared with the land registry with which the movables registry will be colocated. 4. Internet costs: Another very significant factor in some countries is the cost of Internet communication. In some countries, particularly those with wide geographical distribution in remote parts of the world, Internet service can be very expensive, to the point that Internet service costs, assuming an off-shore operator of the registry, could be the largest operating cost after server colocation or rental. So it is essential to determine the order of magnitude of Internet service costs, particularly if an off-shore operator is used. 5. Additional cost considerations: Yet another factor in operating costs is the additional cost of operating if a paper registration option must be provided to users. In that case, there will be costs of remote intake and providing a backup medium for the paper, e.g. scanning to disk or microfilming, so those must be considered in determining total operational costs. SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 67 may, however, be an exception to this rule where there are existing registries of special property that already function Box 32: China—The Classic Case of Disunity in a efficiently. In that case, there is no justification for abolishing Registration System them in favor or a new registry of security interests. The law should clearly identify the types of property excepted The existing unreformed registration system for from the new registration requirements in order to avoid interests in tangible movable property in the Peoples’ duplication of registrations. One example of such an Republic of China is the classic case of disunity. exception occurs in Azerbaijan, where the securities register has a well-functioning process for registration of • First, registration of security in movables is security interests in investment securities. made with a public notary if the debtor is an individual, but with the State Administration of In legal form, financial leases, long-term operating leases, Industry and Commerce (SAIC) if the debtor consignments, sales with reservation of title, the sale of is a business, including a proprietorship. It is secured sales contracts, and liens are not true security often difficult to determine whether an individual interests. However, it is important that they be included is a debtor in his/her individual capacity or in the registry and that they be bound by the same priority in a proprietorship capacity, so the place of rules as true security interests. The reason is that, without registration is uncertain. registration, leasehold interests, liens and the sale of secured • Second, if the debtor is acting as an individual, sales contracts could remain hidden from third parties who registration can be with any public notary in may rely on the debtor’s apparent ability to alienate them. the municipality, and there may be many A registry can easily accommodate registration of notices notaries with concurrent jurisdiction in the same of all such interests, without significant difference from municipality. So there is no way to determine what is required for true security interests. where a registration may have been made. • Third, if the debtor is a business, registration In sum, unity refers to geographical unity, unity of legal is made at an SAIC registry at one of four form of interest, unity of type of movable property and different levels of government, and the basis unity of type of debtor. So the registry should include in of determining the level is by a combination of one database all forms of non-possessory legal interests in obscure factors, including the type of secured all types of movable property wherever located within the asset and the legal form of the interest. jurisdiction (see Box 32). • Fourth, within a given level of government, place of registration is determined by the 2.2. Limited Purposes location of the asset, with separate registries in each geographical division at that level. At Registration should serve only the legitimate purposes of the lowest level, the geographical divisions registration. Those purposes are (i) to give notice that a may be very small and many in number, so security interest may exist in the identified collateral and a movable asset may easily move from one (ii) to provide evidence of publicity as the basis for the registry’s jurisdiction to another without the secured party’s priority in the collateral (see Box 33). move being detected. Extraneous information should not be required. A notice • Fifth, there is no connection of databases, so should not include information that is not necessary to alert searching is limited to one specific registry. a potential creditor or buyer of the possible existence of • Sixth, there is no supervision of the lower levels a security interest; i.e. it should not include information on of registration by the highest level of SAIC, so the nature or amount of the secured obligation or the value policies vary among registries. of the collateral. The bottom line is that registration does not provide any meaningful transparency because it is fragment- 2.3. Rule-Based Decision-Making ed by type of debtor, type of asset, legal form of the interest, level of government, and geographical Registration in and searching of the registry database location of the asset. should not require the use of human discretion on the 68 chapter 4: Implementation part of the registry staff. The registry’s rules, as set out in number of a vehicle or item of serial-numbered industrial, the law and subordinate legal authority, should eliminate construction or agricultural equipment. For a rule-based randomness in acceptance or rejection of a notice and in search to work reliably, there should be only one criterion determining what information to report on a search. See on which to search for each type of search. The reason for Annex 6 for an example of registry regulations. this limitation is that a rule-based search must be done the same way in every case so as to produce the same result set Acceptance and rejection standards for registration must for all searchers. That is, if two criteria were permitted for be concrete, specific, and limited. Reasons for rejection a particular type of search, and if one of them was entered must be objective so that no discretionary judgments are incorrectly when the notice was registered, a searcher involved in the decision-making process. Acceptance or who searches on the incorrectly entered criterion would rejection decisions should be capable of being made by not find the notice, whereas a searcher who searches on the information technology system. the correctly entered criterion would find it. For a search The rules for performance of searches of the registry on any type of debtor, the law must provide for search database must likewise be concrete and objective. There by the debtor identifier (name or number), but it must not are several types of search that may be done to find a give the searcher a choice of criteria. Nor should the law notice or notices, including search by debtor, search by provide for searching on two criteria, because a search registration number of a notice and search by the serial on two or more criteria may exclude a notice that correctly Box 33: Information Required for Registration The information that is necessary to serve the purposes of registration consists of: 1. The identity of the debtor: The form of identification of the debtor must be specified for each type of debtor in the law or the implementing decree or regulation, since the debtor’s identifier is the key used to search the database in most cases. That identifier may be the debtor’s name, national identification number, company registration number or other unique and immutable identifier that may lawfully be used for such purpose. 2. The name and contact information of the secured creditor. 3. A description of the movable property (collateral) that secures an obligation to the secured creditor. When collateral consists of a motor vehicle that is not inventory, the law should provide for indexing and searching by a vehicle’s serial number, also known as vehicle identification number (VIN) or frame number, unless the law provides for registration of security interests in vehicles in a different registry. If business conditions and practices in the jurisdiction establish a need for potential buyers of major end items of equipment (agricultural, construction or industrial) in private sales to search by serial number, the law may also provide for indexing of major end items of equipment by their serial numbers. Depending on the economic needs of the jurisdiction, it may be useful to expand this approach beyond vehicles to include major serial-numbered end items of industrial, construction or agricultural equipment. 4. Duration of registration if the law permits the registrant to specify a period of effectiveness of the registration. In sum, the registry serves an informative function by publicizing information necessary to alert a person who searches the database that a security interest may exist in particular movable property of a particular debtor. SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 69 identifies a debtor by one of the criteria. Box 34 provides change notice if the initial notice’s registration number is examples of problems with multicriteria searches. incorrectly entered. For searches by a serial number or by the registration number of a notice, the search rules are very clear and 2.5. Speed of Registration and Timeliness concrete. That is, the search will identify only those notices of Information for which the number is an exact match. The registry technology system should immediately accept The most effective way to remove human discretion and or reject a notice upon its submission by the user, without error is to use a technology system that applies fixed rules the need for registry staff intervention in the case of in the form of system edits of data fields, fixed search logic registrations submitted via the Internet. The registry system and the use of check sums in registration. The fixed rules should immediately generate a printable confirmation of must yield predictable results, so it is necessary for the registration, to include the date and time of registration, rules to be known by all users, including both registrants the registration number assigned to the notice, and all and searchers. 2.4. Accuracy The registry design should push data entry into the hands Box 34: Example of Problems that Arise from of the registrant in the vast majority of cases, thereby Permitting Search on Alternative Criteria eliminating the possibility of data entry error by registry staff. That can be done by making it attractive to do • In a system that permits searchers to search most, or preferably all, registrations on-line. The same is by a citizen debtor’s name and/or national true of entry of the search criterion for a search. To assist identification number, John Alan Doe, both users and registry staff in ensuring that data entry is national ID# 12345678, is identified on correct, the registry technology system should require a a notice registered by Bank A as John Alan verification step before the user commits a notice to the Dough, national ID# 12345678. database. Finally, if there are notices that must be entered • Bank B then does a search on the same by registry staff from paper, a printout of the entered debtor when he applies for a loan, and data should immediately be given to the registrant who uses the debtor’s correct name, John Alan delivered the paper to the registry office so its accuracy Doe. Bank B does not find the notice can be confirmed or a correction made immediately. registered by Bank A, so makes the loan secured by the same assets that secure The registry’s technology system should also be designed Bank A’s loan. to detect or avoid errors in data entry to the extent possible. • The debtor then defaults on one or both Such measures include system edits that will detect whether loans. a mandatory field has been filled or, where a particular • Bank B claims it has priority because it did type of data is required in a field, whether the data are a correct search and did not find the notice of the right type (e.g. numeric or alpha). Another type registered by Bank A. of error detection and avoidance technique that should • Bank A claims it has priority because it cor- be included in a registry’s design is the use of a check rectly identified the debtor by his national sum in the registration number assigned to a notice by ID#, so Bank B could have found the the system at the time of registration. When a change to notice if it had searched by the ID#. a notice, i.e. amendment, continuation or termination of the notice, is registered, the change notice must identify While the apparent correct result would be for the registration number of the initial notice in order for the Bank B to prevail because it was misled by Bank system to link the change to the initial notice. The check A’s error, experience in jurisdictions that have sum enables the registry system to determine whether the used such systems shows that courts often find in initial notice’s registration number was correctly entered on favor of Bank A. the change notice, and will cause the system to reject the 70 chapter 4: Implementation information entered for the notice. In cases where registry misguided, since they serve no valid purpose and, in any staff must enter information from a paper notice, entry case, can be easily circumvented by any searcher whose should be done immediately upon receipt of the notice. true intent may not be one deemed “legitimate” by the The confirmation should be printed and immediately bureaucrats who operate the registry. returned to the registrant. Since a searcher must be confident that information 2.7. Simplicity found in a search reflects all effective registrations at the moment of the search result, it is essential that all The registry technology system should use simple, user- effective notices be included. Therefore, a notice must not friendly interfaces for the majority of users who register become effective until it has been accepted to the registry notices via the Internet. Information requirements should be database. Information must be available to searchers limited to only those relevant to the purposes of registration immediately upon acceptance of a notice by the registry as described above. system. If information is not available from the moment a The registration law and subordinate legal authority registration is done, a second registrant may search the must not include unnecessary formalities, particularly registry records during the gap before a new registration’s requirements for signatures, notarization or personal information is available, find nothing encumbering assets appearance by parties to the secured transactions. Since of the debtor, and rely on that state of the record to grant registration should only provide notice and not create credit secured by the same assets. rights between the parties, there is no legal reason for requiring signatures, appearance or other formalities. 2.6. Accessibility Though the real risk of fraudulent notices being registered is minimal because perpetrators cannot gain a significant The registry should be available to users for registration legal advantage by doing so, such risk as there is can be and searching 24 hours a day, seven days a week via countered by technology system controls on access to the the Internet to the extent permitted under the laws of the system. Modern systems make it possible to identify a jurisdiction. It is not necessary that users have their own person who submits any application electronically. Internet access in order to use the registry, since transactions can be done as well through other access points such as If there are users of the registry who do not have access Internet cafes. If there are significant numbers of potential via the Internet, paper forms should be simple and user- users who do not have access to the Internet either directly friendly. To the extent possible, they should reflect the or through private sector service providers, the registry requirements and screens used by on-line registrants, so should accommodate receipt of notices by a variety of that registrants who use paper or fax do not have more means such as Post, fax or personal delivery. In some complicated processes than those who register on-line. situations, it may be necessary to provide for receipt of notices through geographically dispersed intake points, as 2.8. Cost Effectiveness in the case of island nations spread across large reaches of ocean or in the case of countries with little or no Internet, Since the costs of registration constitute a burden on telephone or postal infrastructure outside the main cities. secured transactions, they should be minimized. Such costs include both the costs of preparation and presentation of Information in the registry is public information and notices and the fees paid for registration and searching. should be available to any user without restriction. There Costs of preparation and presentation can essentially should be no requirement for any particular capacity of be eliminated by providing for Internet registration and, a searcher because the information is needed by more if necessary, simplified registration on paper or by fax. than just financial institutions, e.g. buyers of movable The operational, overhead and transactional costs of the property such as equipment or agricultural commodities. It registry should be kept as low as possible by making should be noted that some countries with modern secured maximum use of technology to minimize staffing and transactions systems require a searcher to state the purpose archiving needs. Registration fees should be assessed of the search (e.g. Article 173 of the New Zealand per notice, and should be set to recover only the costs Personal Property Securities Act). Such requirements are of operation and capital replacement. The level of fee SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 71 required to cover costs of operation will vary greatly searcher has relied on the uncorrected state of the record from jurisdiction to jurisdiction. Since the largest costs of before the correction is made. operating a registry are fixed, a large jurisdiction with a high volume of registrations will need less revenue per registration than will a small jurisdiction with a low volume 2.10. Security of registrations. For example, the registration fee in the Since information in the registry database is determinative Federated States of Micronesia, with a population of of priorities among competing interests in collateral, it is about 135,000, is US$15, whereas the registration fee essential that the information be secure against all types in Cambodia, with a population of about 12 million, is of threats. The types of security that must be considered the equivalent of US$2.50. The registration fees in the include (i) security of data against electronic tampering, United States differ dramatically from one state to another, (ii) security against natural or human-caused disaster, and but the average is approximately US$10. Registration (iii) physical security of the registry facility. Security should fees in Canada are assessed based on the term of be addressed comprehensively in a security strategy. If effectiveness selected by the registrant, but are in no case necessary, the services of a security specialist may be prohibitive. Access to information by on-line search could helpful in devising the strategy to ensure that all aspects be with or without fee. Some jurisdictions charge a fee for are addressed. The registry’s users must have confidence all searches and others do not charge for doing searches in its continuity of operation and in the reliability of its unless additional service such as certification of the search information. It must, therefore, provide for security against result is needed by the searcher. disruption of operations and for protection of data integrity. 2.9. Add-only Security measures against electronic tampering include The registry should only permit documents to be added the use of firewalls and anti-virus programs, as well as to the record, but never removed. That is, if a notice’s controls of user groups and rights. Security measures effectiveness is terminated by the secured creditor, the act against disasters include location and hardness of the of termination is added to the record so that a viewer of facility, fire suppression system, continuity of power and the record can see that the secured creditor no longer regular back-up of data to a secure remote facility. There claims the security interest, but the act of termination does are many acceptable ways to do back-ups, including a not cause the notice of the security interest to be removed DAT drive mounted on the data server, replication to an from the database, and it can continue to be found in a off-site database, etc. The recommended approach will search until the initial notice’s registration period lapses. vary according to the IT capacity of the country and the registry, as well as other factors. Security measures against The concept also applies to amendments and to corrections physical penetration include both technological controls of the record by the registry in the case of data entry errors such as electronic combination locks and administrative by registry staff from paper notices. That is, the state of the controls such as knowledge of all authorized entrants to record before the amendment or correction was applied the facility. should remain available to searchers, and the record of the amendment or correction should be transparent. 3. Business Model The rationale for adding to, and not removing, registration records before their natural lapse is that it is often important for a searcher to know of a security interest’s existence, 3.1. Physical Form and Modes of even after it has been terminated, and to know the prior Access state of a record that has been amended or corrected. In the case of termination of a security interest, it is possible A secured transactions registry can employ one or more for a registration of termination to be fraudulent or to physical forms and provide a variety of way for users to apply to fewer than all secured creditors. In the case gain access to the registry’s functionality. of a correction, it is important to retain a record of the Spectrum of different types of registries: For the first three uncorrected registration so as to determine liability when a decades of operation under modern secured transactions 72 chapter 4: Implementation laws, the US states and Canadian provinces successfully avoidance, since they need not rely on registry staff to operated paper systems until technology advanced manually enter or scan registration information submitted sufficiently to permit the transition to the use of electronic in hardcopy form. The potential for error, omission or registration. At the opposite end of the spectrum is a fraudulent conduct on the part of the registry staff in purely electronic registry where access is exclusively by a dealing with registration data is eliminated, with the Web form via the internet or kiosks provided for electronic resultant reduction of liability risk to the registry. access by those without their own internet access. In between are different combinations of these forms and Hybrid systems: While a purely electronic registry is the intermediate forms such as registration or search request ideal, there are many countries where that is not possible. by fax or e-mail attachment. There are systems still in For example, there are countries in Africa and the Pacific operation that rely only on paper and equivalents such as where much of the population is widely dispersed in areas fax and e-mail attachments. that either have no Internet access or have very limited access. In such countries it is necessary to consider the Paper-based systems: The traditional, but less ideal, form full range of modes of access to the registry and select the of registry is a pure paper system where a user either best combination to be made available to users. With the presents a notice for registration or a search request in passage of time, the number of users who have access person at the registry or sends it by post or courier. It is to and are able to use electronic media for access to recommended that the paper-based registry system is not the registry should increase as infrastructure develops and used in the creation of future registries. expands to cover areas not currently developed. Web-based systems: Some modern registry systems, Where a purely electronic registry is not feasible due to e.g. most Canadian provinces, New Zealand, Bosnia the technological capacity of the country or other reasons, and Herzegovina, Cambodia and Federated States of alternative methods of access to the registry may be used Micronesia, permit only one method of access, i.e., direct in parallel with Internet access to provide the best possible electronic entry and search of registration data using web means of access to the full range of users. For example, forms. The advantage of such systems is that secured in remote areas where Internet access is not commonly creditors enter their own data to effect a registration available to the private sector, the government may have and to enter the search criterion for a search. The most local offices that have either Internet or WAN access to common means of access is from the user’s computer over the registry IT system. In such cases, the staff in the local the Internet, but in cases of a concentration of very large offices can provide intake and data entry functions for users, it may be advantageous to provide for access via a remote users for registration and searching. In some cases, wide area network (WAN). Users who do not have access not even government offices will have electronic access to through their own Internet connections can use other public the registry database because there is no Internet or WAN access points such as Internet cafes, government kiosks or access in remote locations. In such cases, access to the computer access facilities in public agencies. In some registry may be possible by using fax machines in local countries there are intermediaries that have arranged for government or intermediary offices to fax paper forms to direct access to register or search on behalf of registrants the registry for entry through the same web forms used by who do not have access through their own facilities. Such web registrants and searchers. Where Internet access is intermediaries take different forms in different countries, not generally available to users, users should also be able including the Post, notaries, consortia of private registry to register or search by physical delivery (in person or by intake points, and business services companies. See mail or courier) of hard copy registration or search request Annex 7 for an example of Terms of Reference for the form to the registry for entry by registry staff. development of the registry system using web-based requirements. In considering whether Internet access is sufficient to rely exclusively on it for access by all users, it is important An electronic system is much less costly to operate than to remember that many users of the system will not be others since registration and searching are done by users registrants, but rather will need only to use the search or their intermediaries. Secured creditors and searchers function. While banks and other creditors that both register have complete control over the timing of registration and search will generally have Internet access, those users and searching and have much more control over error that only search may not. They include buyers of farm SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 73 products or livestock and buyers of other movables where the sale is not in the ordinary course of business of the seller, as in the cases of the purchase of an item of a business’ Box 35: Factors to Consider Before Outsourcing Operation of the Registry equipment or the purchase of all of a business’ inventory. Consequently, it is not enough to ask, when determining Before looking into whether to outsource and to what means of access must be provided, whether all of what extent, the first question should be whether the potential creditors that will register notices have access it is possible and advisable to locate all aspects to the Internet; Internet capability of potential search users of the registry within the responsible government must also be considered. In all but the least technologically entity. Things to consider in making this judgment developed countries, however, the needs of such users for include: access to the Internet can be met by Internet cafes or NGO- provided Internet access facilities. • The stability of the entity’s management • The quality of the entity’s information In order to minimize risk of mistake in registrations and technology staff and facilities searches and to ensure standardization of procedures, it • Whether employees are hired on merit or is necessary to require the use of prescribed forms for use patronage by persons who register or search using paper. This will • Stakeholder perceptions of the entity minimize errors in data entry of registration information • Stakeholder attitudes toward outsourcing of by the registry staff. These forms should be available governmental functions throughout the jurisdiction through local intake points, other government offices or by Post. Beyond requiring If the responsible government entity has adequate standard forms, accuracy of entry by registry or intake facilities, is well managed, hires competent point staff must be assured by requiring registrants to employees, is well regarded by stakeholders, immediately check the accuracy of data that have been and wants to assume operational responsibility entered. To that end, each registrant will be given a for the registry, then full operation of the registry printed confirmation of the data that have been entered by the entity is the best option. and instructed to inform the registry or intake point staff of any data entry errors. In order to limit the registry’s liability for such errors, notification to a registrant of the need to transactions registry. As noted in the following section, check the data must be institutionalized, and the law or that does not necessarily mean that the entity will engage other legal authority should set a time limit after which the in the day-to-day operations of the registry. registrant assumes liability for errors if he or she fails to notify the registry of the error so that it can be corrected. 3.3. Extent and Type of Outsourcing 3.2. Responsible Government Entity or The spectrum of options for operation of the day-to-day Entities functions of the registry ranges from mere oversight and legal responsibility for a fully outsourced operation of all If the government has not already pre-empted the choice of registry functions on one end, e.g. Vanuatu, to operation of entity to operate the registry, the responsible entity should all aspects of the registry within the responsible government be selected based on its capacity and willingness to take entity on the opposite end of the spectrum, e.g. Vietnam. on the responsibility. As discussed earlier in this Toolkit, the The one common requirement is for ultimate responsibility entity’s capacity will be assessed based on compatibility for the registry and ownership of registry data to reside of the entity’s mission with the secured transactions function in the government in the form of the responsible entity. and on its technological capacity, facility, management Aside from that requirement, all other elements can be continuity and vision, physical capacity to house the considered for outsourcing to other operators, whether technology assets and personnel, and independence from public or private. political interference in registry operations and budgeting. The selected entity should be enlisted as the local Based on the analysis of the capacity of the responsible governmental partner for implementation of the secured government entity as described in a previous section, a 74 chapter 4: Implementation decision on the extent of outsourcing that is needed must In both forms of outsourcing, i.e. outsourcing of just the be made. If the only significant shortcoming is lack of information technology function and outsourcing of all information technology assets, a commercial data center registry operations, there is an additional factor that should may assume responsibility for managed co-location of be considered. That factor is the balance between capital servers, to include hardware maintenance, running of costs and operational costs. If financing of capital costs is back-ups and off-site storage of back-ups. In that case, the not a major problem, the hardware and system software responsible government entity will retain control of registry may be purchased and located with the outsourcer. If operations such as help desk, management of revenues and capital financing is not readily available, use of leased training of users. The physical location of the outsourcer servers owned by the outsourcer or a third party lessor can for data center functions is not operationally important, be considered. Using the latter option will incur greater but there may be political concerns that outweigh mere periodic costs of operation than will co-location of servers financial considerations. That is, an off-shore data center owned by the government, but the difference in periodic may offer the best value, but political unease about having costs is often less than the amortization of the costs of government-owned data housed outside the country may purchase of hardware and system software. preclude off-shore locations (see Box 35). If the decision is to use an off-shore outsourcer, the best If the responsible government entity lacks interest in or is off-shore option may be the vendor of the application incapable of operating the registry within the government, software, provided it has the capacity to house and essentially all of the registry functions except for high-level maintain the IT assets and provide technical support to oversight may be outsourced. In that case, the outsourcing users. If this option is used, it is important to provide in the options identified in the analysis must be evaluated, and contract that the vendor must supply a copy of the source a decision made on the type of outsourcing to be used. code to the registry operator and keep it updated with Guidance on outsourcing is provided in Box 36. all upgrades or bug fixes that are made, and further that Box 36: Outsourcing – Look for the Best Candidates Factors in assessing outsourcing candidates include: • Information technology capacity • Internet communication costs to the outsourcer’s location (in some remote countries, Internet costs to off- shore locations are high) • Secured transactions registry domain knowledge • Quality of management and reputation among stakeholders Domestic candidates often include the credit information bureau, the bankers’ association, a private business services company or a local data center that has the capacity to provide help-desk support. Off-shore candidates include companies that provide outsourcing to other secured transactions registries, as well as secured transactions registries in other countries that will share their facilities with the registries of other countries (e.g. the New Zealand61 Personal Property Securities Registry). 61. So far, the only jurisdiction worldwide that is offering these services to other jurisdictions. SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 75 the vendor will deliver the database to the government or criterion are returned in the search results. In the case of a new outsourcer upon expiration or termination of the numeric searches such as national identification number, contract. This option is in successful operation in Vanuatu registration number or serial number of a major item of and is being considered in a number of other similar small collateral, the logic is quite simple, i.e. it requires an exact jurisdictions. match of every character. In the case of searches by name of the debtor, the logic may include a normalization Depending on the anticipated volume of transactions, it process whereby certain minor differences between may be viable to rent shared space on an outsourcer’s compared names are eliminated by the system. For servers and other hardware, and thereby avoid much example, individual names may be broken into separate of the capital outlay and maintenance costs entailed in fields for surname, first given name and second given owning the hardware. The decision will be driven by name; punctuation and case differences are eliminated; comparing (i) the present value of the difference in periodic resulting surnames are compared for exact match; and first costs of shared and owned hardware with the capital and and second given names are compared for exact match (ii) the capital outlay for owned hardware. The analysis or, if only an initial is given or the name is left blank, should also consider the costs of the operating systems compared for the correct initial or blank space, which and database, and whether they are included in the are also considered as matches. Legal entity names may shared hardware arrangement. If this option is used, it be normalized by elimination of punctuation and case is important to provide for safeguards against the risks of differences, and elimination of selected words or phrases sharing servers with other users. indicating the kind of entity; the resulting character string is then compared for an exact match. 4. Development of Design and Specifications The logic used for searching for a debtor by name, whether an individual’s name or an entity name, is less exact and more complex than the logic of a numeric 4.1. Factors Considered in Design search. Therefore, if there is a reliable, immutable and unique number that may be used under the law to identify 4.1.1. Best practices a debtor, numeric identifiers are preferred to the name. For example, if the jurisdiction has a system that assigns a While all of the best practices described in 4.C.2, above, national identification number to all individuals that stays should be considered and incorporated in the registry with them for their lives, if each citizen can have only one design, there are some that require special consideration number, and if there are no restrictions under the law on Those are rule-based decision-making, simplicity and add- the number’s use, it is preferable to the name to identify only. citizens. It is possible that different types of identifiers may be needed for different classes of debtors. For example, Rule-based decisions that are made by the registry the national identification number may be the best option technology system relate both to acceptance or rejection for citizens, while it may be necessary to use the name of registrations and to determining what to report in for foreigners because passport numbers are neither response to a search request. Rules for acceptance or immutable nor unique, i.e. a new number is issued upon rejection are embodied in system edits of required fields renewal, and a person may have more than one passport to ensure that all required fields include an entry. In some at a time. cases, the rules will require fill of at least one of multiple alternate fields. If a registrant fails to fill the required fields, Simplicity is served by the design in two respects. system edits will cause an error message to be generated First, screens must be designed to eliminate clutter and to direct the registrant to correct the defect. If defects are crowding, with only that information needed by registrants not corrected, the system must reject the registration. If all available to them on the screen. Second, screen flows edits are passed, the system must automatically accept it. must be intuitive to any user, so a registrant is led through the process from start to finish. As to searches, the rules set out in the law and implementing regulation must be embodied in the system search logic Add-only refers to the registry system’s preclusion of so that all entries in the database that match the search alteration by any person, including registry staff, of data 76 chapter 4: Implementation that have been committed to the database. For example, are used for payment, the system will capture the name if a paper registration has been entered by the registry of the card owner when the transaction is done, and the staff, and if a data entry error made by the registry staff system should retain that in the payment record for the is then discovered, the original erroneous entry is not transactions done. If other means of payment are used, eliminated when the registry corrects the error. Rather, similar measures should be taken to ensure the identity of the registry adds to the file a correction of the registered the payor is known. For example, if payment is made notice that shows the date and time of the correction, so to the registry’s bank account in advance of service, the a later search will show both the initial erroneous entry bank should be required to positively identify the payor and the correction. That is necessary so that the history is by identification card and to enter the name of the payor available to explain the results of a search conducted in in the payment record. the gap between the initial entry and the correction. Corruption by registry staff generally consists of Add-only also refers to retention in the active database demanding premiums for performing registration duties. of all registrations until their lapse at the end of the The factors that enable such corruption are the ability to registration period, regardless of whether a termination exercise discretion over the acceptance of a registration of the registration may have been entered. A search that and the handling of cash received from the registrant. identifies a terminated registration will simply show the The registry design should eliminate both factors to the termination in the file of the registration, along with the extent possible. An electronic registry that applies rule- initial notice and all other entries such as amendments based decisions eliminates all or nearly all discretionary and continuations of the registration. This approach is judgments. If paper must be used to accommodate users necessary both to protect the interests of co-secured who do not have Internet access, it is more difficult to creditors who do not terminate their interests and to protect eliminate the opportunity for corruption, such as demanding against the possibility of a debtor eliminating a registration a premium for expeditious entry. But measures to limit from the active archive by fraudulently terminating it. discretion should be designed into the system, such as using the same application software for Internet registrants and registry staff, who should not be permitted to reject 4.1.2. Antifraud and anticorruption a registration for any reason other than rejection by the measures registry technology system or lack of payment. Handling of The registry design must protect against fraud by users cash payments from users can and should be eliminated by and corruption by registry staff. Both can be deterred by using a payment system that does not allow cash payments features of the information technology system. directly to the registry. For example, payments may be made to the registry’s account at a commercial bank that Fraudulent acts by users of the registry are rare but may issues numbered receipts or deposit slips that can then generally consist of either false registrations by unknown be used by registrants as payment for fees. In one Asian persons for the purpose of harassment of or economic jurisdiction where government corruption is endemic, the damage to persons named as debtors, or fraudulent opportunities for demanding premiums were eliminated to termination of a notice by a person named as a debtor the extent that it is possible to do so by permitting only in a registered notice. In both cases, the best deterrent electronic registration and using a commercial bank for is knowledge by the offending person that he or she can payment intake. be identified with certainty by the registry. Therefore, the registry design should ensure that persons who register The system must provide a full audit trail from every payment or pay registration fees can be identified. In the case of to either the services for which it paid or a user’s account, regular users who have accounts with the registry, that and from an account to a every service of the account is a simple matter, because each individual user of such holder. The audit trail should also track every payment an account will have a unique user ID and password, from receipt to deposit to the treasury or, if the registry and the user ID can be captured and associated is operated by a private outsourcer, to the bottom line of permanently with all transactions done by the user. In the financial report from the outsourcer to the responsible the case of one-off registrants, the system must include government entity. means to identify the payor of the fees. If credit cards SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 77 4.1.3. Users and fee payment methods payment should be required. The options for payment methods are set out in the following paragraph. What is Users: There are two different types of users of a registry, important, however, is that one-time users should be able those being regular users such as banks and leasing to register as quickly as a regular user, or nearly so. companies, and one-off users such as a self-financing seller of equipment not in the ordinary course of business. Both Payment methods: The selected payment methods for types of users should be able to pay fees in such a way payments by both types of users will depend on what is that they can have real-time access to register electronically available in the country. But whatever payment methods or by delivery to the registry or an intake point. are used, each must permit the identification of the payor so as to validate payments to the accounts of regular users The common payment mechanism for regular users is to and to prevent the potential for fraudulent registration by maintain an account with the registry to which payments one-time users. In some more advanced countries, the use are made periodically and to which fees are automatically of electronic funds transfer (EFT) payment to the registry’s charged for services. Such accounts can be designed for account in a commercial bank may be viable for regular advance payment to a draw-down account or for payment users and perhaps even for one-time users, provided there on period statements in arrears. As noted in 4.C.1.5 is a means for identification of the one-time user and a supra., both types of systems are viable options. means for immediate notice of the payment details to the registry’s system. If credit card usage is sufficiently Since the risk of non-payment by a one-time user is high widespread in the country that all potential one-time users if permitted to pay in arrears on an invoice, advance of the registry would have them, they can be used both for Table 10: Payment Method Options Method Advantages Disadvantages Examples Vietnam, Cambodia, Federated States of Frequent user account, also User convenience; automated Micronesia, US states, Minor risk of abuse by user known as client account fee accrual and management Canadian provinces, Albania, Bosnia and Herzegovina Reduced risk of corruption Payment through commercial or loss of cash, eliminates Minor inconvenience for users Cambodia, Albania, Bosnia bank registry labor for payment who register on paper and Herzegovina entry Reduced risk of corruption Payment through treasury or loss of cash, eliminates Minor inconvenience for users Federated States of offices registry labor for payment who register on paper Micronesia entry Can be used on-line or at Service charges by Vietnam, US states, Canadian Credit card intake points by all types of clearinghouse; risk of provinces users dishonor after use Cash to registry or intake Simplicity and convenience of Opportunity for corruption; Vietnam, US states, Canadian point users who register on paper risk of loss of cash provinces Convenience of regular Vietnam, US states, Canadian Inter-bank transfer Less useful for one-time users account users provinces Limited to cell phones that are owned and whose owner can SMS payment by pre-paid Convenience of one-time None known to use this be identified by recipient of phone card or account users method payment, i.e. caller ID is not blocked 78 chapter 4: Implementation one-time payments at the time of logging in to the registry selected application software for particular operating site and for payments on accounts by regular users. system and database, and what components (firewall, Since credit card transactions incur a service charge, the domain servers, e-mail server, etc.) are available from the government may wish to have an automatic computation facility where the technology system is located. of the service charge by the registry system and add it to the amount, or alternatively may set the fees incrementally The minimum hardware configuration, assuming placement higher to account for such charges. in a facility where firewall, domain server and e-mail server are already available, is one web/application Many emerging market countries do not have a sufficient server and one database server. In this case, each server level of credit card penetration to make credit cards would need an operating system (OS), and the database viable, so an alternate means must be devised. If there is server would need a database. However, the better at least one leading commercial bank that has wide and configuration is redundant servers for both functions with deep branch distribution across the country, the registry automatic failover in the event one server crashes. In can contract with one or more such banks to perform higher volume situations, it may be necessary to have a payment intake and payor identification functions for both shared data array for the database servers. Requirements one-time users and regular users. One-time users can pay for PCs and peripherals will be determined by the business fees into the registry’s account at the bank through their model selected, i.e. managed by a government entity, full local branches, and the bank can then use an interface to outsourcing or hybrid systems. the registry system to enter payment details immediately. The same system can accommodate payments by regular If servers are purchased and located in the registry or a data users as well. If bank branches do not have Internet center, the minimum recommended configuration would be access, variations on this approach can be worked out redundant web/application servers and database servers, using other technologies such as fax. Alternatively, the assuming that a separate data array is not necessary and distributed intake points may be used to enter information that the facility already has domain, firewall and e-mail from deposit slips or receipts brought to them by users. servers that can be utilized. Costs for the operating system Depending on the media available to them, the intake (OS) and database will depend on the choice of product. points may transmit the information via the Internet or by If a low cost option such as open source or Microsoft fax. is used with the minimum configuration, capital outlay for servers, OS and database should be on the order of There may be other payment methods that are better US$80,000 to $140,000. If Oracle running on Unix adapted to specific environments, so the foregoing is used, the cost will be significantly higher. If domain, methods should not be considered to be exclusive. e-mail and firewall servers are not already available in the Whatever methods are used, they should, if possible, facility at no capital cost, the cost of the additional servers, not include cash payments to the registry office or intake probably redundant domain servers and one server for points. Especially in emerging market countries, the risks e-mail and firewall, plus the OS and the firewall software, of handling cash in the registry include corruption, loss should be on the order of US$10,000 to $25,000. of cash through inadvertence and loss of accountability between payment and services. Cost considerations—Registry within the responsible government entity: If the registry and its information technology system will be operated by and within the 4.1.4. Costs of registry configuration and responsible government entity, there may be substantial location options capital costs in preparing the facility for the technology assets if the entity does not already have such a facility Costs consist of capital outlays and ongoing operating with sufficient capacity for the registry’s technology costs of the registry. In both cases, they are affected by assets. Those capital costs include, among others, a the configuration of the information technology system and secure room that has climate control, an automated the location options for the technology, i.e. the degree of gaseous fire suppression system, conditioned power, outsourcing. uninterruptible power supply (UPS), grounded circuitry, Configuration decisions are dependent upon several automated back-up power generators and sufficient rack factors, including uptime reliability, the needs of the space for the registry’s servers. There would also be SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 79 capital costs for housing and equipping the registry IT countries can range from around US$800 per month up and administrative staffs. to US$2000 per month, depending on the volume of activity and other factors. Operating costs will be widely variable and dependent on many factors. It is necessary to assess all the relevant factors as part of the decision-making process for choices 4.2. Process Model on location, management and outsourcing options. For example, if the registry is located in and managed by The first step in developing the design of any system is the responsible government entity, the marginal operating to understand what the system will do. If we think of the costs of adding the registry will be small if the entity sequence of operations within the system as a play, the already has a fully-staffed and equipped data center means used to communicate the lines and actions of all facility within it, whereas those marginal costs will be very the actors is the script. The script used to communicate high if IT staff and facilities are dedicated to supporting the operations of the registry system to the designers only the registry. That is because there should be at least and operators of the system is a narrative description a database administrator and one other IT staff member of each process, known as a process model narrative to ensure 24/7 availability of the system to web users, (PMN). The PMN describes in detail the role of every whether they serve several applications in the government actor who participates in the registry system and every entity or just the registry. Further, if management staff for function performed within the system. The PMN provides the registry must be full-time dedicated to registry functions all the information needed by a designer or an operator instead of shared with other tasks, there will be personnel to understand what the system must do and how it will and related costs for that staff. do each operation. It will be used in conjunction with other technical design specification documents to tailor the Cost considerations—Technology system in a commercial registry system to the exact needs of the registry. data center: If the registry owns and co-locates its servers in a commercial data center, there will be co-location costs, hardware maintenance costs and the cost of 4.3. Technical Specification Documents removing and storing periodic back-ups of data. If the While the PMN is the most essential document needed by minimum recommended configuration is assumed, and if a designer or operator of a registry system, designers will it is further assumed that the facility will provide shared need a more detailed description of the operations and domain servers, firewall and e-mail server, the co-location, relationships in the system. This level of detail may be maintenance and back-up costs could range from on the provided in detailed graphical representations of the data order of US$300 per month upwards. elements commonly known as business rules matrices, Cost considerations—Internet connectivity: If the registry screen maps and flow diagrams of system functions. The is contained fully within the responsible government entity registry expert may develop these technical specification or if the technology is outsourced to a data center, there documents separately or in conjunction with the developer will also be Internet connectivity costs. Internet rates vary of the system. widely by location and by bandwidth. So it is necessary to scope the Internet costs and determine the periodic cost 5. Staffing, Housing and Equipping of connectivity. In the smallest of jurisdictions, it may be the Registry possible to use a 256 KBPS bandwidth, but for larger countries, it is advisable to use 512 KBPS or better. Planning for operation of a registry must include logistical issues of staffing, housing and equipping it. All three of Cost considerations—Registry completely outsourced: If those issues will be affected by the extent to which the all registry operations are fully outsourced, and if shared registry is automated and the choice of options for location server space is rented on fully redundant servers where and operation of the technology components. system software and Internet connectivity are included, there will be no significant operating costs other than the For fully web-based systems, with no provision for periodic fee to the outsourcer. Experience has shown that registrations or requests for searches of the database to such outsourcing to off-shore companies in developed be submitted on paper, and if operation of the technology 80 chapter 4: Implementation system is outsourced, staffing needs are minimal. In such the country makes it necessary to provide for intake of a case, the only requirement for staff is to run reports on paper at remote locations, staffing of the remote intake the system’s performance and revenues, and, on rare points will be necessary. In nearly all such cases, the occasions, to respond to a request from a user for help with number of registrations and requests received through use of the system. In this scenario, staffing could consist such remote intake points is so small that the function of assigning the registry function to an existing employee can be accommodated as an additional duty of existing or employees in the host organization as an additional employees in the office that is designated as the intake function, since the time required would be far less than one point. The exact functions and equipment requirements full-time employee equivalent, perhaps as little as one or of such employees will depend upon the limitations of two hours per month in smaller jurisdictions. There would the IT and communications infrastructure used to connect be no need for housing new employees in such a case, the remote intake points to the registry. For example, if and there should be no need for additional equipment, the remote intake points have access to the Internet, the assuming each employee has access to a PC and printer. business design may provide either for the intake point employees to enter data, or for the employees to scan the If the registry is fully web-based, with no provision for paper documents for transmission to the registry for data paper, but with the operation of the IT system located within entry. In either case, each employee will need access to a the registry’s office, there will be a need for IT support, but PC with an Internet connection and, in the latter case, will probably less than full time. If the registry is located within need access to a simple document scanner and a printer. a government office that has an IT staff, the registry could If the remote intake point does not have Internet access share that staff, provided it has the appropriate skills to but does have phone service, the employee would need maintain the database and hardware. There should be access to a fax machine to permit the paper documents to sufficient IT staff to ensure that appropriately skilled people be faxed to the registry for data entry. are able to respond within a short time to a failure of the system, so as to maintain 24/7 operation. If there is no possibility of shared IT staff, the registry must hire enough 6. Operating Budget Estimate staff or contract for such services to maintain operations. If existing staff of a host office are used, there will be no The factors that must be included in an operating budget need for additional space or equipment. will vary according to the business model that is chosen, and to a smaller extent, according to the design of the IT For hybrid systems, that is, if the registry permits the use of system. Estimates of the relative costs of different models paper for registration and search requests, in addition to may be an important consideration in deciding which electronic registration, the numbers of paper registrations model to use. Once the model is chosen, more exact and requests must be projected, and staffing levels set to estimates must be made to establish an operating budget provide for data entry from paper documents. Since the for operation of the registry. In making these estimates, registry staff should use the same application software for it is useful to examine the different categories of costs, as entry of registrations and requests that is used by users follow: who register or search via the web, data entry should be simple and quick, meaning that each employee can enter many registrations in one day. Since the registry must be 6.1. Connectivity available for paper registration at all times during business Regardless of the business model used, there will be costs hours, there should be at least two employees who can for Internet connectivity. In the case of outsourcing of the enter data for registrations and requests. Each employee complete operation, connectivity costs may be bundled will need a PC with an Internet connection, office space, in the package price, so will not need to be considered and access to a shared printer. The need for IT staff will separately. In all other business models, it will be necessary be determined by whether the IT function is outsourced to compute projected connectivity costs. and by the availability of shared assets, as described in the foregoing paragraphs. Unless the registry will share a domain with a parent government entity, it will have to acquire a domain and For paper-based systems, if the registry provides for paper pay the annual fee to maintain it. for registration and requests, and if the geography of SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 81 The bigger cost, however, is the Internet service provider access controls, hardening against natural disaster, (ISP). Some ISPs charge a variable fee based on the conditioned power, grounded circuitry, UPS, back-up amount of traffic per month, while others charge a flat generator with fuel supply, 24/7 air conditioning with monthly fee. In both cases, the fees will vary according to failure alarm, gaseous fire suppression system, provision bandwidth, so it is important to determine how much traffic for off-site storage of data back-ups, and professional is anticipated and what level of service users expect. If staffing consisting of at least a database administrator and registration volume is expected to be low, and if users another IT professional. In this case, budgeted operating generally do not have high-speed connections, 256 KBPS costs, excluding personnel, will include utility costs, fuel may be sufficient. But if users expect high speed, and if costs for the generator, and maintenance costs for the volumes are anticipated to be high, 1 GBPS may be a facility and all of its security and environmental systems. better choice, despite the higher cost. If hardware is purchased, and if the registry facility is After the bandwidth decision has been made, the periodic inadequate for location of the hardware, the servers may cost of connectivity can be computed. If the ISP charges be kept in a managed co-location facility, which may based on traffic, it will be necessary to estimate the amount be operated by the central government or a commercial of traffic per month, based on the expected number enterprise located in the country or off-shore. Costs of of registrations and searches, and the average size of managed co-location will be charged on different bases each. In the case of registrations, the traffic estimate will by different co-location facilities, but generally consist of a be based on the average notice size times 2, times the rack space charge per “U” of space, a maintenance fee per number of notices, since the returned confirmation will be device for minor maintenance functions such as swapping approximately equal to the inbound notice. In the case out drives, a charge for periodically removing and of searches, the estimate will be based on the number of installing back-up media in an automated back-up device, searches times the sum of the average request size and the off-site back-up storage charge, and an access charge to average report size. permit maintenance by registry IT staff or contractors. All of these components are generally flat periodic charges, Once the periodic ISP fees have been estimated, they so budgeting for them is straightforward. should be annualized, and the annual domain cost added to it to determine the total connectivity costs per year. In order to reduce capital costs, it is possible to lease servers in a co-location facility. In this case, the costs will be similar to the costs for managed co-location of owned 6.2. Operation and Maintenance of servers, but with the addition of the lease charge. the Information Technology System If hardware is purchased, there will be maintenance costs Costs of operation of the IT system will vary greatly for the hardware and system software (OS and DB) after depending on the business model that is selected. If registry the warranty periods. Those costs may be charged on a operations are totally outsourced, the costs will probably periodic flat rate per item or on a per call basis. In the latter be bundled, so need not be considered separately. In all case, the number of hours of each type of maintenance other business models, however, different combinations of services must be estimated and multiplied times the rate cost factors must be considered. for the type of service. If hardware is leased from the co-location facility, the system software maintenance costs In all such business models, there will likely be a maintenance may or may not be included, so it is necessary to determine cost for the application software after the warranty period, that when budgeting. which is generally one year from acceptance. Software maintenance costs can be defined with either a flat annual fee or with an hourly rate for actual services. If it is the 6.3. Staffing, Housing and Equipping latter, estimated annual cost will be based on projected the Registry needs for maintenance and upgrade of the software. Staffing costs will vary according to the selected business If hardware, including system software, is purchased, it model as indicated in section C.5, above. In the case may be located in the registry facility if it has the requisite of complete outsourcing of the operation, staffing of the security and environmental features such as physical 82 chapter 4: Implementation registry’s oversight entity will be negligible, as it will be only though that should not be a significant factor. As noted a small part-time requirement for oversight of the outsourcer above, the only other operating cost is for maintenance of and perhaps making payments to it under the contract for the application software after the warranty period. services. In all other models, there will be some staffing and related costs, though they may be small. 7. Implementation Timeline As noted in section C.5, staffing in the case of a fully web- The implementation schedule will vary depending on based registry with no paper, where servers are co-located the business model, procurement methods and other in an external facility, will be only one or two persons on factors. It is important that the timeline be established the existing staff of the entity under which the registry is as early in the development process as possible, so that located. Staffing costs may be apportioned to staff based dependencies can be identified among steps and so as on projected time spent in running reports and responding to permit concurrent development of different components to assistance calls from users, but should amount to only a wherever feasible. A GANNT chart or equivalent can be fraction of one full-time employee equivalent. There should used to identify dependencies and permissible concurrent be no housing and equipping costs, assuming that the operations, and thereby to determine the target timeline to staff already has access to PC’s with Internet connections implementation. and a printer. Dependencies that must be identified include such things If servers are located within the registry facility, staffing costs as (i) that finalization of the law’s provisions on registration will include costs for a database administrator and other must precede development of the design specifications IT professional(s). If those functions are shared with other and (ii) selection of the application software vendor must functions in the entity in which the registry is located, the precede completion of the specifications for hardware staff costs may be apportioned according to the projected and system software. There are many other dependencies loads for support of the registry IT system and others within that will become apparent when the GANNT chart or the entity. If staff must be dedicated only to the registry, equivalent is prepared. its housing and equipment costs must also be included in the budget. There may also be a space charge for the 8. Legacy Data Conversion servers, whether apportioned or dedicated. If the legal expert and the registry expert are not the same If the registry provides for a paper alternative for person, the registry expert must work with the legal expert registration and requesting a search, the paper volume to advise what is possible in the transition provisions of must be projected and the staffing level estimated from that the law, as described previously. The registry expert will projection. The pay level for clerical level employees must identify which of three registry situations prevails under be determined and applied to the number of staff needed. prior law, i.e. no registration, decentralized or otherwise Space and equipment costs can then be developed from fragmented registration, or centralized registration of the staffing level. If there are remote intake points, any interests that would be covered by the reformed law. If apportionment of their costs must be determined, though there is no registration under the prior law, there is no in most cases, there will be no marginal costs due to legacy data issue. If either of the second or third situations registration duties of the existing staff in those locations. exists, the registry expert will analyze it and advise the legal expert. 6.4. Budget Factors in Complete Table 11 provides a checklist of events, steps, and Outsourcing processes that must be plotted in the timeline. If all operations of the registry are outsourced under a When registration is decentralized or fragmented by type single contract, budgeting is quite simple. Such contracts of asset, interest or debtor, the analysis focuses on what generally provide for a flat periodic fee that covers all data other than that required for registration under the functions, including hardware usage. The only additional reformed law will be required for transition registrations. cost that may arise is an apportioned staff cost for the Such information may include the date/time of the prior oversight responsibility in the responsible government entity, registration, name or location of the registry, and registration SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 83 Table 11: Examples of Events to be Plotted in Timeline  Finalization of the law’s provisions governing registra-  Preparation of tender documents for ISP tion  Approval of ISP tender documentation  Development of the registry design specifications  Publication of tender for ISP (PMN, BRM, screen maps, etc.)  Evaluation of bids and selection of ISP  Preparation of application software tender documenta-  Final passage of law tion  Develop implementing regulation/decree  Approval of software tender documentation by approv-  Negotiate and sign contract with co-location facility ing entities  Negotiate and sign contract with ISP  Publication of Request for Expressions of Interest  Develop staffing requirements and qualifications  Selection of short list of application software vendors  Publish notice for hiring staff  Publication of tender for application software  Identify or procure location for registry administration  Preparation of tender documents for local IT firm for IT  Equip registry office and translation support  Hire staff  Approval of tender documents for local IT firm  Prepare public awareness and training programs  Publication of tender for local IT firm  Delivery of text from software vendor to local IT firm for  Evaluation of bids and selection of vendor of applica- translation tion software  Approval of implementing regulation/ decree  Evaluation of bids and selection of local IT firm  Develop user documentation and operations manual  Development of specifications for hardware and system for registry software  Integration of local language by software vendor  Preparation of tender documents for hardware and  Identify and contract with escrow agent for source system software code and payments to software vendor  Approval of hardware/system software tender docu-  Publish effective date mentation  Public awareness campaign  Publication of tender for hardware/system software  Train staff  Negotiate and sign contract with software vendor  Initial round of end user training  Evaluation of bids and selection of hardware/system  Delivery and installation of hardware/system software software vendor  Delivery of application software source code into  Negotiate and sign contract with hardware/system escrow software vendor  Installation of application software  Preparation of tender documents for colocation facility  Testing and evaluation of application software  Approval of colocation facility tender documentation  Acceptance of application software  Publication of tender for colocation facility  Delivery of technical documentation from software  Evaluation of bids and selection of colocation facility vendor  Registry in operation number or the book and page of the registration. The • The first question in such an evaluation is whether the registry expert may also advise on the type and duration legacy database includes at least the data elements of the transition registration period. required for a sufficient notice under the new law. • The second question is whether the debtor identifier When there is an existing centralized database of that is used for searches under the new law is capable registrations of security interests, it should be evaluated to of being mapped from the legacy database to the determine if it is feasible to convert those registrations to new database. For example, if the new law and the new registry system: implementing regulation (decree) call for searching by an individual debtor name using a process that 84 chapter 4: Implementation requires the surname and given names to be in amendments of legacy registrations, must be preserved separate fields, and if the legacy database includes in the new database and, if so, how to accommodate all elements of the debtor’s name in one field, then them. Finally, there may be information in the legacy the name cannot be reliably mapped to the new database that is not transitioned to the new database. It database. As to entity names, if the legacy system must be determined whether there is any legal requirement permits abbreviations or less than complete names, to preserve such legacy data and, if so, in what form and and if searching in the new system is by entity name for how long. Once all these issues are resolved, it is using either an exact match or a normalized match critical that the transition process be planned so that the process, then the name cannot be reliably mapped legacy database is fully transitioned before the start-up of to the new database. If debtors are identified by a registration under the new law. This plan will require the number, and the numbers in the legacy database are bulk of the migration of data to be completed and tested not in defined fields, it may not be feasible to map some time before the start-up date. In the period between them to the new database. the mass migration and the start-up date, registrations • The third question is whether there are other data in the legacy registry will also have to be added to the elements that are permissible search criteria under transitioned data in the new database. the new law and that are incapable of being reliably mapped to the new database. For example, if the new law provides for searching by serial number 9. Procurements of vehicles or major equipment items, and if those serial numbers are not entered in defined fields in the 9.1. Allocation of Components: Number legacy database or identified with a tag, then they of Procurements cannot be reliably mapped to the new database. • The fourth question is whether the expiry date of The form and number of procurement processes is a legacy registration can be mapped to the new dependent on the business model that is selected, as well database or can be automatically computed from a as the resources that are available within the registry’s registration date and entered in the new database. organization. The number of different procurement actions • The final general question is whether there are any may be anywhere between one and seven. The different other elements that are required by the new law that components that may or may not require procurement cannot reliably be converted to the new database. include the application software license, hardware and system software, server co-location, ISP services, local IT If it is determined that it is not feasible to reliably convert support, office space and office equipment. registration data from the legacy database to the new database, transition of legacy registrations will have to be The outsourcing business model has the simplest as described in the prior paragraph for transition from a procurement requirements if it includes the complete decentralized or fragmented system. outsourcing of the registry’s operation. It requires only one or two procurements, since all components, with the When prior interests are registered in a legacy database possible exception of the application software, can be in a manner that permits them to be converted into the included in one tender that includes provision of hardware new database, priority can relate back to the date of the and system software, connectivity, maintenance, help- original registration, thereby preserving priority among desk support and all staff-related components such as competing prior interests. This process, however, is not housing and equipment. It may be possible to include without difficulty. It will require creation of a separate the application software license in the same procurement, mapping program to pull data out of the legacy database since most of the vendors of secured transactions software and map it into the appropriate fields and formats of also have the capacity to provide the other components the new database. If some elements, e.g. collateral and are most likely to have the expertise to provide help- descriptions, are not in a format that can be mapped as desk and maintenance support. data, they may need to be converted to an image format, e.g. PDF or JPG, and attached to the notice in the new Under all other business models, there must be at least database. It must be determined whether certain historical separate procurements for the application software license information from legacy registrations, e.g. extensions or and for purchase or lease of hardware with system software. SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 85 The decision between purchase and lease will require a on local factors and the anticipated value of the tender. cost-benefit comparison of the options. Procurement of ISP So it is necessary to conduct an evaluation of the rules services is also necessary unless the entity in which the and facts in each case before deciding on the process. registry is located already has a contract for such services Since the rules and value limits are subject to change over that can be extended to cover registry business. Unless time, they will not be addressed further here, but must be the registry’s own IT staff is capable of maintaining the investigated case-by-case. application software and the hardware/system software, it is advisable to procure a local IT firm to maintain those Several local factors must be considered in determining after the warranty periods. what process to use. First is the availability of bidders for the product or service within the country. In the cases of If servers are to be located within the registry’s facility, ISP support and purchase of office equipment, it is clear space for servers and staff may have to be procured if that procurement will be local, and in most cases will be the entity in which the registry is located does not already competitive. The exception to competition is where there have sufficient space. In any such case, the IT staff and may be only one viable option, as commonly happens in registry operations staff will need office equipment, so it countries where the local telecom has a monopoly on ISP must be procured. service. In the cases of application software, managed co-location facility and hardware/system software, it may If servers cannot be located in the registry facility, a tender be advisable to use international competitive bidding, will be required for a managed co-location facility, unless since it may lead to more competition, or it may be there is a central government co-location facility that can necessary because the goods or services are not available be used. If a commercial facility is required, it may be or adequate locally. Other local factors that may affect possible to combine the co-location and ISP procurements the decision to procure by local bidding include the effect into one, provided that the major co-location facilities in of customs duties or taxes on the bottom line price. In the market are operated by ISPs, which is quite common in this respect, there may be exemptions for government that many emerging economies. can be applied to mitigate the effect of such duties or other taxes, so their effect must also be determined and 9.2. Rules That Must Be Applied considered. Before commencing any procurement, it is necessary to 10. Testing and Acceptance determine what procurement rules govern the process. The determination will depend on several factors, but the most Testing and acceptance of both the application software important factors are the funding source and the nature of and the hardware and system software must be done the funding commitment, i.e. loan or grant. Because of the before start-up is attempted. Testing and acceptance number of variables that must be considered, it is necessary of hardware and system software are technical and to do the research in each case. But in general, if the objective, and can be assigned to IT staff of the registry, a funding source is a donor, the donor’s rules will normally local IT firm retained to maintain the system or the technical apply. If funding is by a loan, local procurement rules staff of a managed co-location facility if so provided in its may also apply. If some funds are provided by another contract. The process described in the remainder ofthis donor, its rules may also bear on the procurement process. section addresses a procurement managed by the donor, Most donors generally have procurement offices in country since most procurements of application software will be so or regional offices that can provide expert assistance to managed. In the case of a procurement managed by the project staff or consultants, so they should be called upon client country, the donor should provide advice and support in any case of uncertainty about the procurement process. of the same type of testing and acceptance process. 10.1. Composition of Acceptance 9.3. Type of Bidding Process for Each Team Procurement In order to ensure that the application software conforms The bidding process used for each procurement will to the requirements set out in the specifications and tender depend first upon the relevant procurement rules, but also documents, testing of the installed software should be 86 chapter 4: Implementation overseen and evaluated by an acceptance team composed The expert must notify the vendor of failure of the software of the main stakeholders and IT experts. The team should on any evaluation point. include at a minimum the registrar or responsible manager in the governmental entity in which the registry is located, 11. Start-up Management an IT professional from the registry or local IT support provider, a representative of one of the major institutional 11.1. Setting Effective Date users of the registry and the donor’s registry expert. If it is possible to do so, the secured transactions law should 10.2. Development of Test Scenarios provide for implementation of the law upon occurrence of an act that can be controlled by the registry or the and Scripts governmental entity under which it is located. This will During development or modification of the application permit implementation to occur when the registry system software, the vendor will conduct unit testing of the different is ready to start operation. The act can be publication of application modules. The vendor and the registry expert a decree, publication of a notice of implementation in a should jointly develop test scenarios and scripts for the gazette, effectiveness of an implementing regulation, or operations of modules for use in unit testing. other act that can bring the law into effect at a time of the registry’s or its parent entity’s choice after the registry When the vendor installs the application software, it is ready. will have to conduct integration testing of the whole application. In preparation for that, the registry expert, 11.2. Coordination of Publication of a representative of the registry or the governmental entity Implementing Act in which it is located, and the vendor should develop test scripts for all types of operations of the registry by all types Once it is known when the registry system will be of users. ready for operation, the person who is responsible for the act can set the date for implementation of the law 10.3. Development of Acceptance and commencement of registry operation. In addition to Scoring Documents readiness of the registry system, other factors in setting the effective date include providing for adequate public Acceptance is critical to both the client government and notice of the law’s effective date and for initial training the vendor, since it will be a milestone for the vendor and of users of the registry. When the date is set, it should the last chance before implementation for the client to then be officially published, and the training of users and require fixes to the software. Therefore, scoring by the publicity campaign should be scheduled to lead up to acceptance committee must be fair and transparent. The implementation. registry expert should develop scoring sheets with detailed points on which the software will be scored during testing. 11.3. Assuring Effectiveness and Scoring of each point should be objective and should Implementation of Contracts for identify the minimum performance level for acceptance on the point. If the team finds that performance fails to meet Services the minimum performance level on any point, acceptance It is essential that all contracts for continuing services that will not occur until it is corrected by the vendor. support the registry’s operation be in place before the implementation date. If operation of the registry is fully 10.4. Oversight of Testing and outsourced, the outsourcing contract must be in place well Acceptance Processes in advance of implementation, since it will cover testing and installation as well as operation of the registry after The registry expert will set the schedule for integration the implementation date. In other business models, service testing and meetings of the acceptance committee. The contracts may be with one or more of an ISP, a managed expert will also monitor integration testing and all meetings co-location facility and a local IT support firm. of the acceptance team to ensure that evaluation of the software is procedurally correct and fully documented. SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 87 11.4. Management of Problems and donors for support of the awareness-raising and training efforts. The availability of resources from the WBG Defects or other donors must be determined in that case. The The registry expert will ensure that the application software necessary resources would include at least an international vendor establishes a bug reporting and tracking system consultant and two local staff, plus funding for materials, that enables the registry and the government entity in travel, publicity and training event facilities for the periods which it is located to submit bug reports or complaints to of awareness-raising activities and training. the vendor for fix under the warranty. The tracking system should permit all parties to track the status of each bug 1.2. Capacity of Media to Support or complaint until it is fully fixed and the fix is accepted Public Awareness by its submitter. Fixed bugs and complaints will then be archived and made accessible to the vendor and the Print and broadcast media are the principal tools of the registry. The bug reporting and tracking system should be awareness campaign. In assessing their capacity to transferable to whatever IT resource will assume software support the public awareness campaign, it is necessary maintenance responsibility after the warranty period, to identify the most useful outlets by determining on what whether it is registry IT staff or an IT support firm. outlets business people rely for information. The evaluations for the different media will be somewhat different. D. Public Awareness Building For broadcast media, the essential elements are format and coverage of the jurisdiction. For television, that and Training means identifying outlets that have national coverage and that have news and public service programs that reach the 1. Information Gathering and target populations. As to radio, many smaller countries have one outlet that carries only local news and public Analysis affairs content and on which most of the population relies for information that affects their lives. If there is such an 1.1. Capacity of Registry Operator outlet, it should be identified. Radio outlets that have to Perform Awareness and Training substantial news and interview content should also be Activities identified as resources for awareness-raising interviews with registrars or officials from the government entity in Once it is determined in what government entity which the registry is located. responsibility for the registry will be located, its training and public relations capabilities should be assessed There are three broad types of print media that should to determine whether it is capable of managing the be assessed. The most useful type consists of focused awareness raising and training activities associated with publications that are distributed primarily to membership launching the registry. The assessment should determine organizations whose members have a natural interest in whether the entity or its parent has an existing public secured transactions, e.g. bankers’ association, leasing relations function that could support an awareness raising association, bar association, chamber of commerce, etc. effort or if it has an existing training structure that could The second type consists of newspapers that focus on support both staff and user training. Regardless of those business issues, though not on any particular organization. findings, the assessment should also determine whether The final type includes newspapers of general circulation. public relations and training functions have a budget line The outlets of each type should be identified, and their item and, if they do, whether it is sufficient to cover the willingness to carry articles on the law and registry should costs for registry awareness and training activities. be determined. If there is no existing capacity, or if capacity is insufficient 1.3. Geographic and Demographic to support awareness-raising activities and training of registry staff and users, resources will have to be identified Limitations and arranged. If the client government cannot raise the Planning for awareness and training events must take into resources, it may be necessary to turn to the WBG or other consideration the necessity to deliver them to users away 88 chapter 4: Implementation from the capital. Therefore, it is necessary to determine to train new participants in the system. Institutions that can what factors will dictate the number and locations of such provide such continuing training should be identified so events. that training and materials can be sent to those institutions. Appropriate institutions include professional associations The factors that must be identified in planning for events such as bankers’ associations, bar associations, business are both geographic and demographic. Geographic associations, etc. Institutions of higher education such as factors include contiguity of the country and barriers to business and law schools at universities should also be travel by both the target population and those who conduct identified for distribution of information they can use in the events. A nation made up of islands stretched across courses on business finance. expanses of ocean may require a number of events at widely distributed locations in order to reach most of the 2. Public Awareness economically active population. A nation with a poor road network or barriers such as mountains or deserts will 2.1. Identification of Target Groups require a similarly distributed effort. Demographic factors include the number and distribution of commercial centers The people who need to know about the secured and economically active population concentrations. If transactions law and registry extend beyond secured resources limit the number of events that can be conducted creditors. They are also important to businesses and around the country, they must be prioritized according to consumers who may make use of the law to gain access where they will have the greatest impact. Therefore, the to credit that had been unavailable to them. The law most important centers of commerce and economically and registry are also very important to buyers of movables active populations must be identified. that may be encumbered by a security interest, to include particularly buyers of vehicles, equipment, receivables, 1.4. Continuing Availability of Support farm products and livestock (see Box 37). for Training after Start-up While the initial round of training is the most critical to getting the registry started, there must be continuing opportunities Box 37: Target Groups for Awareness Raising • Major financers such as banks, NBFI’s, leasing companies and buyers of accounts receivable and secured sales contracts • Trade financers who may secure their trade receivables with purchase-money security interests in the sold goods; these might include manufacturers, wholesalers and retailers • Buyers of farm products from producers • Buyers of livestock from producers, or purchasing agents for such buyers • Businesses that may gain access to credit by giving security interests in their existing movable property or that may finance the purchase of equipment by giving a purchase-money security interest • Retailers, manufacturers or agricultural producers who may obtain operating lines of credit by giving security in their inventory, accounts receivable, raw goods, work in process or crops • Business and commercial lawyers who serve any of the foregoing groups • Consumers who may make use of purchase-money security interests to acquire major durables such as vehicles • Courts with jurisdiction over commercial disputes • Financial reporters from business-oriented print media • General media outlets SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 89 2.2. Public Awareness Plan 2.2.3. Delivery responsibilities 2.2.1. Timing As a general rule, the principal responsibility for public awareness delivery is the registry or the government entity The timing of awareness-raising activities will vary according in which it is located. However, before and during the the targeted group. In general, groups should be targeted implementation period, an international registry expert in time to give them sufficient time to be prepared to use should participate in preparation of written materials such the registry or give advice on doing so, but not so early as white papers, articles for professional publications, news that it will be ineffective or will cause business decisions to releases, public service announcements and brochures. be delayed pending implementation. Though each public The international registry expert may also participate in awareness plan will be tailored to specific circumstances, speaking engagements with professional associations and the following guidelines may be used as a starting point. as a guest instructor for business or law schools. However, it is not recommended that the international registry expert 2.2.2. Media mix and modes of delivery be the principal speaker at press conferences. Before the international registry expert departs, he/she should Different target groups will be most effectively reached by train registry or parent government entity’s staff sufficiently specific media, delivery methods and times, so it is critical that they can assume responsibility for awareness-raising to select media that are tailored to the target group at an actions thereafter. appropriate time. There are many situational factors that will cause the media mix to be different for any situation, but the following media recommendations may be useful 2.3. Content and Materials as a starting point: Preparation Written materials should be prepared in advance, either by or with the participation of an international registry Table 12: Planning for Public Awareness Timing Target Groups Beginning after the implementation date is known, but not Financers (banks, NBFIs, leasing companies, etc.) and their more than two months prior to implementation, and extending trade associations; bar association; financial reporters for through the first round of training business-oriented media Beginning before implementation, and extending through Courts with jurisdiction over commercial disputes training, which may be before or after implementation Beginning shortly before implementation, and extending after Businesses and their trade associations, including trade implementation financers, borrowers and line of credit users Beginning at time of implementation, and extending after Buyers of equipment, farm products and livestock; consumers; implementation general media outlets (broadcast and print) 90 chapter 4: Implementation expert. They should explain the economic rationale for infrastructure, costs of a program should not exceed about the law and registry, address the mode of operation of US$50,000. the registry, refer to international best practices, provide directions to additional information on the registry’s or 3. Training parent government entity’s website and provide information on training events or resources available to users. 3.1. General Considerations 2.4. Costs A well-designed training program for registry operators can facilitate the use of the registry system by lawyers and The public awareness effort’s costs will vary greatly creditors. Judges and enforcement officers will also need according to the size of the jurisdiction, availability of to be trained to implement the law in their areas. useable media outlets, communication and transportation infrastructure and other factors. But even in the largest The following description of training methodology jurisdictions with costly media and problematic and mechanisms applies to all groups involved in the Table 13: Media Tools and Modes of Delivery Medium/mode Target Groups Timing Guest article for professional or trade Bankers, bar, leasing, business and Generally before implementation or publications trade association publications shortly after Business-oriented and general media Generally immediately before and at Press release outlets time of implementation White paper Courts, and business and law schools Before or after implementation Concentrated just before or at Press event or news conference General media outlets implementation Guest appearance on broadcast General broadcast media outlets Just before and after implementation medium Direct mail Banks, NBFIs and leasing companies Before implementation Participation in event of professional Bankers, bar, leasing, business and or trade association, as speaker or Any time trade associations otherwise Buyers of equipment, farm products Public service announcements or paid and livestock; trade financers; business Starting just before and continuing after advertisements borrowers and line of credit operators; implementation consumers Banks, NBFIs, leasing companies, Invitation to training Before and just after implementation lawyers and courts Buyers of equipment, farm products Brochures distributed through public and livestock; trade financers; business Any time institutions borrowers and line of credit operators; consumers Guest instructor engagement Business and law schools After implementation SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 91 implementation of modern secured transactions systems. 4. Registry operators The following topics should be included as part of the 5. Other groups such as lawyers, notaries and training program for each group. potential debtors Methodology/approach: As a matter of principle, each 3.2. Training to Creditors training program follows the “train the trainer” approach; that is, it involves training people who can subsequently General considerations: The first and most important train their colleagues. It is commonly thought that such target for training consists of institutions that provide an approach requires a specialized training method. credit. These may include banking institutions, micro However, experience shows that a training plan that credit organizations, leasing companies and businesses includes building this capacity among trainees has long- that sell goods on credit. This group may also include term benefits by reducing dependency on long-term public institutions that use the law and registry to enforce international training assistance. In the context of modern statutory obligations. Typical examples are tax or customs secured transactions, training should be the jumpstart for departments. Trainees from credit providers may include development, not a continuous condition for sustainability. management level personnel such as credit department For example, the training program for registry staff should managers, and operations level personnel such as loan not be limited to the immediate participants, but should officers, leasing agents, risk managers and enforcement include written material and instructions for training of staff. future registry employees. Training topics: Scale of the training: If budgetary or time constraints limit the scope of coverage, training should start with the most 1. Change attitude toward movable property: important groups—creditors and judges—and continue Historically, movable property (or personal property) with lower priority groups such as execution officers, was considered “real” property. This was a result government officials and law students. All trainees should of a perception that movable property was less receive the tools to allow them to transfer their knowledge marketable than real property. In reality, the market to their colleagues. value of movable property such as construction or agricultural equipment, production machines, Delivery tools: Training on the secured transactions law and accounts receivable, or intellectual property such registry may be given in several ways. The most common as patents or trademarks, often exceeds the market format is the seminar or workshop, which generally runs for value of real property such as residential units or even one to three days. A second tool is the study tour by selected land. Further, movable property is often more liquid individuals to jurisdictions with successful experience in than real property, enabling faster recovery for the employing secured transactions systems. A study tour may creditor in enforcement. Coupled with an effective be important from a practical and political standpoint legal system that protects and facilitates enforcement because it can increase substantive capacity and diminish of property rights, movable property becomes “real” doubts regarding the efficacy of such systems. Another security for creditors, increasing their willingness to tool is the conference, which is generally used for the provide secured credit (see Box 38). A well-designed sharing of information, often among several jurisdictions, training plan will begin with a general overview of and to harmonize laws and technology on a regional the legislation and the operation of the registry. The basis. Other tools include on-line training programs and inherent risk of using movable property as security interactive electronic media programs such as CDs with should be discussed, and practical solutions for simulations of the registration system that allow new users control and monitoring of assets such as inventory, to practice before handling live registration. bank accounts and other movable property should also be addressed. Target groups: The groups identified for secured transactions training are: 2. Introduction to secured transactions law: Training should familiarize creditors with new concepts and 1. Creditors principles of secured transactions law, to include 2. Judges types of transactions and properties included in 3. Enforcement or execution officers 92 chapter 4: Implementation the scope of the law, creation of security interests, and the debtor, to include (a) an agreement in writing notice registration, priorities, and enforcement. This that does not require formalities such as notarization preliminary training phase may be offered to large or registration to be effective, (b) an alienable interest number of participants and can function primarily to of the debtor in the property used as security, and (c) raise awareness. It should set the platform for a more value given by the creditor. Sample security agreement specialized training plan that will focus on each of the may be used during training. topics described below. More specialized sessions can be offered to smaller groups of creditors to allow 5. Priorities: The real value of secured transactions: more interaction and to deal with specific issues One of the most important areas of modern secured related to different types of creditors such as lenders, transactions laws is the scheme of relative priorities leasing companies or public institutions. between conflicting claims against the same properties. There are some fundamental priority rules 3. Scope: Creditor training should introduce trainees to that are adopted by most jurisdictions undertaking this the concept of the unified security interest that includes reform. Other rules are more specific, less central and in its scope all types of legal interests that secure an not always are adopted as part of the reformed law. obligation with movable property. This includes all the This document provides recommendations on training traditional forms of security such as the pledge, mortgage on the central priority rules. Further training on more of movables, conditional sales and others. Training specific rules may be considered based on the specific should also address the scope of types of property legislation in a jurisdiction. to which the law applies, to include tangible and intangible, present and future. Finally, training should First-to-register rule: The general priority rule is that cover the scope of obligations including monetary and priority is determined by the chronological order of non-monetary, existing, present and future. registration, possession or control. Training should include scenarios illustrating the rule (see Box 39). 4. Creation of security interest: Training should cover the conditions required to create an enforceable security Priority of Buyers of the collateral: Under modern interest. This should cover all three of the requisites secured transactions laws, a registered security for an enforceable interest as between the creditor interest’s priority in the property continues even after acquisition of the property from the debtor by a buyer. Training of creditors should include specific scenarios illustrating the operation of the rule (see Box 40). Priority of purchase-money security interest (PMSI): Box 38: The Case of Albania and Bosnia and The PMSI exception to the first-to-register priority rule Herzegovina should be included in the training on priorities. The PMSI exception is important since it permits a creditor In Albania, acquisition of greenhouses by who finances the purchase of property by the debtor farmers was financed and used as security for to take priority with respect to the specific property the credit. The value of the green house was in financed over a prior general registered security the neighborhood of US$250,000. In one of interest in the class of goods. the cases when the borrower defaulted on the repayment, his greenhouse was seized and sold. Purchase money creditors include: The implementation of the secured transactions • Banks and other financial institutions that advance law facilitated the recovery of credit by the credit to borrowers for the purchase of specific creditor. items of movable property In Bosnia and Herzegovina, mining equipment • Financial lessors (valued at approximately US$10 million) was • Sellers on credit (see Box 41) used as collateral for credit and recorded at the 6. The use of the registry: Creditors should be trained pledge registry. on the use and operation of the registry for both SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 93 registration of security interests and searching for • How to search the registry archive for prior notices information on prior security interests that identify the by different criteria, i.e. by debtor, by serial- same debtor or, in the case of vehicles and, if the law numbered collateral or by registration number of a so provides, serialnumbered equipment, that identify registered notice the same collateral. Training should be provided to • The importance of accuracy in choosing and entry representatives of as many creditors as possible in workshops for two or three representatives from each creditor institution. Methods of creditor training on use of registry: Box 39: Practical Example (First-to-Register Training workshops should make use of the most Rule) effective mixes of training methods and media that the situation permits. In addition to lecture and discussion, Jan. 1 – Alfa Bank signs a contract with Irina and training should include visual media, preferably a live takes possession of Irina’s BMW demonstration of all aspects of the registry system on a replication of the live system. If facilities are not Feb. 2 – Beta Bank registers a notice describing available for a live demonstration in conjunction with Irina’s BMW as a collateral and then signs the the lecture/discussion, all of the interfaces that a user contract of the system will encounter must be presented visually Feb. 2 – Alfa Bank registers a notice describing as their functions are discussed, and copies of them Irina’s BMW as collateral. provided to all participants. Optimally, all participants should be able to practice the functions on a simulated Question: Who has priority, Alfa Bank or Beta system, but that will require availability of sufficient Bank? hardware and connection to the simulated system. Finally, if resources are available, participants should Trainees will have to read the priority provisions be provided with a soft copy of the replicated system in the legislation and determine who has priority. on a CD to take with them back to their institutions Of course the answer will depend on whether the to continue practicing how to use the system and to date of registration, date of possession or date of use in training of employees who will interact with the signing the contract determines priority. system, e.g. loan officers and leasing agents. The creditor training must include, as a minimum, the following topics: Box 40: Practical Example (Priority of Buyers) • The structure of the registry web-site and how to navigate through it Alfa Bank provides credit to Jim. This credit is • How to establish, use and maintain a user account secured with Jim’s computer. Alfa Bank registers for fee payment and access control, including notice of a security interest against Jim’s computer. addition or deletion of authorized users of the Jim then sells the computer to Anne who does account not know about the existence of the earlier • The payment methods and media that may be registration. used to make payments either on user accounts or Training shall highlight the importance of the for services by one-off users provision which gives priority to Alfa Bank • How to register a notice of security interest over Anne even though Anne paid Jim the full • How to register a change to an existing registration, price for the computer. This provision should be to include amendment, extension, termination or contradicted with traditional priorities of good other change provided for by the law faith buyers where in the situation described • The law’s requirements for identification of debtors above Ann would have priority. and description of collateral in a notice of security interest 94 chapter 4: Implementation of the search criterion, and the search logic used disposition; (b) notices required to the debtor, by the system for each type of criterion other creditors. and holders of other interests in • The different outputs of the system and their use in the property and exceptions to the requirement for documentation of a loan or lease file of the creditor; certain types of property; (c) permissible methods outputs include the confirmation of registration and of disposition under the law; (d) standard of care the search report generated by the search process required of creditor in selecting the disposition method; (e) the potential role of enforcement 7. Enforcement: Creditors should be trained on the agencies in disposition; and (f) legal requisites for enforcement mechanisms provided in the law. This is retention of the property by the creditor in lieu of particularly important to overcome creditors’ reluctance disposition if the law permits the option to rely on movables as security because of their distrust • Distribution of the proceeds of disposition, to of traditional ineffective enforcement mechanisms include (a) legal prerequisites to distribution, i.e. under which seizure and disposition of collateral final resolution of the creditor’s right by consent of can be excessively time-consuming and costly. A the debtor or a judgment; (b) any notice required by training program that introduces modern enforcement the law; (c) the sequence for distribution, including approaches as part of the secured transactions reform expenses, creditors according to priority, other may address these concerns. claims. and the debtor; and (d) any procedural Training of creditors on enforcement should include the requirements of the law following topics: 8. Lending practices using movable property as • Seizure of the property, to include both (a) the legal collateral: In jurisdictions where pre-reform laws requisites for self-help possession by the creditor have not supported the use of movables as security, and (b) the process and the elements of proof for financial institutions have had no occasion to an expedited judicial proceeding for possession develop the knowledge and skills that are required to • Disposition of the property, to include (a) successfully lend secured by movable assets. Those maintenance and preparation of the property for skills extend well beyond mere knowledge of the secured transactions law and use of the registry. They include, among others, due diligence examination of applications for credit, to include credit worthiness, cash flow, balance sheets, business plan and the competitive market in which the borrower operates. Box 41: Practical Example (Priority of PMSI) Further, financial institutions that have not relied on movable security are usually not organized to support Jan. 1 – Alfa Bank advances 5,000 Euro to Anila it. For example, they likely will not have a department to renovate her home. to monitor collateral, i.e. to physically check the Feb. 3 – Alfa Bank registers a notice describing existence and condition of assets that are proposed the collateral securing the 5,000 Euro as Anila’s as collateral, and to periodically visit the site where “all present and future personal property.” the collateral is kept to ensure it is still present and is Mar. 3 – Beta Bank advances to Anila 20,000 being maintained during the course of the agreement. Euro she used to purchase a new vehicle. Consequently, training should extend beyond just the Apr. 4 – Beta Bank registers a notice describing secured transactions law and registry, and include the vehicle as the collateral securing the 20,000 training of financial institutions comprehensively on Euro. the skills and organization required to support secured lending on movables generally. Training programs Training will focus on the operation of the PMSI have been developed to provide this type of training to establish Beta’s priority over the prior security in several regions, most notably in the Mekong interest of Alfa that would have priority under the countries. general rule. SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 95 3.3. Training of Registry Staff The manager should be trained on the policies and procedures of the registry, to include the registration General considerations: Modern electronic secured provisions of the law, the implementing decree or transactions registries require relatively little intervention by regulation, and access policy. Depending on (a) the registry staff, with correspondingly limited training required. degree and type of outsourcing of registry functions, The extent and types of staff processes and related training (b) whether paper may be used to register, (c) depend on a number of factors, including: whether there are distributed intake points, and (d) what forms of payment are permitted, additional staff • Whether geographical or political considerations may be necessary. If management of the IT system require that there be a paper registration option in is not outsourced to the private sector or a central addition to pure electronic registration by users government facility, there may be a need for at least • f a paper option is required, whether distributed one IT professional to manage the system. However, intake points are required and, if so, what the IT staff probably will not require specific training technological means exist for communicating on the subject matter of registration, since its functions registration information to the registry office and are common to any IT operation, e.g. running back- database ups, monitoring and maintaining servers, tuning the • The extent of outsourcing all or part of the registry system, responding to problems with connectivity, functions to private sector entities etc. If additional staff are required to process paper, • Whether the organization in which the registry is manage distributed intake points, or process cash located has its own IT assets and support, and payments, those staff must be trained on the functions whether the capacity of the technology is sufficient assigned to them. For example, if there are distributed to meet the needs for a secured transactions intake points that receive paper notices, the staff in the registry, e.g. 24/7 operation with near 100 intake points may be trained on how to receive the percent up time notice, how to transmit it and related payment and • Whether the payment receipt process requires staff identification information to the registry, and how to intervention, as in the case of cash payments at the receive the confirmation of registration and return it to registry office the registrant; such staff would not have to be trained • The level of sophistication and existing understanding on all aspects of registration (see Box 42). of registry processes of the staff who will provide user support The methodologies used for training of registry staff will vary according to the type of staff to be trained. For all types of staff, study tours to jurisdictions that already have implemented similar registry institutions successfully may be a starting point for the training program. However, to Box 42: Examples of Registry Management Tasks the extent possible, training should take place within the • Recruiting of registry staff jurisdiction where the registry institution will be located. • Producing and publishing the registry guide Registry staff may also benefit from taking active role • Producing registry certificates (for jurisdictions in the creation of the registry guides on policies and with no e-signature law) procedures. • Managing of registry Web site • Publicizing the fee schedule and other information Training Topics: on the registry Web site 1. General management: A well-designed e-registry will • Reporting to body in charge of the registry on have relatively modest needs for human resources. financial, performance and statistics There should be at least one person available to • Planning registry annual budgetary and logistical users of the registry during regular business hours. needs This person may be the manager of the registry. 96 chapter 4: Implementation 2. Familiarity with the registry IT system: Whether or recommended that an operational guide for the use of not the IT function is outsourced, the registry manager the registry IT system be developed in conjunction with must be trained on how to use the IT system and how the training of the registry staff. to communicate requirements and problems to the IT staff. Staff training should include simulations of 3. Customer services on technical issues: Training of registrations, searches, and of other functions of the registry staff should include customer service or help- system, particularly if the registry must accommodate desk functions. Depending on the form of the registry, the use of paper from which the registry staff must enter requests for assistance may be received in person, by data. The registry staff should understand not only the phone or on-line. Most of the knowledge required to management of the registry system, but also the client provide technical assistance will be learned in training side of the application (see Box 43). Sustainability on the system. Additionally, staff should be trained not of the registry operation requires that replacement to provide legal advice in the course of responding to registry staff be trained in the future. It is therefore requests for assistance. Finally, staff should be trained on how to manage the Frequently Asked Questions (FAQ) on the web-site and to include new questions that might recur (see Box 44). 3.4. Training of Judges Box 43: Typical Training Topics on Secured General considerations: The training of judges has a long- Transactions Registry Systems term rather than immediate impact and therefore can be • Managing user accounts offered in the second phase of a training program. The role • Entering registrations of the judiciary under modern secured transactions laws is • Performing searches primarily limited to three types of issues, and all generally • Running reports and queries arise in the context of enforcement actions. Judges should • Maintaining user-maintainable values such be trained on each of those types of issues as follow. as fees and default values in drop-downs Training topics: • Adding, maintaining and deleting user groups 1. Issues arising between the parties under the security • Managing of registry Web site agreement: Judges should be trained on the content and form of a security agreement. This training should include reference to the specific provisions in the legislation that govern the security agreement, to Box 44: Examples of User Issues Requiring include which transactions fall within the scope of the Technical Assistance legislation and the requisites for enforceability of an agreement. • Loss of passwords to use the registry system 2. Resolution of priority disputes: Judges need to be • User’s rights are locked for excess failed familiar with the priority rules in the law, specifically log-in attempts the general rule and its exceptions. Training should • Registry web site does not work include discussion of the policies underlying each • Administrative matters such as hours of priority rule or exception. Part of this training will operation and means of access include use of registry reports such as confirmation • Fee questions of registration and search results to determine priority • How to open a user account among competing claims. When the priority rules • How to terminate a registration • How to make a payment on a user account SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 97 of the secured financing law apply also during 3.5. Training Costs bankruptcy proceedings, training can be offered to trustees in bankruptcy or receivers. The effort and related costs for the design, preparation and implementation of training depend on the characteristics 3. Enforcement orders: While modern secured of each jurisdiction, e.g. geographical distribution of transactions laws provide for self-help enforcement population centers, level of sophistication of bankers, as the first option in taking possession of collateral technology options, etc. However, experience shows that in an enforcement proceeding, it is important to with the use of modern technology, the costs are not as prepare the judiciary to adjudicate cases where significant as their potential benefit (see Box 45). judicial intervention is required to take possession of the collateral from the debtor. Training should include Costs can be minimized and benefits maximized by relying (a) time limits within which actions must be taken; (b) on techniques such as training of trainers or self training the limitation of issues that may be considered in the using the registry web site with training modules provided decision to order seizure; (c) factors that may support on-line. Training of trainers involves the initial training of immediate post-seizure disposition, e.g. goods that persons who can subsequently be qualified to provide may spoil or otherwise decline in value; and (d) training to their colleagues. This method not only reduces options for protection of debtor rights, e.g. ordering costs, but also promotes sustainability as trainees become proceeds of disposition held in escrow pending final trainers, and the registry itself can replace the international decision on the merits, or ordering that seized goods donor with the long term on line support. not be disposed of until final decision on the merits if they are unique and irreplaceable. Box 45: Cost-Effective Training Mechanisms in Bosnia and Herzegovina In 2005, several months before the Bosnia and Herzegovina pledge law and registry came into effect, there was a strong need to provide training to some 50 financial institutions. With the main offices and branches, the number of people who needed to be trained was approximately 1,500. The implementing project of USAID launched training seminars where only two representatives from each financial institution were invited for the initial training. Following the initial training, the USAID project was available to answer questions on-line and provided on-line support to all 50 financial institutions for six months. The result was that, by the time the legislation came into effect and the registry became operational, all financial institutions reported they were ready. The resources for this activity were held to a minimum, with only one initial training seminar, followed by on-line support during the transition period. Following the transition period, the registry staff that was trained as trainers took over the long-term, on-line support and continue to provide this service. 98 chapter 5: Monitoring and Evaluation Chapter 5: Monitoring and The IFC has developed a monitoring and evaluation methodology that is somewhat standard for all advisory Evaluation services projects.62 There are obviously differences in the indicators that are used for each type of project depending on the product, but the methodology to collect results is A. What to Measure? standard. Indicators are derived from program logic models. These models describe the sequences of cause It is essential for the success of any secured transactions and effect relationships that link IFC program activities to and collateral registries reform program to set performance intended impacts. Each model has five basic components targets and to measure them. The project task manager as illustrated in Figure 6. will need to make sure that performance is measured from the very inception of the project to make sure that Inputs refer to the resources used in program activities. performance targets are met after the implementation. Activities are the actions taken or work performed in The monitoring of the project and the performance will particular projects using specified inputs. IFC technical serve as a reporting tool to the implementing institution, assistance projects include activities such as assessments, donors, the government, and main stakeholders that will advisory services, training, and public awareness give recognition to the work and to the reform. Monitoring campaigns. These activities are intended to result in the project impact is certainly one of the most important outputs such as reports, advice, training events, and components of the project. media coverage. In turn, these outputs are expected to Figure 6: Basic Program Logic Model M&E Framework Activity/ Goal Objectives Inputs Output Outcome Impact Goal: Objectives: Activities/Inputs: Output: Outcome: Impact: What do we What should Physical actions Direct results from The expected Desired final want ti change? be implemented and resources the Activities. effect. Measures change. Measures to achieve Have immediate the achievement the achievement of the desired r short term effect of Objectives. Goals. Has effect change? during the project Observed during within 3-5 years timeframe. the project life or longer after and up to 3 years completion, rarely after completion. during the project timeframe. Source: International Finance Corporation 62. See “Guide to Core Output and Outcome Indicators for IFC Technical Assistance Programs”, January 2006. SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 99 yield certain outcomes in terms of changes in knowledge, The project team will need to track indicators for the behavior, and performance among beneficiaries in the different elements of the log frame illustrated in section target population. Finally, it is anticipated that programs 5.A. Section 5.B provides some guidance on what type will generate development impacts including higher of indicators could be used for each of the elements of productivity, greater income, and economic growth. the log frame: outputs, outcomes, and impact. However, this list is not comprehensive of all the indicators that exist for measuring the impact of a secured transactions B. Tracking Impact through and collateral registries project. The project team might Indicators63 consider that some of these indicators are not appropriate and could instead replace them with others. The project manager and the team need to determine during the design phase of the project which indicators 1. Output Indicators for Secured they want to measure to achieve the intended results. There Transactions and Collateral are many outcomes and impacts that can be measured in a project like this. Therefore, the project manager will have Registries to choose those indicators that are most appropriate for Output indicators aim to measure the magnitude of the the project, depending on the objectives and expectations activities produced directly by IFC and/or third parties of donors and stakeholders. under contract to IFC in advisory services projects. Table Table 14: Output Indicators for Secured Transactions and Collateral Registries Projects Expected Project Output Indicator Measuring Tool Component/Activity (Data Source) 1. Review of Legal and • Number of entities receiving advisory services [TARGET] Institutional Framework • Number of entities receiving in depth advisory services for Secured Transactions [TARGET] • Number of new laws/regulations/amendments drafted or Baseline Survey contributed to drafting [TARGET] 2. Creation of • Number of procedures, policies, practices proposed for improvement or elimination [TARGET] Doing Business Secured Transactions Infrastructure: Movable • Number of workshops, training, events, seminars, conferences, Report (Legal Rights Collateral Registry etc. [TARGET] Index) • Number of participants in consultative workshops, training events, seminars, conferences [TARGET] 3. Enabling Stakeholders • Number of women participants in consultative workshops, ICR ROSC to Use New Secured training events, seminars, conferences [TARGET] Transaction Systems • Number of participants providing feedback on satisfaction Registry Survey Efficiently [TARGET] • Number of participants reporting satisfied or very satisfied with Program records workshops, training, seminars, conferences, etc. [TARGET] • Number of reports (assessments, surveys, manuals) completed [TARGET] Source: International Finance Corporation 63. Taken from the “Guide to Core Output and Outcome Indicators for IFC Technical Assistance Programs”, January 2006 with adaptations for secured transactions programs. 100 chapter 5: Monitoring and Evaluation 14 provides indicators that can be used for activities that in the processes, and changes in knowledge and behavior are considered as outputs. due to the outputs. Table 15 provides guidance on the type of indicators that can be used to track the outcomes 2. Outcome Indicators for Secured of such projects. Transactions and Collateral An example of how some of the outcome indicators are Registries Projects measured in practice is provided in Box 46 below with regard to IFC reform project in Vietnam. Outcome indicators for a secured transactions and collateral registries project aim to measure the changes that occurred Table 15: Outcome Indicators for Secured Transactions and Collateral Registries Projects Expected Project Measuring Tool (Data Outcome Indicators Component/Activity Source) 1. Review of Legal and Enactment of new/revised secured lending legislation Institutional Framework for • Number of recommended laws/regulations/ Secured Transactions amendments/codes enacted [BASELINE] [TARGET] • Number of entities that implemented recommended changes [BASELINE] [TARGET] • Score of Legal Rights Index [BASELINE] [TARGET] Creation at the legal/regulatory level of new/re-reorganized registry • Number of entities that implemented recommended changes [BASELINE] Baseline Survey [TARGET] • Number of recommended laws/regulations/ amendments/codes enacted [BASELINE] [TARGET] Doing Business Report Other/Non-Standard (Legal Rights Index) • Number of registries that are unified for all types of security interests in all types of movable property ICR ROSC [BASELINE] [TARGET] 2. Creation of Secured Implementation of enacted new/revised legislation Transactions Infrastructure: • Number of recommended laws/regulations/ Movable Collateral Registry amendments codes enacted [BASELINE] [TARGET] SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 101 Table 15: Outcome Indicators for Secured Transactions and Collateral Registries Projects (continued) Expected Project Measuring Tool (Data Outcome Indicators Component/Activity Source) 2. Creation of Secured Implementation of enacted new/revised legislation Transactions Infrastructure: • Number of recommended laws/regulations/ Movable Collateral Registry amendments codes enacted (continued) [BASELINE] [TARGET] New /reorganized registry becomes operational • Number of entities that implemented recommended changes Registry Data [BASELINE] [TARGET] • Number of new entities created [TARGET] Program records • Score of Legal Rights Index [BASELINE] [TARGET] • Number of new registrations Training Participant [BASELINE] [TARGET] • Number of searches made [BASELINE] Survey [TARGET] Other/Non-Standard • Number of business completing a new reform procedure64 Data on Lending Volumes [BASELINE] from Creditors [TARGET] • Number of entities that implemented recommended changes65 [BASELINE] [TARGET] • Number of registries that are unified for all types of Data from Central Bank security interests in all types of movable property [BASELINE] [TARGET] • Number of registries that are open to all public and are accessible on-line [BASELINE] [TARGET] 3. Enabling Stakeholders • Number of New Business Models or New Financial to Use New Secured Services Implemented Transaction Systems [BASELINE] Efficiently [TARGET] 64. “Businesses” in this context will mean banks, financial institutions and non-bank financial institutions. 65 “Entities” in this context refers to registries. 102 chapter 5: Monitoring and Evaluation Table 15: Outcome Indicators for Secured Transactions and Collateral Registries Projects (continued) Expected Project Measuring Tool (Data Outcome Indicators Component/Activity Source) 3. Enabling Stakeholders Outstanding Loans to Use New Secured • Number of all outstanding loans Transaction Systems [BASELINE] Efficiently (continued) [TARGET] • Value of all outstanding loans (US$) [BASELINE] [TARGET] Loans Disbursed • Number of all loans disbursed secured by movable collateral [BASELINE] [TARGET] • Value of all loans disbursed secured by movable collateral (US$) [BASELINE] [TARGET] Other • Number of entities that implemented recommended changes [BASELINE] [TARGET] • Increase in percentage of loans guaranteed by movable collateral [BASELINE] [TARGET] • Increase in diversification of lending portfolio [BASELINE] [TARGET] Source: International Finance Corporation 3. Impact Indicators for Secured higher productivity, increased employment, etc) is not easy to demonstrate. Therefore, while the project should aim at Transactions and Collateral achieving development impact, the main objective should Registries Projects be to improve access to credit by establishing a new secured transactions legal framework and a collateral Finally, the project team will have to measure the impact, registry. The indicator that better reflects this objective is which is the desired final change and is normally provided in Table 16. associated with the development impact, which includes higher productivity, greater income and economic growth. Box 47 provides information about some of the results For any project related to improving access to finance, measured by IFC Advisory Services in its secured including secured transactions and collateral registries transactions project in China. The results were measured projects, the correlation between the project outputs and using the above methodology with some specific outcomes and the project impact (economic growth, adjustments. chapter 5: Monitoring and Evaluation SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 103 Box 46: Secured Transactions Reform in Vietnam : On the Right Path to a Modern Secured Financing System In 2006, IFC conducted a diagnostic of the secured transactions system in Vietnam and provided a report with recommendations to the Ministry of Justice on how to modernize the system. As of 2009, the Ministry of Justice has implemented, with the support of IFC, a number of these recommendations (including the passing of a new Secured Transactions Decree) and is currently working on the creation of a new electronic web-based movable collateral registry. The reforms introduced have already produced a substantial positive effect in the financial sector in Vietnam through: • Improvement of the secured transactions legal framework with the promulgation of the Secured Transactions Decree (published in the official gazette in January 2007), which enhances creditors and debtors rights by increasing the scope of assets that can be used as collateral, making registration of security interest easier, protecting secured creditors, and by establishing a clear priority scheme in case of default and facilitating enforcement mechanisms. • An increase in the number of registrations in the National Registry of Secured Transactions (NRAST), from 43,000 in 2005 (when the project started) to 120,000 by the end of 2008, which confirms that financing against mov- ables has certainly increased after the reform. NRST has also confirmed that 3,200 searches on existing security interests were done in 2008. • Improved access to credit for businesses as reported by the Doing Business 2008 report, in which the Legal Rights Index indicator that measures the strength of secured financing systems was increased from 4 to 7. • Vietnamese stakeholders (including public sector and private sector/financial sector representatives) have increased their awareness about the new secured transactions system. The program has facilitated training through workshops to more than 200 practitioners and different stakeholders. Table 16: Impact Indicators for Secured Transactions and Collateral Registries Projects Measuring Tool Expected Project Component/Activity Impact Indicator (Data Source) 1. Review of Legal and Institutional Framework Increased Financing Baseline Survey for Secured Transactions • Value of financing facilitated by advisory services (US$) Doing Business Report (Legal [BASELINE] Rights Index) 2. Creation of Secured Transactions [TARGET] Infrastructure: Movable Collateral Registry • Value of financing to SMEs Registry Data [BASELINE] Program records [TARGET] 3. Enabling Stakeholders to Use New Secured • Number of SMEs benefiting from Data on Lending Volumes Transaction Systems Efficiently new financing mechanisms from Creditors [BASELINE] Data from Central Bank [TARGET] Source: International Finance Corporation 104 chapter 5: Monitoring and Evaluation Box 47: Impact of Secured Transactions Reform in China Since 2004, China has embarked upon a reform of its movable collateral framework with support from the BEE and A2F Business Lines of IFC. The goal of reform was to encourage financing against valuable movable assets such as inventory and receivables. This was particularly important for China’s large number of SMEs, whose assets are mostly in the form of inventory and receivables and who reported access to credit as their most significant business constraint. Secured Transactions legal framework: Until 2007, secured financing in China was governed by the Security Law, which allowed giving security interests in very few types of movable assets. In 2005, the People’s Bank of China (PBOC), in collaboration with the IFC team developed detailed recommendations for reforming the legal system, including the adoption of modern secured financing law in the Property Law, China’s first comprehensive law on ownership. The involvement, from an early stage, of the National People’s Congress (NPC) Legislative Affairs Commission – for which a study tour of movable collateral registries in the USA and Canada was arranged – proved crucial in garnering support from this key stakeholder. As a result, in March 2007, the NPC passed the historic Property Law, which adopted a number of important principles of modern secured transactions laws. The chapter significantly improves the legal framework for asset-based finance in the country and is expected to put in circulation over US$2 trillion of movable assets. Major improvements under the law include: • Expanding the scope of movable collateral by adopting a single unitary security interest which applies to movable property of all kind, tangible and intangible, present and future, eliminating the positive list of assets that can be used and allowing all types of movables as collateral. • Simplifying the formalities required for creating security interests and improving the publicity of the system by: al- lowing notice registration, eliminating the need to register the security agreement; allowing any person, natural or legal, to give a security interest; creating an electronic registry of security interests allowing public on-line access to information on security interests. • A more transparent priority scheme for secured and unsecured creditors, by incorporating specific rules about prior- ity by date of registration, rules on proceeds, buyers of collateral, special priority rules or super-priorities, etc. Registry for pledges of receivables: With IFC’s support, in October 2007 the PBOC Credit Reference Center (CRC) created a national on-line registry for pledges of receivables and inventory, the first of this kind for China. The new receivables registry is easy to use and efficient, incorporating all the key features of a modern movable collateral registry. In conjunction with the launch of the registry, the PBOC also issued receivables registry rules which have adopted modern collateral registry principles. As of June 2009, the Credit Reference Center has reported an impressive impact: • Over 75,000 registrations of security interest in receivables, representing loans with a value estimated at over US$570 billion. • Of the US$570 billion in financing, US$240 billion or 40% of the total corresponds to SME financing. • More than 100,000 searches on existing pledgers over receivables have been performed in the registry. • The number of SMEs that are registered as secured debtors in the AR registry is around 40,000. • The percentage of movable-based lending in China went from 12 percent, pre-reform and prior to the creation of the receivables registry, to 20 percent after the creation of it. • The use of receivables as collateral has led to the development of a factoring industry in the country. The value of domestic factoring has reached a volume of US$ 21 billion. • Around 3,000 people have participated in workshops, trainings and awareness raising events. chapter 5: Monitoring and Evaluation SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 105 • Among the registry’s 5,000 users are banks, guarantee companies, law firms, finance companies and pawn shops. The user experience with the registration system has been overwhelmingly positive. Remaining challenges: These efforts to expand the scope of permissible movable collateral under the Property Law and to improve the movable security registry have opened the door for the development of a modern secured financing system in China. However, a few challenges remain: (i) The Property Law remains vague in a few areas, notably rules regarding registration, given the parallel system of registries that exist. The Property Law fails to consolidate more than 15 movable collateral registries into a single nationwide system. The IFC project only focused on creating an electronic registry for security interests in receiv- ables, but could not focus, due to lack of political support, on centralizing all types of secuirty interests on movable assets into one single electronic registry, by unifying the 15 registries for machinery, equipment and inventory. The result of this is that, at the moment, receivables are registered in PBOC’s new electronic registry created with the support of IFC, but the rest of security interests on movable assets (machinery, equipment and inventory) are registered in 15 decentralized registries, including the Administration of Industry and Commerce (AIC). The issue with this is that not all the information on pledges of assets is contained in a single depository, where financial institutions can search for existing pledges. In addition to this, the 15 decentralized registries are not accesible on- line and, therefore, the search for existing pledges in real time is not possible, creating additional risks to financial institutions when lending accepting movable assets as collateral. In the second phase of this project IFC will focus on working with the State Council (responsible for the 15 decentralized registries) in trying to merge all the regis- tries into one and make the information available on-line to users. (ii) The enforcement process remains court-oriented, while private enforcement or out of court enforcement is not permitted. The critical issue of how to improve the judicial enforcement process is still left primarily to the judicial system to address. Source: FIAS, International Finance Corporation C. When to Measure? During the diagnosis or design phase, the project team will need to ensure that performance is measured from the very There are three specific times when a measurement of inception of the initiative to guarantee that performance performance indicators should be made throughout the targets are met. Without accurately recording data, the secured transactions reform project. The first stage is at the project team will not be able to determine whether the diagnosis phase when the assessment of secured transactions introduction of a new secured transactions regime has met systems is being made. The second measurement exercise its goals. To determine whether a reform process has been should occur when results can or should be expected (e.g. successful, it is necessary to conduct an evaluation, essentially months) during the implementation of the project and after taking “before” and “after” snapshots of performance. To do the project has been completed. This measurement is this, the diagnostic phase should include a benchmarking intended to determine whether the reform introduced has exercise to capture performance indicators prior to the actually resulted in improvements. The third measurement process design. Normally, the reform team should undertake period takes place in the immediate years after the project baseline surveys (see Annex 1) in the design phase to was completed and the measurement is usually done by obtain statistics regarding the indicators provided in the the owner of the reform or client. previous tables. These baseline indicators will be used then to compare results after the reform process. 106 chapter 5: Monitoring and Evaluation D. How to Measure? assess client satisfaction and learning outcomes should be conducted upon project completion as needed. Other Monitoring Tools and Data surveys should be undertaken before programs are initiated Collection66 to establish needed baselines and repeated annually (as budget allows) in order to monitor changes. Data should Successful measurement depends on the quality of data also be collected from secondary sources on an annual collected through program records, surveys, and secondary basis. sources. Data should be collected in a consistent manner Program records: The project teams should maintain using agreed definitions and procedures, and stored in complete and accurate records. This should include data appropriate computer databases to facilitate data access, on the characteristics of organizations receiving advisory analysis and reporting. services from IFC or third parties under contract to the Table 17 lists the sources of data needed to calculate IFC, including intermediaries and private enterprises. It core indicators and the recommended frequency of data should also include data on particular projects, including collection efforts. Program records detailing the nature and the type of activity (assessment, advisory services, training magnitude of activities undertaken by IFC and associated and information dissemination), participants, service outputs should be continuously updated. Surveys used to providers, date of initiation and completion, and budget expenditures. Table 17: Monitoring Tools and Frequency of Data Collection Data Sources Timing and Frequency of Data Collection Program Records Ongoing, during the whole project cycle Surveys Baseline Survey (Needs Assessment) Diagnostic phase, one time Client satisfaction Upon project completion, one time Training participants Upon completion of training during whole project cycle Creditors Diagnostic phase and annually thereafter Registry Diagnostic phase and every 6 months thereafter Borrowers Diagnostic phase and annually thereafter Secondary Sources World Bank, Doing Business Data Diagnostic phase and annually thereafter World Bank other: ICR ROSC, FSAPs, enterprise surveys Diagnostic phase Government Ministries, Central Banks, Courts Diagnostic phase and annually thereafter Other Reports Diagnostic baseline and annually thereafter Source: International Finance Corporation 66. See “Guide to Core Output and Outcome Indicators for IFC Technical Assistance Programs”, January 2006. SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 107 1. Surveys: As noted, the project teams will need to surveys should seek to achieve a high response conduct a variety of surveys to collect requisite data. rate (at least 60 percent) to reduce potential To ensure the quality of data, the following procedures response bias. To help ensure a high response rate, are recommended: the project team should obtain the commitment of participants to respond to surveys as a condition • Questionnaires: Project managers should use of program participation. instruments that contain questions needed to obtain • Data entry: The team should establish specific data required for relevant indicators. Questions procedures for dealing with completed surveys. should be worded in the same manner with any This includes tracking responses so that individuals translations checked to ensure that meanings have failing to respond initially can be contacted and not been altered inadvertently. The standard survey encouraged to complete the questionnaire. The instruments provided in this Toolkit could be used. quality of data entry should be verified by checking • Sampling: The goal is to have a sample that is all or a sample of questionnaires for accuracy and representative of the population and therefore can by carefully examining data for responses that are be used to make valid generalizations. Unless a not consistent. All questionable entries should be census is appropriate, project managers should checked for problems and verified. Original copies survey a random sample of organizations drawn of written questionnaires should be kept on file. from the appropriate set of program participants • Survey schedule: March is generally a good time or the target population as a whole. A random to administer surveys to businesses because it sample is where each entity in the sample frame allows sufficient time for companies and institutions has a known and independent probability of being to close their books after the end of the fiscal year selected for the sample. The size of the sample and have fresh data for the last fiscal year. (Most should be large enough to provide sufficient fiscal years end December 31.) statistical power. Although there are no formal standards for statistical power, project teams 2. Secondary sources: Data required to calculate certain should aim to draw a sample that would provide indicators will need to be obtained from secondary a power of 0.8 or greater. sources such as government institutions, courts, and • Administration: Given the nature of the information surveys conducted by multilateral organizations (WB, sought, most surveys should be administered in IMF) and other donor organizations. The project person (as opposed to mail or telephone) with a team will need to work with these organizations to strict promise to protect the confidentiality of the ensure that data are accurate and provided in a respondents and their responses. Field personnel consistent manner. should be trained to conduct the surveys. All 108 Annex 1: Diagnostic Survey – Baseline Data Annex 1: Diagnostic Survey – Baseline Data Project Needs and Impact Questionnaire The purpose of this questionnaire is to collect baseline data at the beginning of each project and to get a holistic view of the shortcomings in the secured lending framework. It is especially critical to collect data about the volume and characteristics of asset-based financing from financial institutions (section A), as they will determine the success of the project after completion. The same questionnaire will be used two years after the completion of the project to assess and measure the project impact. A. CREDIT MARKETS A.I. Volume of Credit a US$ or Item no. Item Percent 1 Volume of consumer loans secured by movable property (US$) Of which, volume of loans to male borrowers (US$) Of which, volume of loans to female borrowers (US$) 2 Volume of corporate loans secured by movable property (US$) Of which, volume of loans to SMEs (US$) Of which, volume of loans to large firms (US$) 3 Percent of all loans secured only by movables (by loan values) 4 Percent of all loans secured only by immovables (by loan values) 5 Percent of all loans secured by a combination of movables, immovables and/or any personal or third party guarantees (by loan values) 6 Unsecured loans as percent of total loan value a. Dollars in millions A.II. Cost of Credit Item no. Item Percent 1 Average effective lending interest rate for loans secured by movables 2 Average effective lending interest rate for loans secured by immovables 3 Average effective lending interest rate for unsecured loans 4 Spread between loans secured by real estate and loans secured by movables 67. For example, two years and three months would be 3/2. SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 109 A.III. Default Rates by Type of Borrower Item no. Default Rates by Loan Volume for Percent 1 Average delinquency rate for loans secured by movable collateral 2 Average delinquency rate for loans secured by immovable collateral 3 Average delinquency rate for unsecured loans Default rates by Loan Volume for: 4 Large borrowers 5 Small borrowers 6 State-owned companies 7 Private companies A.IV. Credit Recovery and Credit Risk Management Item no. Credit Recovery Mechanisms Yes/No Does your institution have a credit recovery department that handles collection of credits 1 secured by movables upon default of the debtor? 2 At what point is a credit transferred to the credit recovery department for action? 3 Do the same credit policies apply to defaulted loans secured by movables and immovables? A.V. Defaulted Loans: Enforcement and Credit Recovery Process Procedure Commonly Followed to Enforce Secured Claims (percent of Item no. Percent total enforcement cases) 1 Debt rescheduling Outside courts (e.g., informal workout arrangement between debtor and 2 rd creditor/s, Alternative Dispute Resolution mechanisms, sale of credit to 3 party) 3 Through the courts but outside insolvency proceedings 4 Through insolvency proceedings 5 Conversion of debt to equity 6 Other (please specify) Time required to secure a default judgment (court judgment) Months/years67 7 on loans secured by movable collateral Cost of enforcement As percent of loan value Usual cost to enforce secured claim including costs of litigation, lawyers, 8 valuation reports, auctions, etc. Recovery rate Percent of total loan value Average recovery rate as a percent of the total credit due, including interests, for 9 credits secured by movable collateral 110 Annex 1: Diagnostic Survey – Baseline Data Average recovery rate as a percent of the total credit due, including interests, for 10 credits secured by immovable collateral Modes of disposition of the reposed collateral Percent 11 By public auction 12 By judicial auction 13 By private sale 14 Assets retained by the institution 15 Other (please specify) B. LEGAL FRAMEWORK B.I. Types of Movable Collateral Item no. Type of Asset Financial Institution Legal Review Please indicate (yes/no) which Please indicate (yes/no) whether of the following the financial the legal framework has any institution accepts as collateral restrictions on the acceptance of the these as collateral A Tangible movables accepted as collateral 1 Machinery and equipment 2 --industrial and non-agro machinery 3 --agro-machinery and equipment 4 Motor vehicles 5 Agricultural products 6 --crops and other agricultural yields 7 --livestock, fish farm, etc. 8 Consumer goods 9 --personal computers 10 --furniture B Intangible movable property 1 Investment property (stocks and securities, options and futures, derivative products, etc.) 2 Intellectual property (e.g., patent rights, trademarks) 3 Insurance policies 4 A single accounts receivable 5 Multiple accounts receivable 6 Inventory, i.e., goods for sale 7 Membership and partnership interests in business entities and cooperative shares 8 Futures (e.g., crop futures, future acquisitions of collateral described in the agreement, and unborn livestock) 9 Other: specify 10 Other: specify 11 Other: specify SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 111 B.II. Types of Obligations What obligations are capable of being secured? (1) Present obligations? (2) Future obligations? (3) All the debtor’s obligations? B.III. Procedures for Creation of Security Interests What procedures / formalities are involved in the creation of security interests B.IV. Priority Rules In competing claims (multiple security rights on the asset) other than statutory claims (e.g., taxes, workers’ salary, etc), which secured creditor has priority? First creditor to either register or take possession YES NO First creditor to notarize YES NO First creditor pursuant to the date of agreement YES NO First creditor to provide finance YES NO First creditor to register YES NO Other ______________________________________________________________________________________ B.V. Enforcement 1. Default rates vary by types of borrower. True False 2. Small borrowers have higher default rates than larger borrowers. True False 3. Private companies have higher default rate than state-owned companies. True False 4. Loans secured exclusively by immovable assets: ________________ (% of loan value) 5. Loans secured exclusively by movable assets: ________________ (% of loan value) 6. Unsecured loans: _________________ (% of loan value) 7. Loans secured exclusively by third party guarantees: __________________ (% of loan value) 8. What procedures are commonly followed to enforce secured claims? rd 8.a. Outside courts (e.g. informal workout, sale of credit to 3 party)____ (% of the total enforcement cases) 8.b. Through courts but outside insolvency proceedings _____ (% of the total enforcement cases) 8.c. Through insolvency proceedings _______ (% of the total enforcement cases) 9. How long does it usually take to secure a default judgment on movable property collateral? ___________ months 10. How much does it usually cost to enforce secured claims? Court-related cost [ ______ ]% of the loan value 11. Taxes/fees incurred when collateral is sold by judicial auction. Please specify. ______ 12. Are there simplified / summary proceedings for enforcing secured claims? Yes No If your answer is yes, please answer the following: 13. How often is a simplified / summary procedure used? 13.1. Among state-owned enterprise clients _______________ % of the cases 112 Annex 1: Diagnostic Survey – Baseline Data 13.2. Among joint stock and limited liabilities enterprise clients ___________ % of the cases 13.3. Among foreign-invested enterprise clients ______________ % of the cases 13.4. Among individual borrowers ___________________% of the cases 14. Which cases are qualified to be processed through a simplified / summary procedure? 14.1.The loan value is less than certain amount True False 14.2.The ownership of the property is properly documented True False 14.3. The security is properly registered True False 14.4. The debtor is a sole proprietor or a household business True False 14.5. Other, please specify 15. How long does it usually take to enforce a non-complicated movable security claim through a ___ months. simplified / summary procedure? 16. How much does it usually cost to enforce claims in a summary procedure? _____% of the loan value Completely Basically Basically Completely 17. What is the public perception on the following items? agree agree disagree disagree 17.a. Law does not fit commercial needs 17.b. Law does not clearly establish priority rules among possible competing creditors 17.c. Immature market for movable assets (i.e., it is difficult to resell collateral) 17.d. Regulation is difficult or expensive 17.e. High court enforcement cost 17.f. Intervention from government 17.g. Long enforcement time 17.h. Complex enforcement process requires creditor to first apply for a judgment and then apply to have judgment executed 17.i. Cumbersome judicial sale procedures that require appraisal and multiple auctions 17.j. Resources of judicial system are limited 17.k. Other, please specify Annex 1: Diagnostic Survey – Baseline Data SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 113 C. REGISTRY C.I. Basic Information on Registry Structure 1. Is there unified registration and data storage for all security interests on movable assets at the Yes No national level? 2. If yes, number of security claims filed in the past five years 3. Number of inquiries (to verify security interest) If no, what are the means of publicizing security interests? C.II. Providing and Accessing Information in the Registry 1. Indicate the ways in which collateral can be registered and Way to register Available % what percent of registrations (numbers of filings) are done by each means. In-person Yes No _____ Internet Yes No _____ Fax Yes No _____ Total 100% 2. Indicate the ways in which a security interest can be Type of Query Available % queried and what percent of queries are done by each In-person Yes No _____ means. Internet Yes No Fax Yes No Total 100% 3. What are the restrictions on access to information in the ____No restrictions, all information is available to the public registry? Mark all that apply. ____ Requires having the registration number or other pertinent information on the security interest ____ Requires signature of borrower ____ Requires signature of lender ____ Requires notary or lawyer to certify request ____ Other requirement________________________________ C.III. Time Required to Use Registry How long it takes (business days or hours) in terms of statutory Statutory limits Duration in Practice limits and duration in practice to: 1. Register a security right for a piece of equipment, after the documents _________ _________ are delivered to the registry 2. Register a security right for an automobile, after the documents are _________ _________ delivered to the registry 3. Retrieve information from the registry to verify a security right _________ _________ 114 Annex 1: Diagnostic Survey – Baseline Data C.IV. User Fees and Cost Recovery To register a security interest To inquire about a security interest 1. Is there a fee? Yes No Yes No Flat fee (amount):__________ Flat fee (amount):__________ 2. If there is a flat fee, please indicate Currency: ____________, Currency: ____________, amount & currency. as of __________(date) as of __________(date) Percent of collateral: ______% Percent of collateral: ______% Typical fee: Typical fee: 3. If the fee is a percent of collateral __ Less than US$10 __ Less than US$10 value, please provide percent, and __ Between US$10 and US $50 __ Between US$10 and US $50 typical range of fee paid. __ Between US$51 and US$100 __ Between US$51 and US$100 __ Between US$101 and US$250 __ Between US$101 and US$250 __ More than US$250 __ More than US$250 Typical fee: Typical fee: 4. If the fee is determined in another __ Less than US$10 __ Less than US$10 manner (neither flat fee nor % of __ Between US$10 and US $50 __ Between US$10 and US $50 collateral) describe fee basis below and give typical fee range. __ Between US$51 and US$100 __ Between US$51 and US$100 Fee basis: __ Between US$101 and US$250 __ Between US$101 and US$250 __ More than US$250 __ More than US$250 5. Do fees vary by way of accessing Yes No Yes No information—i.e., by Internet, in If Yes indicate most, least expensive If Yes indicate most, least expensive person, by phone Most:_________ Least:___________ Most:_________ Least:___________ 6. Does the registry cover its cost of Yes No operations? _________Government (Please specify what agency / ministry)___________ 7. If the registry doesn’t cover its costs, who covers the shortfall? _________Affiliated organization (Please specify organization)___________ _________Registry is in debt C.V. Operations / Procedures 1. Registration requires completion of an application for registration form. True False 2. Registration requires notarization of one or more registration documents. True False 3. The registry officials review the authenticity of the information in the security agreement and principal True False agreement before registering a security right. 4. The registry guarantees the validity or legality of the security right or agreement registered. True False 5. Registration requires the signature of the debtor. True False Annex 2: Model Survey to Assess Registry Capacity SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 115 6. Registration requires the signature of the creditor. True False 7. Registration requires specification of the value of the obligation for which security is granted. True False 8. Registration requires specification of the value of the security property (or collateral). True False 9. Valuation of security interest by a third party is mandatory. True False 10. Amendment to registration requires physical presence of both parties of the contract in the registry. True False C.VI. Problems with the Registry Yes No 1. It requires very specific description of collateral, so precludes securing collateral that may change over time. 2. It requires documents proving the ownership or right to use of collateral, but it is not very clear what type of proof can be used. 3. It is difficult to determine the place to register. 4. Documentation requirements are excessive and burdensome. 5. Registration requires determination of the value of the collateral, making it impossible to secure interests in collateral that varies in value. 6. Registration is only issued after substantive review, which is complicated and time consuming. 7. Historical registration records are incomplete and hard to search 8. Information in the registry is not readily available to all who may need it. 9. It takes too long for a registration to be processed. 10. Fees are too high. 11. Requirements and procedures differ between offices of the registry. 12. Registration and searching cannot be done on-line but require a visit to the office of the registry. 13. There is no unified registration and data storage system. 116 Annex 2: Model Survey to Assess Registry Capacity Annex 2: Model Survey to Assess Registry Capacity World Bank Group Survey on Secured Transactions Registries (Movable Collateral Registry, Charges Registry) Note on Definitions Please note that a reference to “security interest” in this survey includes any interest in movable property (referred to as “collateral”) of a debtor given to or reserved by a creditor to secure an obligation. The most common types of transactions providing for security interests are security agreement (generic), chattel mortgage, floating charge, title reservation sales agreement (conditional sales contract), pledge without dispossession agreement, hire-purchase agreement, charge agreement, and security lease. As used herein, the term “registry” includes what is often called a “filing office” for notices of security interest. Similarly, the verbs “register” and “file” may be used interchangeably in this survey. “Collateral” means the movable property used to secure the obligation. I. Contact Information I.1 Name of the registry I.2 Address – street – city – country I.3 Phone - email I.4 Fax I.5 Web site I.6 Official in charge of registry – name and title I.7 Official responsible for completing survey – name, title, phone and e-mail (to facilitate contact if needed to clarify survey responses) II. Basic Information on Registry Structure II.1 Year registry founded II.2 Number of full-time registry employees ____________ Of which, number of full-time employees working on security interests in ____________ movable property (collateral registry, charges registry) II.3 The day-to-day operations of the registry are performed by: An office of the executive branch of the government [ ] Private parties [ ] NGOs [ ] Courts [ ] II.4. Which ministry or institution in the government has oversight responsibility for the registry? SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 117 II.5. If the registry is not operated within a government agency, is it a for For Profit Not-for-Profit profit or not-for-profit entity? II.6. If the registry is not a government agency, is it independent or owned by Independent another institution or group, such as the Chamber of Commerce? Owned by other:___________________________ III. Number of Filings in Past 10 Years and 2009 Projected Filings Year Total new filings / Amendments Continuation / Searches Terminations / registrations extensions discharges 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 Please also provide any other form of statistics that you may have collated on registry functions (e.g. annual reports, periodic statistical bulletins, periodic updates etc.). IV. Types of Movable Collateral in the Registry Please indicate which of the following types of movable collateral can be filed with your registry and also indicate if, in fact, they are currently filed with your registry. Accepted at Currently in % of total number Type of collateral registry registry of filings in 2007* IV.1. Universal security over all present and future assets Yes No Yes No IV.2. Machinery and equipment Yes No Yes No IV.3. Motor vehicles Yes No Yes No IV.4. Ships, boats Yes No Yes No IV.5. Planes, aircrafts Yes No Yes No IV.6. Agricultural products Yes No Yes No IV.7.Crops and other agricultural yields (plants and trees Yes No Yes No on land) IV.8. Livestock etc Yes No Yes No IV.9. Investment property (stocks and securities, options Yes No Yes No and futures, derivative products, etc) 118 Annex 2: Model Survey to Assess Registry Capacity IV.10. Documents of rights, financial instruments (bank Yes No Yes No notes and drafts, commercial bills, etc) IV.11. Intellectual property (e.g. patent rights, Yes No Yes No trademarks) IV.12. A single account receivable Yes No Yes No IV.13. Multiple accounts receivable Yes No Yes No IV.14. Inventory (i.e., goods for sale) Yes No Yes No IV.15. Membership and partnership interests in business Yes No Yes No entities and cooperative shares IV.16. Future (e.g., future crops, future acquisitions of collateral described in the agreement, and Yes No Yes No unborn livestock) IV.17. Other. Please specify: *Please round estimated % of filings to nearest 10% V. Operations / Procedures V.1. The registry requires the use of standard form(s) that are separate from the security agreement. True False If true, forms need to be signed by the parties. Yes No If true, they need to be kept in the registry in original or copies. Yes No V.2. Registration requires one or more of: notarization, signature guarantees or certification or stamp True False taxes of one or more registration documents. V.3. The registry officials review the authenticity of the information in the security agreement and True False principal agreement before registering a security right. V.4. The registry guarantees the validity or legality of the security right or agreement registered True False V.5. Registration requires the physical presence of a party True False V.6.Registration requires filing a copy or the original loan and/or security agreement. True False V.7. Registration requires specification of the value of the obligation for which security is granted True False V.8. Registration requires specification of the value of the security property (or collateral). True False V.9. Evaluation of collateral by a third party is mandatory. True False V.10. Amendment to registration requires physical presence of both parties of the contract in the True False registry. VI. Time Required to Use Registry Please estimate how long it takes (business days) in terms of Statutory limits Duration in Practice statutory limits and duration in practice to: VI.1. Register a security right for a piece of equipment, after the _________ _________ documents are delivered to the registry Hours/Days Hours/Days VI.2. Register a security right for an automobile, after the documents are ________ _________ delivered to the registry Hours/Days Hours/Days _________ _________ VI.3. Retrieve information from the registry to verify a security right Hours/Days Hours/Days SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 119 VII. Providing and Accessing Information in the Registry VII.1 Indicate the ways in which security interest can be Way to register Available % registered and what percent of registrations (numbers of In-person Yes No filings) are done by each means. Internet Yes No Fax Yes No Postal mail Yes No Total 100% VII.2 Indicate the ways in which a security interest can be Type of Query Available % searched and what percent of searches are done by In-person Yes No each means. Internet Yes No Fax Yes No Postal mail Yes No Total 100% VII.3 What are the restrictions on access to information in the ____No restrictions, all information is available to the public registry? Mark all that apply. ____ Requires having the registration number or other pertinent information on the security interest ____ Requires signature of borrower ____ Requires signature of lender ____ Requires notary or lawyer to certify request ____ Payment of a fee ____Other Requirement_____________________________ VII.4 Indicate the relative distribution of use of the registry for Registrations of Searches registering security interests and for searches. movable collateral Commercial banks % % Non-bank fin. Inst. % % Private firms % % Individuals % % Government agencies % % Other % % VII.5. Please provide a standard form for filing and a typical report that would be provided to a search on a particular item. VIII. User Fees and Cost Recovery To register a security interest To search a security interest VIII.1. Is there a fee to register and/or Yes No Yes No search? VIII.2. If there is a flat fee, please Flat fee (amount):__________ Flat fee (amount):__________ indicate amount and currency. Currency: ____________, as of Currency: ____________, as of __________(date) __________(date) 120 Annex 2: Model Survey to Assess Registry Capacity VIII.3. If the fee is a percent of the value Percent of secured debt: ______% Percent of secured debt: ______% of the secured debt, please Typical fee: Typical fee: provide percent, and typical __ Less than US$10 __ Less than US$10 range of fee paid. __ Between US$10 and US $50 __ Between US$10 and US $50 __ Between US$51 and US$100 __ Between US$51 and US$100 __ Between US$101 and US$250 __ Between US$101 and US$250 __ More than US$250 __ More than US$250 VIII.4. If the fee is determined in another Typical fee: Typical fee: manner (neither flat fee nor % __ Less than US$10 __ Less than US$10 of secured debt) describe fee __ Between US$10 and US $50 __ Between US$10 and US $50 basis below and give typical fee __ Between US$51 and US$100 __ Between US$51 and US$100 range. __ Between US$101 and US$250 __ Between US$101 and US$250 __ More than US$250 __ More than US$250 Fee basis: VIII.5. Do fees vary by way of accessing Yes No Yes No information, i.e., by Internet, in If Yes indicate most, least expensive If Yes indicate most, least expensive person, by phone? Most:_________ Least:___________ Most:_________ Least:___________ VIII.6. Is there remote automatic filing Yes No Yes No over the Internet? If Yes, what is the additional fee?_____ If Yes, what is the additional fee?_____ VIII.7. Do the registry revenues cover its Yes No cost of operations? VIII.7.a If the registry doesn’t cover its ___Government (Please specify what agency / ministry)______________ costs, who covers the shortfall? ___Affiliated organization (Please specify organization)______________ VIII.8. Please provide additional information on the funding structure of the registry. IX. Laws and Regulations IX.1 Is there a specific law relating to security interests on movable collateral? YES NO IX.1a Please provide the name / no. of the law______________________________________ IX.2 Is there a regulation/s specific to registration of security interests on collateral? YES NO IX.2a Please provide the name / no. of the regulation_________________________________ IX.3 Which secured creditor has priority over other secured creditor on the same collateral? [other than statutory claims (e.g. taxes, workers’ salary, etc)] First creditor to either register or take possession YES NO First creditor to notarize YES NO First creditor pursuant to the date of agreement YES NO First creditor to provide finance YES NO First creditor to register YES NO Other ____________________________________________________________________ SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 121 X. Technical and operational issues X.1. Limitations to access to the registry via the Internet negatively impacts the efficiency of the registry. True False X.2. Blackouts of electrical power disrupt and limit the use of the Internet. True False X.3. The payment system limits collection of registry fees in efficient ways (credit card, bank account, True False check). X.4. The registry has data entry backlog of filings of security interests in movable property. True False If true, how many filings are backed up? If true, what is the longest period between receipt of a registration and its availability for searching? True False ___________ ___________ XI. Registry Support and Upgrade XI.1. An Internet-database system for my registry will improve services. True False XI.2. A computer database for registration will improve errors, omissions, or fraud at my registry. True False XI.3. My registry would like to eliminate stored paper, microfiche, or document images of security interest True False filings, and instead run only a digital database. XI.4. Free public access to information of security interests would reduce the workload. True False XI.5. We would like to outsource some or all of the registry’s operations. True False XI.6. We would like to authorize private lenders to process filings of security interests in our database. True False XI.7. We would like to rent Internet computer servers to hold our database of security interests and provide True False Internet access. XI.8. We would like Internet backups of our database of security interests in other countries. True False XI.9. We would like our registry/archive/database of security interests to be administered by private True False parties and we think we would be a viable institution to supervise a registry run by private parties. XI.10. Notaries and lawyers complain to us when we upgrade from paper to computer systems. True False XI.11. We would like to discontinue our present database and use an Internet database administered True False outside our office. XII. Additional Information XII.1. The following other institution(s), not our office, would be more appropriate to run a registration system of security interests in movable property: XII.2. Other comments / problems: 122 Annex 3: Doing Business Methodology for the Legal Rights Index Annex 3: Doing Business Methodology for the Legal Rights Index68 Doing Business constructs measures of the legal rights of borrowers and lenders. The Legal Rights Index indicator describes how well collateral and bankruptcy laws facilitate lending. The data on the legal rights of borrowers and lenders are gathered through a survey of financial lawyers and verified through analysis of laws and regulations as well as public sources of information on collateral and bankruptcy laws. Survey responses are verified through several rounds of follow-up communication with respondents as well as by contacting third parties and consulting public sources. The survey data are confirmed through teleconference calls or on-site visits in all economies. Strength of Legal Rights Index The strength of legal rights index measures the degree to which collateral and bankruptcy laws protect the rights of borrowers and lenders and thus facilitate lending. Two case scenarios are used to determine the scope of the secured transactions system, involving a secured borrower, the company ABC, and a secured lender, BizBank. Several assumptions about the secured borrower and lender are used: • ABC is a domestic, limited liability company. • ABC has its headquarters and only base of operations in the economy’s largest business city. • To fund its business expansion plans, ABC obtains a loan from BizBank for an amount up to 10 times income per capita in local currency. • Both ABC and BizBank are 100 percent domestically owned. The case scenarios also involve assumptions. In case A, as collateral for the loan, ABC grants BizBank a non-possessory security interest in one category of revolving movable assets, for example, its accounts receivable or its inventory. ABC wants to keep both possession and ownership of the collateral. In economies in which the law does not allow non possessory security interests in movable property, ABC and BizBank use a fiduciary transfer of title arrangement (or a similar substitute for non possessory security interests). In case B, ABC grants BizBank a business charge, enterprise charge, floating charge or any charge or combination of charges that gives BizBank a security interest over ABC’s combined assets (or as much of ABC’s assets as possible). ABC keeps ownership and possession of the assets. The strength of legal rights index includes eight aspects related to legal rights in collateral law and two aspects in bankruptcy law. The index ranges from 0 to 10, with higher scores indicating that collateral and bankruptcy laws are better designed to expand access to credit. A score of 1 is assigned for each of the following features of the laws: 1. Any business may use movable assets as collateral while keeping possession of the assets, and any financial institution may accept such assets as collateral. 2. The law allows a business to grant a non-possessory security right in a single category of revolving movable assets (such as accounts receivable or inventory), without requiring a specific description of the secured assets. 3. The law allows a business to grant a non-possessory security right in substantially all of its assets, without requiring a specific description of the secured assets. 4. A security right may extend to future or after-acquired assets and may extend automatically to the products, proceeds or replacements of the original assets. 68. http://www.doingbusiness.org/MethodologySurveys/GettingCredit.aspx SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 123 5. General description of debts and obligations is permitted in collateral agreements and in registration documents, so that all types of obligations and debts can be secured by stating a maximum rather than a specific amount between the parties. 6. A collateral registry is in operation that is unified geographically and by asset type and that is indexed by the name of the grantor of a security right. 7. Secured creditors are paid first (for example, before general tax claims and employee claims) when a debtor defaults outside an insolvency procedure. 8. Secured creditors are paid first (for example, before general tax claims and employee claims) when a business is liquidated. 9. Secured creditors are not subject to an automatic stay or moratorium on enforcement procedures when a debtor enters a court supervised reorganization procedure. 10. The law allows parties to agree in a collateral agreement that the lender may enforce its security right out of court. 124 Annex 4: Model Memorandum of Understanding with Government to Reform Secured Transactions Regimes Annex 4: Model Memorandum of Understanding with Government to Reform Secured Transactions Regimes MEMORANDUM OF UNDERSTANDING69 between [COUNTRY COUNTERPART] and INTERNATIONAL FINANCE CORPORATION (IFC) Dated DD MMMMMM, 20YY 69. This MOU is just an example and by no means constitutes a legal contract between IFC and a client. When WBG staff sign an MOU with a client they should consult with the appropriate legal officers in charge. SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 125 This MEMORANDUM OF UNDERSTANDING (the “Agreement”) is signed on DD day of MMMMM, 20YY, by and between: (1) MINISTRY OF [Counterpart Ministry], a government agency organized and existing under the laws of [Country]; and (2) INTERNATIONAL FINANCE CORPORATION (IFC), an international organization established by Articles of Agreement among its member countries, including [Country]. WHEREAS: A. International Finance Corporation, a member of the World Bank Group, is an international organization whose mission is to promote sustainable private sector investment in developing countries, helping to reduce poverty and improve people’s lives. For the purpose of this project, IFC’s DFO facility [Name of Facility] will undertake the project. The [Facility] is a multidonor funded initiative set up by the IFC in [Country or Region], to reduce poverty through sustainable private sector development. The Financial Sector Development Program is one of IFC’s key programs and strengthening financial infrastructure in [Country] is an important objective. B. The MINISTRY OF [Counterpart Ministry] is a government agency of [Country] and the key government agency responsible for drafting the [secured transactions law] [implementing decree for the secured transactions law] [regulation]. The Government of [Country] has established a drafting committee which consists of the representatives from [Counterpart and other ministries, central bank, et.al.] to prepare the [secured transactions law] [implementing decree] [regulation]. C. [Counterpart] and IFC intend to cooperate in the development of financial sector practices and regulations in [Country]. D. The purpose of this Agreement is to set out the main terms and conditions of the cooperation between [Counterpart] and IFC. NOW, THEREFORE, in recognition of their interests and objectives, [Counterpart] and IFC hereby confirm their understanding in respect of the following: 126 Annex 4: Model Memorandum of Understanding with Government to Reform Secured Transactions Regimes I. BACKGROUND AND INTRODUCTION Access to credit remains a significant constraint for private sector growth in [Country]. The lending environment is heavily reliant on collateral, and private firms are restricted in applying for credit because of the firms’ inability to effectively translate movable assets like equipment, receivables, and inventories into collateral. This significantly diminishes the ability for all businesses, but especially SMEs, to access credit. To address these shortcomings, [Counterpart] of [Country] asked IFC to provide technical assistance in preparing the [secured transactions law] [implementing decree] [regulation] for the secured transactions law] and developing the secured transactions registry system in [Country] by a letter of request on MMMMM DD, 20YY. In this respect, [Counterpart] and IFC have agreed that the technical assistance will be provided in three following areas : 1. To prepare the [secured transactions law] [implementing [decree] [regulation] for the existing Secured Transactions Law] 2. To devise the administrative and technical design of the registry system 3. To draft specifications for the registry system to enable procurement of software 4. To build the capacity of users of registry and create awareness about the newly introduced system Details of the project’s activities and expected timeline are explained below II. PROJECT DELIVERABLES AND TIMELINES The project will start in MMMMM 20YY and all of the following will be delivered by the end of MMMMM 20YY. 1. Assistance in preparing the [Secured Transactions Law] [implementing [decree] [regulation] for the existing Secured Transactions Law] IFC will assist the [Country] drafting committee in preparing the draft [law] [implementing decree] [regulation] in line with international best practice. Below are task activities to be carried out by the IFC expert team, which consists of the local and international experts: • IFC expert team will prepare a first draft of the [law] [decree] [regulation] for consideration by the [Country] drafting committee. • IFC expert team will present recommendations to the drafting committee and key stakeholders to get their feedback and comments. • After incorporating feedback from the drafting committee and key stakeholders, the IFC expert team will assist the drafting committee to prepare the discussion draft. • IFC expert team and the drafting committee will organize a consultation workshop and present the draft to key stakeholders in a detailed review of each feature. • IFC expert team will assist the drafting committee to finalize the [law] [decree] [regulation] based on feedback from key stakeholders 2. Assistance in devising the administrative and technical design of the registry system IFC expert team will develop a proposed technical design of the registry that is suitable conditions of [Country] and present it to [Counterpart] for approval. SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 127 3. Assistance in preparing technical specifications for registry software The IFC expert will prepare detailed specifications for the application software required to support the technical design that is approved by [Counterpart] to enable preparation of tender documents for the software. 4. Assistance in building capacity of users and registry The IFC expert will prepare training and public awareness programs and materials and work with [Counterpart] and registry staff to publicize commencement of operation of the registry under the [law] [decree] [regulation] and to train the end users and the registry staff on use of the registry system. III. IFC RESPONSIBILITIES AND RESOURCES [Counterpart] and IFC have discussed and agreed upon detailed terms of reference for IFC assistance as described above. IFC will provide its internal resources and expertise and will provide international and local experts to carry out the above mentioned activities. It will also cover expenses related to activities mentioned in the components of this Project listed in Section II above, including IFC experts’ fees, translation of the [law] [decree] [regulation] and other administrative expenses of the workshop organization. IV. [COUNTERPART] RESPONSIBILITIES AND RESOURCES [Counterpart] is the [Country] Government partner to cooperate with IFC in this project. [Counterpart] shall make its best efforts to ensure timely and full implementation of the project and provision of local support, including; (i) Obtaining all approvals as may be necessary; (ii) Making drafting committee members and other resources available for consultations and meetings with IFC; (iii) Making relevant laws and regulations available for IFC’s comments as requested and necessary; (iv) Coordinating with related Departments within the [Counterpart] and other relevant external agencies, Ministries and government bodies; and (v) Providing organizational, logistical and other in kind support in organizing the meetings and consultation workshop. [Counterpart] shall be independently responsible for paying its respective staff members dedicated to this Project. V. CONFIDENTIALITY AND ACCURACY 1. Both IFC and [Counterpart] shall maintain in confidence all information provided to the other party during this Project. 2. During this assignment, IFC hereby represents that it will carry out its obligations under the Agreement with competence, care and diligence. However, IFC shall not assume responsibility for the accuracy or completeness of its support in relation to this Project, or in any other manner. 128 Annex 4: Model Memorandum of Understanding with Government to Reform Secured Transactions Regimes VI. SPECIAL CONDITIONS AND DISPUTE RESOLUTION [Counterpart] and IFC hereby commit to cooperate on a basis of mutual understanding and respect, and agree to facilitate open and ongoing dialogue between the two parties while making adjustments as needed. In the event that a dispute arises out of or in connection with the implementation of this Agreement, it shall be resolved through friendly consultations. Should consultations fail to amicably resolve such a dispute, either party shall be entitled to discontinue the performance of their services by the provision of thirty (30) days prior written notification to the other party. VII. NON-BINDING The parties hereby acknowledge and agree that this Memorandum is not legally binding. It is not the parties’ intention to create, and nothing herein shall be construed as creating, legal rights and obligations or any commitment whatsoever. Each party shall have the discretionary right to terminate at any time any discussion whatsoever regarding the Project or this Memorandum. IN WITNESS WHEREOF, the parties have caused this Agreement to be signed in their respective names as of the date first above written. [COUNTERPART] By: _________________________________________ Name: Title: INTERNATIONAL FINANCE CORPORATION By: _________________________________________ Name: Title: SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 129 Annex 5: The World Bank Principles for Effective Insolvency and Creditors Rights Systems (Revised 2005) In the context of the joint World Bank (Bank) and International Monetary Fund (Fund) initiative on standards and codes, insolvency and creditor rights constitute one of the 12 areas that have been identified as useful for the operational work of the Bank and the Fund, and for which standard assessments are to be undertaken. Work toward defining an international standard on insolvency and creditor rights systems has been undertaken on two complementary fronts, led by the Bank and the United Nations Commission on International Trade Law (UNCITRAL). The Bank-Fund initiative on standards and codes was developed in the wake of the financial crises of the late 1990s as part of a series of measures to strengthen the international financial architecture. The international financial community considered that the implementation of internationally recognized standards and codes would provide a framework to strengthen domestic institutions, identify potential vulnerabilities, and improve transparency. The Reports on the Observance of Standards and Codes (“ROSC”) are designed to assess a country’s institutional practices against an internationally recognized standard and, if needed, provide recommendations for improvement. The process of participation and the production of the report are intended to help spur reform and foster strengthened economic institutions in member countries. In 1999, the Bank’s initiative to develop benchmarking principles for core commercial law systems was launched, leading to the development of the Principles and Guidelines for Effective Insolvency and Creditor Rights Systems (“Principles”). Principles is designed as a broad-spectrum assessment tool to assist countries in their efforts to evaluate and improve the core aspects of their commercial law systems that are fundamental to a sound investment climate and commerce, including credit access and protection mechanisms, risk management and restructuring practices and procedures, formal commercial insolvency procedures, and related institutional and regulatory frameworks. Principles was elaborated in collaboration with partner organizations and experts serving on the Bank’s Task Force and working groups. Advisory partners included: African Development Bank, Asian Development Bank, European Bank for Reconstruction and Development, Inter-American Development Bank, International Finance Corporation, International Monetary Fund, Organization for Economic Cooperation and Development, UNCITRAL, INSOL International, and the International Bar Association (Committee J). The Task Force and working groups comprised more than 70 international experts. Principles was vetted in a series of regional roundtables involving more than 700 participants from 75 countries (mostly middle-income and developing nations), involving high-level officials and designated experts from the private sector. Principles was also posted on the Bank’s web-site for international comment and discussed and approved by the Bank’s Executive Directors in 2001 for use in a series of pilot country assessments under the ROSC program, subject to a review and updating of Principles based on that experience. In 2003, the Bank began a review of the ROSC experience on insolvency and creditor rights systems, and in 2005 the Bank concluded a revision of Principles, which both took stock of the lessons learned from that experience and reflected feedback from the international community in connection with the Global Forum on Insolvency Risk Management, the Forum on Asian Insolvency Reform, the Forum on Insolvency in Latin America, and the Global Judges Forum. The revision was also based on the Bank’s collaboration with its original partners, the European Commission, Group of Twenty, Asia-Pacific Economic Cooperation, International Association of Insolvency Regulators, and others. Following is a brief summary of the key elements in Principles on Creditors Rights. Credit Environment Compatible credit and enforcement systems. A regularized system of credit should be supported by mechanisms that provide efficient, transparent, and reliable methods for recovering debt, including the seizure and sale of immovable and movable assets and sale or collection of intangible assets, such as debt owed to the debtor by third parties. An efficient system for enforcing debt claims is crucial to a functioning credit system, especially for unsecured credit. A 130 Annex 5: The World Bank Principles for Effective Insolvency and Creditors Rights Systems (Revised 2005) creditor’s ability to take possession of a debtor’s property and to sell it to satisfy the debt is the simplest, most effective means of ensuring prompt payment. It is far more effective than the threat of an insolvency proceeding, which often requires a level of proof and a prospect of procedural delay that in all but extreme cases make the threat not credible to debtors as leverage for payment. While much credit is unsecured and requires an effective enforcement system, an effective system for secured rights is especially important in developing countries. Secured credit plays an important role in industrial countries, notwithstanding the range of sources and types of financing available through both debt and equity markets. In some cases, equity markets can provide cheaper and more attractive financing. But developing countries offer fewer options, and equity markets are typically less mature than debt markets. As a result, most financing is in the form of debt. In markets with fewer options and higher risks, lenders routinely require security to reduce the risk of nonperformance and insolvency. Collateral systems. One of the pillars of a modern credit economy is the ability to own and freely transfer ownership interests in property, and to grant a security interest to credit providers with respect to such interests and rights as a means of gaining access to credit at more affordable prices. Secured transactions play an enormously important role in a well-functioning market economy. Laws governing secured credit mitigate lenders’ risks of default and thereby increase the flow of capital and facilitate low-cost financing. Discrepancies and uncertainties in the legal framework governing security interests are the main reasons for the high costs and unavailability of credit, especially in developing countries. The legal framework for secured lending should address the fundamental features and elements for the creation, recognition, and enforcement of security interests in all types of assets—movable and immovable, tangible and intangible—including inventories, receivables, proceeds, and future property and, on a global basis, including both possessory and non-possessory interests. The law should encompass any or all of a debtor’s obligations to a creditor, present or future, and debt obligations between all types of persons. In addition, it should allow effective notice and registration rules to be adapted to all types of property, and should provide clear rules of priority on competing claims or interests in the same assets. For security rights and notice to third parties to be effective, they must be capable of being publicized at reasonable costs and easily accessible to stakeholders. A reliable, affordable public registry system is therefore essential to promote optimal conditions for asset-based lending. Where several registries exist, the registration system should be integrated to the maximum extent possible so that all notices recorded under the secured transactions legislation can be easily retrieved. Enforcement systems. A modern, credit-based economy requires predictable, transparent and affordable enforcement of both unsecured and secured credit claims by efficient mechanisms outside of insolvency, as well as a sound insolvency system. These systems must be designed to work in harmony. Commerce is a system of commercial relationships predicated on express or implied contractual agreements between an enterprise and a wide range of creditors and constituencies. Although commercial transactions have become increasingly complex as more sophisticated techniques are developed for pricing and managing risks, the basic rights governing these relationships and the procedures for enforcing these rights have not changed much. These rights enable parties to rely on contractual agreements, fostering confidence that fuels investment, lending and commerce. Conversely, uncertainty about the enforceability of contractual rights increases the cost of credit to compensate for the increased risk of nonperformance or, in severe cases, leads to credit tightening. SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 131 World Bank’s Principles for Effective Creditor Rights Systems No PART A . LEGAL FRAMEWORK FOR CREDITOR RIGHTS A1 Key Elements A modern credit-based economy should facilitate broad access to credit at affordable rates through the widest possible range of credit products (secured and unsecured) inspired by a complete, integrated, and harmonized commercial law system designed to promote: • Reliable and affordable means for protecting credit and minimizing the risks of nonperformance and default; • Reliable procedures that enable credit providers and investors to more effectively assess, manage, and resolve default risks and to promptly respond to a state of financial distress of an enterprise borrower; • Affordable, transparent, and reasonably predictable mechanisms to enforce unsecured and secured credit claims by means of individual action (e.g., enforcement and execution) or through collective action and proceedings (e.g., insolvency); • A unified policy vision governing credit access, credit protection, credit risk management and recovery, and insolvency through laws and regulations that are compatible both procedurally and substantively. A2 Security (Immovable Property) One of the pillars of a modern credit economy is the ability to own and freely transfer ownership interests in land and land- use rights, and to grant a security interest (such as a mortgage or charge) to credit providers with respect to such interests and rights as a means of gaining access to credit at more affordable prices. The typical hallmarks of a modern mortgage system include the following features: • Clearly defined rules and procedures for granting, by agreement or operation of law, security interests (mortgages, charges, etc.) in all types of interests in immovable assets; • Security interests related to any or all of a debtor’s obligations to a creditor, present or future, and between all types of persons; • Clear rules of ownership and priority governing competing claims or interests in the same assets, eliminating or reducing priorities over security interests as much as possible; • Methods of notice, including a system of registry, which will sufficiently publicize the existence of security interests to creditors, purchasers, and the public generally at the lowest possible cost. A3 Security (Movable Property) Clearly defined rules and procedures to create, recognize, and enforce security interests over movable assets, arising by agreement or operation of law; Allowance of security interests in all types of movable assets, whether tangible or intangible (e.g., equipment, inventory, bank accounts, securities, accounts receivables, goods in transit; intellectual property and its proceeds, offspring, and mutations), including and with respect to present, after-acquired, or future assets (including goods to be manufactured or acquired), wherever located and on a global basis, and based on both possessory and non-possessory interests; Security interests related to any or all of a debtor’s obligations to a creditor, present or future, and between all types of persons; Methods of notice (including a system of registration) that will sufficiently publicize the existence of security interests to creditors, purchasers, and the public generally at the lowest possible cost; and Clear rules of priority governing competing claims or interests in the same assets, eliminating or reducing priorities over security interests as much as possible. A4 Registry Systems 132 Annex 5: The World Bank Principles for Effective Insolvency and Creditors Rights Systems (Revised 2005) There should be an efficient, transparent, and cost-effective registration system with regard to property rights and security interests in the borrower’s immovable assets. There should be an efficient, transparent and cost-effective means of providing notice of the possible existence of security interests in regard to the borrower’s movable assets as well, with registration in most cases being the principal and strongly preferred method (with some exceptions). The registration system should be reasonably integrated, easily accessible, and inexpensive with respect to recording requirements and searches of the registry, and it should be secure. A4.1 Land and mortgage registries. Registries pertaining to land (or land use rights) and mortgages are typically established solely for recording interests of this nature, although permanent fixtures and attachments to the land may be treated as subject to recordation in the place of the underlying real property. Land and mortgage registries are typically established by jurisdiction, region, or locale where the property is situated; ideally, they should provide for integrated, computerized search features. A4.2 Charge registries. Registries pertaining to movable assets of enterprises should be integrated and established nationally, with filings made on the basis of the enterprise or business name, ideally in a centralized, computerized registry situated in the jurisdiction or location where the enterprise or business entity has been incorporated or has its main place of registration. A4.3 Specialized registries. Special registries are beneficial in the case of certain kinds of assets, such as aircraft, vessels, vehicles, and certain types of intellectual property (such as trademarks and copyrights). A5 Commercial Enforcement Systems A5.1 Enforcement of unsecured debt. A functional credit system should be supported by mechanisms and procedures that provide for efficient, transparent, and reliable methods for satisfying creditors’ rights by means of court proceedings or nonjudicial dispute resolution procedures. To the extent possible, a country’s legal system should provide for executive or abbreviated procedures for debt collection.70 A5.2 Enforcement of secured debt. Enforcement systems should provide efficient, cost-effective, transparent, and reliable methods (both nonjudicial and judicial) for enforcing a security interest over assets. Enforcement proceedings should provide for prompt realization of the rights obtained in secured assets, designed to enable maximum recovery according to market-based asset values. 70. Enforcement under this principle aims primarily at the treatment with respect to proceedings to recover against corporate debtors. Where enforcement proceedings involve individuals or persons, reasonable exemptions may need to be adopted to allow individuals or persons to retain those assets indispensable to the subsistence of the debtor and his/her family. Any such exemptions should be clearly defined and narrowly tailored. SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 133 Annex 6: Example of Regulation for Registry Procedures REGULATION ON PROCEDURES OF THE COLLATERAL REGISTRY This regulation is promulgated under the authority of Article NN of the Law on Secured Transactions. The regulation is promulgated by the Minister of AAAAA. It shall take effect on MMM DD, 20YY. Article (1) The Collateral Registry (registry) is established in the Ministry of AAAAA (Ministry). Article (2) 1. The location of the registry is in the Ministry of AAAAA in [City]. 2. The hours of operation of the registry are 8:00 a.m. to 4:30 p.m., Monday through Friday, except for official government holidays. 3. A help desk for persons who have questions or problems concerning registration is available during those hours by telephone. The telephone number will be posted on the registry’s web-site. 4. The hours of operation of the registry for registration of documents and searching the database through the registry web-site are 24 hours per day, seven days per week. Article (3) Information in a notice will be entered in [language]. Article (4) Notwithstanding that a termination notice may have been registered, the notice record will be maintained in the registry as if it were an effective notice for the period specified in the notice. Article (5) The registry will not inspect a notice to determine whether it is legally sufficient. A notice will be refused only as determined by logic in the registry software, which is based on the criteria set out in Article NN of the Law on Secured Transactions. Article (6) 1. The registry will provide for registration of notices electronically through its web-site. 2. Notices will be effective immediately upon acceptance by the registry software. 3. The registry software will determine whether the information entered for a notice is sufficient for registration. If it is not sufficient, the registry software will immediately notify the registrant and identify the necessary corrective action. The notice will not be registered until it meets the minimum requirements for registration as defined by the law and this regulation. 134 Annex 6: Example of Regulation for Registry Procedures 4. When the information that is entered is sufficient for registration, the registry software will accept the notice and generate a confirmation of registration that the user may print as proof of registration. The confirmation will include the date and time of registration, the registration number assigned by the registry and all information on the registered notice. Article (7) 1. Except as otherwise noted in this Article, the requirements for a notice of security interest will apply to a notice of lien. 2. A notice of lien may be registered by the government for a tax obligation, by a court for enforcement of a judgment against movable property, or by a receiver or court in an insolvency proceeding. 3. The registry will indicate that the notice is a notice of lien in the record of the notice. 4. For notices of lien, the government, court or insolvency receiver will be treated as a secured party, and the taxpayer, judgment debtor or insolvent person will be treated as a debtor. Article (8) 1. For each initial or subsequent related notice that is registered, the registry shall generate a unique registration number. The number will have a fixed number of digits, including leading zeroes. 2. For each initial notice, the registry technology system will generate an additional two digits that will be appended to the end of the registration number and become a part of it. The additional digits are computed mathematically from the digits of the unique number, and are later used to automatically validate the number when it is entered on subsequent notices related to the initial notice. 3. The registry will relate each notice to a record identified by the number assigned to the initial notice. The record will indicate the date and time of registration of the initial notice. 4. The registry will maintain the record for public inspection. Article (9) 1. For each amended notice, continuation notice, termination notice and notice of objection, the registry software will validate the registration number of the initial notice that must be entered by the registrant. 2. When the registrant enters the registration number of the initial notice, the registry software will determine what the last two digits should be by computing them from the preceding digits. The software will then compare them with the last two digits of the registration number that was entered by the registrant. If the numbers are not identical, the number has been entered incorrectly. 3. If the initial notice’s registration number is determined by the computation to be correctly entered, the registry software will determine if the notice record identified by the number is effective. 4. If the initial notice’s registration number is not entered, if the number entered is determined to be incorrect, or if the record identified by the number is not effective, the registry software will cause the new notice to be refused and will return an error message to the registrant stating the reason for refusal. SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 135 Article (10) The registry shall provide internet access to all effective records in the database through the registry web-site. Any person may have access to the database for searching and viewing records of notices of security interest. The registry may provide access to a PC in the registry or in selected [district][provincial] offices of the Ministry for any person who does not otherwise have access to the Internet. Article (11) The registry shall provide a certified report of search on a registration number, debtor, or a serial number of [a motor vehicle][serial numbered equipment] upon request. The person who requests the certified search report will log in to the registry Web site, select the option to generate a certified search report, and conduct the search of the database. The search report will include a certificate of authenticity with the facsimile signature of the registrar and a unique certified search report number. If the person who requests the certified search report is a client whose account [balance is insufficient for the fee][is suspended or closed], or if the person is a non-client whose payment is insufficient for the fee, the certified search report will not be issued, and the person will be informed of the reason. The registry shall keep a record of the certified search report, which will include the date and time of the search and the criterion on which the search was conducted. If the authenticity of a certified search report is questioned in a judicial proceeding, the report may be retrieved by its certified search report number and reproduced and authenticated by the registrar. The record shall be retained in electronic form. Article (12) 1. The fees of the registry shall be: a. For registering an initial notice of security interest XX b. For registering an amended notice XX c. For registering a continuation notice XX d. For registering a termination notice XX e. For registering a notice of objection XX f. For the provision of a certified search report XX 2. The Ministry will periodically review the revenues of the registry to determine if they are sufficient to cover the costs of operation of the registry. If they are found to be either too low or too high, the Minister may amend this regulation to adjust the fees to cover costs of operation. 3. There is no fee for a search conducted by any person using the electronic services of the registry. 4. There shall be no fees for registration of notices of lien and related notices by courts, government entities or insolvency liquidators, or for other services provided to them by the registry. Article (13) 1. An individual or entity that regularly uses registry services may establish with the registry [a pre-paid][a post-paid] client account to which it may charge the fees for registrations and certified search reports. 2. The individual or entity will complete an application form on the registry’s web-site to become a client of the registry. The application constitutes an agreement that the client is responsible for control of passwords used by individual users authorized by the client and is responsible for all transactions done by its individual users. 136 Annex 6: Example of Regulation for Registry Procedures 3. The registry will create a client account record for each client. Information in the record will include the name, address, contact information for the client, and the user name and password combination of each authorized user of the client’s account. The registry will provide to the client its client account number, which it will use in combination with individual user IDs and passwords to identify its account and charge fees to the account. The client account record will also include a history of all transactions for which fees are charged to the account. 4. As the client conducts transactions, the registry will charge the fees to the account. 5. The registry will generate a monthly statement for each client. Statements will be posted in the client’s account record, and may be viewed or downloaded by authorized users of the client account. 6. To pay on the client account, the client will [payment process and media options]. 7. When a client makes a payment on the account, the registry will add the amount to the account balance and enter the payment in the transactional history in the client account record. 8. If a client account [balance is insufficient for the fee of a transaction that an authorized client user attempts to do][is suspended or closed when a user attempts to do a transaction], the registry will not permit the transaction to proceed, and will notify the user of the necessary corrective action. 9. If the client account is inactive for a period of NN months, the registry may close it for inactivity. Article (14) 1. A person who does not have a client account may use the registry’s web-site to register notices and request certified search reports. 2. The person may find the fees for the desired services on the registry’s web-site. 3. The person will make the required payment by [payment process and media options]. 4. The person will then log in to the registry web-site as a nonclient, and will enter the necessary contact information and payment information. 6. After the registry’s technology system validates the payment information, the person may register notices or request certified search reports. 7. If the payment is insufficient to cover all of the transactions the person attempts, the registry will not permit further transactions after the amount is exhausted, and will inform the person that the payment was insufficient to proceed. 8. If the amount of a bank receipt is greater than the total of fees, the person may use the balance for future transactions or may request that it be refunded. SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 137 Annex 7: Example of Terms of Reference for Registry IT System Terms of Reference for Registry IT System Background [Description of existing situation] Scope of Services Development of a web-based registry system for implementation and ongoing operations is a specialized activity, which requires a combination of proprietary skills and experience in the following areas: • Secured lending registry that conforms to international best practices • Data security, privacy protection and other legal compliance • Data processing management • Documentation and training support • IT project management • Software development and maintenance • Data migration [Purchaser] is seeking a technology partner with international experience to assist with the establishment of a ”best practice” web-based secured lending registry system. In this respect, the required solution should be both functionally rich and flexible, but, at the same time, it should be priced at a level appropriate to the scale and sophistication of the local market. It is anticipated that the system will support the following types of on-line users: • Regular or recurrent users also known as “clients.” These include banks, finance companies, and other regular providers of financing secured by assets. A regular user will establish an account with the registry to which fees for registrations and request for certified search reports may be charged. One-off users, also known as “nonclient.” These include those who want to register a notice of security interest or request a certified search report, but who do not have an account with the registry. This type of user has to make payment prior to requesting a paid service. Web search users: These are all users who do their own web searches without logging into the system. They may search for information and print the results without charge or restriction, but do not receive certified results. • Other types of users include registry’s bank, registry staff, and system administrators. The solution must accommodate globally accepted best practice in terms of confidentiality, security and privacy principles. As the long-term success and efficiency of the registry system is dependent more on the operational and organizational rules and principles than on the actual technological solution, the technology partner is expected to provide services in all of the following areas: • Registry system development/customization and localization into [local] language • Operational support of the system and correction of defects in the application software under a warranty for one year from the date that the registry accepts the application software as operational 138 Annex 7: Example of Terms of Reference for Registry IT System • Provision of a complete technical infrastructure requirement to operate the registry system • Support and advice in data centre technical and operational set-up • Documentation, to include technical documentation for the application software and internal user documentation for registry system operations • Knowledge transfer to the registry’s technology staff on day-to-day maintenance and operation of the technology system, and internal user training on use and management of the system. [Purchaser] believes that to meet the current market needs, it will be necessary to utilize a proven Web-based registry system and customize it to the specific needs of the registry. The solution should have the technical flexibility to meet future market needs (new type of registration, new type of user, value added products, etc.) and changing compliance issues. It is recognized, however, that the level of functionality and customization could have a significant bearing on costs. It is therefore anticipated that the solution provided may well be derived from an existing generic solution and localized to adapt to the local market needs. Business Requirements It is anticipated that the on-line registry solution will have, as a minimum, the following features / functionality, as more fully described in the attached Process Model Narrative: On-line registration services The system would be expected to support the following types of notice: • Notice of security interest • Change Notice o Amended notice o Notice of extension/continuation o Notice of termination/discharge o Notice of objection Data requirements will differ based on the type of notice, while identification data required for the debtor will be based on the type of debtor. Search logic The system should employ search logic that is appropriate to the type of search criterion, i.e., exact match on numeric criteria and normalized match for alphanumeric criteria, and display all the records that match the search condition. Where the search logic is one that may produce a search result that includes false positives, the operator should be presented with information, e.g., address of a debtor, that will permit false positives to be identified. User access • As a minimum, the required solution should be localized and support notice registration by on-line users [and entry of registration data on behalf of registrants who deliver notices on paper] • Formatted input screens • Standard SSL encryption • User Log-on and password SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 139 Standard outputs • Printable confirmation of registration returned for each notice • Printable reports of search results generated for each search, whether or not certified • Electronic reports and queries for use by registry administrators Maintainable variable values Variable values used in the system may be maintained by registry staff without technical support. Variable values may include fees charged by the system, table default values, report schedules, words to be dropped during normalization, aging periods, etc. Search and access The standard search criteria required for the system are as follows: Search Category Search Criterion Registration number Registration number [Vehicle/Equipment number] [Serial number] Debtor Citizen [National ID number][Name] Foreigner Name Domestic or registered foreign legal entity [Business Registration number] [Name] Unregistered foreign legal entity Name Other entity Name Note: Name searches will use normalization algorithms for individual or entity names, as appropriate to the type of debtor. Application security This module is to perform various tasks to maintain and operate the system safely. It is used to manage security objects in the system. This module will enable the exclusive creation of user groups and affiliate in the system and assign privileges for each user group. The system should maintain a comprehensive log file of all user activities. Fiscal system This module will manage service pricing, capture all revenues derived from registry services paid through various payment methods, generate statements, maintain account status, and so forth The fiscal system will also provide a web interface to the registry’s bank’s users to enter payments by clients and non- client users. 140 Annex 7: Example of Terms of Reference for Registry IT System Standard system reports and data presentation facilities The system should provide for tracking of all payments to services or accounts, and maintain a permanent audit trail. It should also provide maintenance reports for use in data analysis by the registry. Reports should contain, as a minimum requirement, the following templates: • Security violation report. • Statistical reports (samples attached). • Data center security policies • The solution provider should, as a minimum requirement, address the following security/continuity aspects: • Physical data security • Change management security • Operating system security related to system administration • Data encryption • Back-up/disaster recovery [Data migration] [Description of existing registration data that must migrate to new registry system] Documentation The technical documentation of the system, including procedures, operating parameters, and maintenance requirements should be fully documented in [local language]. After-sales technical support and maintenance A critical aspect of this assignment will be the level of local support provided by the vendor, whether directly or through the vendor’s local partner, both during the implementation stage and post implementation. It is envisaged that a support and maintenance agreement will be executed with the solution provider, incorporating: • General technical support • Application maintenance support • Operational consultancy Knowledge Transfer Prior to commencement of the project [purchaser] will nominate “product champion” who will act as the primary contact point for communications during the project. The vendor will make sure that this individual is actively engaged in the development process and is provided with both practical and theoretical training at appropriate key points. Additional overview training should also be provided to key project team members, for example, IT staff, at the beginning of the project, and support staff after completion of the models. SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 141 Annex 8: Impact of Secured Lending in Gender Financing71 Summary Step 1. Diagnostics 1.1. Analyze the lending market through a gender lens 1.2. Obtain gender-disaggregated private sector views 1.3. Analyze the legal and administrative framework Step 2. Solution Design 2.1. Agree on gender-related program results 2.2. Undertake legal and regulatory reform to enable and encourage lending to women 2.3. Undertake awareness raising directed at women 2.4. Undertake capacity building for financial institutions and implementers of new laws Step 3. Implementation, and Monitoring and Evaluation (M&E) 3.1. Ensure key information can be gender disaggregated 3.2. Incorporate output and outcome indicators that highlight gender aspects of the program This module provides tools to enhance reforms to improve women’s ability to use movable assets as collateral for loans. The module (i) suggests methods to explore differences in women’s and men’s access to secured lending (step 1—Diagnostics), (ii) provides possible solutions to enable women to benefit from programs of secured-lending reform (step 2—Solution Design), and (iii) suggests ways to incorporate gender considerations into implementation as well as monitoring and evaluation of secured lending reform programs (step 3—Implementation, and Monitoring and Evaluation). Why Gender Matters Lack of access to finance is consistently cited by business owners as one of their most limiting constraints, and it disproportionately affects women. Most studies find that women are not more likely than men to be rejected for loans or be subject to higher interest rates. But women are less likely to apply for loans than men72 (see Box 8.1). 71. This annex corresponds to Module 5 of Sevi Simavi, Clare Manuel and Mark C. Blackden, “Gender Dimmensions of Investment Climate Reform: A Guide for Policy Makers and Development Practitioners,” Washington, D.C., World Bank, 2009). 72. See summary of evidence in World Bank. 2007. Millennium Development Goals Global Monitoring Report. Washington, D. C, 110. 142 Annex 8: Impact of Secured Lending in Gender Financing Box 8.1 Although women entrepreneurs run nearly half of Kenya’s micro, small, and medium-sized enterprises, they receive less than 10 percent of credit. And they receive only 1 percent of credit directed to agriculture, despite managing 40 percent of smallholder firms.73 Women in Uganda own about 40 percent of their country’s private enterprises, but receive only 9 percent of credit.74 In Tanzania nearly 30 percent of male-headed enterprises have received bank finance, whereas only 8 percent of female-headed enterprises have. Only 10 percent of men are currently bank financed; the proportion of women is half that.75 In a survey of women’s businesses in the Middle East and North Africa,76 most women owners did not have access to formal credit and were financing their businesses mainly through personal sources, such as savings, family, and friends and by reinvestment of their business earnings. Microfinance has made a major contribution to enhancing women’s access to credit. It is estimated that 8 out of every 10 microfinance clients are women. But the rigidities of microfinance can be limiting for women.77 By definition, amounts lent are small, interest rates tend to be higher than commercial bank rates, and lending periods are short. Lack of access to land title can be a major impediment for both men and women seeking finance in formal systems that are frequently highly collateralized. But the problem is likely to be significantly worse for women (see Box 8.2). Box 8.2 More than 85 percent of loans in Kenya require collateral. The average value of the collateral taken is nearly twice that of the loan. In the vast majority of cases, the collateral required is land, usually land that has a registered title. Women hold only 1 percent of registered land titles, with about 6 percent of registered titles held in joint names.78 Reforms to a country’s secured-lending system to enhance the use of movable securities can have a significant impact on access to credit across the board (see Box 8.3). Box 8.3 In 1999 Romania undertook a package of measures, including legal reform, to make it easier for a wider range of movable assets to be used as collateral. Since then, more than 200,000 notices of security interests have been registered, the number of borrowers has increased threefold, and the volume of credit has grown by 50 percent. Following similar reform in the Slovak Republic in 2002, more than 70 percent of new loans to businesses are now backed by movable assets and receivables. Credit to the private sector has since increased by 10 percent.79 73. A. Ellis, et al. 2007. Gender and Economic Growth in Kenya. Directions in Development, World Bank, Washington, D.C. 74. A. Ellis. et al. 2006. Gender and Economic Growth in Uganda. Directions in Development, Washington, D.C., World Bank. 75. A. Ellis, et al. 2007. Gender and Economic Growth in Tanzania. Directions in Development, Washington, D C., World Bank 76. Surveys conducted by IFC GEM in Bahrain, Jordan, Lebanon, Tunisia, and the United Arab Emirates in 2006. Women Entrepreneurs in the Middle East and North Africa: Characteristics, Contributions and Challenges. June 2007 The Center of Arab Women for Training and Research and IFC GEM. 77. DFID. March 2007. Briefing Note No. 5 Gender and Growth 78. World Bank. 2004. Kenya Investment Climate Survey. 79. World Bank. 2006. Doing Business in 2006: Creating Jobs. World Bank, Washington, DC, and IFC, Secured Lending Program. SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 143 Enabling movable assets—such as machinery, book debts, jewelry, and other household objects—to be used as collateral can benefit all businesses. But opening up this type of financing has the potential to be of particular benefit to land-poor women, enabling them to circumvent their lack of titled land and use the assets they do have to unlock access to formal credit markets (see Box 8.4). Box 8.4 In Sri Lanka women commonly hold wealth by way of gold jewelry. This is accepted by formal banks as security for loans.80 In Tanzania, Sero Lease and Finance, a women’s leasing and finance company, provides loans to women to purchase equipment for their businesses, using the equipment as security through leasing agreements.81 Sero has more than 10,000 exclusively female clients.82 Women’s access to credit not only enables them to start or grow their businesses, but the impact on the household is likely to be profound. When poor women (rather than men) are the direct beneficiaries of credit, its impact on the various measures of household welfare (such as school enrolment rates83) is greater. Step 1. Diagnostics Step 1 provides tools to explore (i) the extent to which patterns of secured lending are skewed in favor of men84 and (ii) legal, regulatory, and administrative reasons for any such unequal distribution. The critical steps to be taken during an initial project design phase (in the absence of a full diagnostic at that point) are highlighted in **orange.** 1.1. Analyze the Lending Market through a Gender Lens ** Critical initial project design step** Key issues to assess: • How important is collateral in the lending system? What percentage of lending requires collateral? • What percentage of (secured) lending is to women and what percentage to men? • What percentage of collateral taken is land title and what percentage is movable85 assets? • What percentage of registered land title is held by women? Possible sources for this information may include the central bank, the national statistics office, the ministry of land or land registry (in relation to the question about land), and reports on the financial sector. If a full diagnostic is being undertaken, overall information on the lending market could be supplemented by more detailed exploration of the issues with officials from commercial banks and other lending institutions. 80. M. S. Pal, 1997. Women Entrepreneurs and the Need for Financial Sector Reform. Economic Reform Today, Number Two. 81. Leasing is frequently regarded as a form of secured lending, and is often regulated as such. Strictly speaking however, title to the asset remains with the lending institution until full payment has been made. 82. A. Ellis, et al. 2008. Doing Business: Women in Africa. World Bank, Washington, DC. 83. Mark Pitt and Shahidur Khandker. 1998. “The Impact of Group-Based Credit Programs on Poor Households in Bangladesh: Does the Gender of Participants Matter?” Journal of Political Economy 106: 958–96. 84. It is highly unlikely to be skewed in favor of women. 85. That is, assets that are not land. 144 Annex 8: Impact of Secured Lending in Gender Financing There may be organizations in the country that provide secured finance primarily or exclusively for women—such as microfinance institutions, savings and loan cooperatives, or banks with credit lines directed at female-owned businesses (for example, Access Bank in Nigeria—see Box 8.5). These organizations may have interesting perspectives on women’s ability to access secured lending generally. Box 8.5 Access Bank, one of Nigeria’s leading banks, is one of the first banks in Africa to dedicate lines for credit to finance female-owned businesses. The International Finance Corporation (IFC) provided the bank with a US$15 million loan specifically to extend lines of credit to women entrepreneurs. In addition, the IFC provided comprehensive assistance and training to the bank to enhance its ability to reach out to the women’s market. 1.2. Obtain Gender-Disaggregated Private Sector Views a. Consider existing private sector surveys for gender-disaggregated data. ** Critical initial project design step** Gender disaggregation of existing data may reveal differences in men’s and women’s abilities to access finance or secured lending and the reasons for any such differences. Good sources of information are likely to include Finscope™ Surveys,86 investment climate surveys, household surveys, and enterprise surveys. The central bank may also have conducted relevant research and have survey information. If a published report does not contain gender-disaggregated data, it may be possible to access the underlying data (particularly if the research has been conducted recently), which may be susceptible to gender disaggregation. National and international nongovernmental organizations (NGOs), particularly those with a focus on gender (which may not traditionally be consulted in investment climate work) should also be requested to provide any relevant survey evidence they may have. b. Collect new data from the private sector. Existing survey evidence can be supplemented by a more in-depth exploration of disparities and the reasons for them. This could be by way of a full-scale survey, focus group discussions (FGDs), or one-on-one interviews (see Box 8.6). 86. http://www.finscope.co.za/about.html. SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 145 Box 8.6 IFC undertook a study in South Africa to explore why women, particularly black women (more than 90 percent of whom run their own businesses), find it difficult to access finance. The study was based on (i) existing survey evidence, (ii) focus group discussions with businesswomen, and (iii) interviews with financial institutions. Key obstacles to women accessing finance were found to include • lack of collateral; • financial literacy: poor understanding of financial terminology and law; • attitudes of banks (only one of South Africa’s four major banks is contemplating a specific program to increase its share of female-owned enterprises); • lack of awareness of availability of finance (few women in business know about the different institutions, their products, or how to access them—out of 170 women surveyed in four provinces, only seven were familiar with the offerings for small and medium enterprise finance from financial institutions in their province); and • lack of financial confidence: women are more risk averse than men. Evidence may emerge of discriminatory attitudes and treatment of women on the part of financial institutions (see Box 8.7): Discussions may be held with men and women who have successfully financed their businesses through secured lending and those who have been unable to do so. Candidates for interview could be found through business associations (including women’s business associations). Microfinance institutions may have successful (female) clients seeking to make the transition to the formal lending system, and their experiences may be relevant. Box 8.7 Although banking laws do not discriminate against women borrowers, banks in many countries in the Middle East87 ask for the husband to be a co-signer—even if he lacks financial resources or is not involved in the woman’s business. The intent is to ensure that the woman’s activities do not interfere with the wishes of her family or her husband. 1.3. Analyze the Legal and Administrative Framework ** Critical initial project design step** Secured lending reform requires an understanding of the existing legal framework, in particular the extent to which it facilitates movable assets being used as collateral. Consideration should be given to the extent to which the legal framework enables women to own (and therefore use as collateral) movable assets and to whether the law discriminates in other ways against women when they seek to access finance (see Box 8.8 for examples). 87. Chamlou. 2007. “The Environment for Women’s Entrepreneurship in the Middle East and North Africa Region.” Pg. 47. 146 Annex 8: Impact of Secured Lending in Gender Financing Box 8.8 In Cameroon married women have no property rights. The civil code states, “The husband alone administers matrimonial property . . . the husband shall administer all personal property of his wife” (articles 1421 and 1429). Until very recently in Lesotho women were considered as minors and thus were ineligible to undertake legal transactions in their own right. Local women lawyers’ organizations (for example, the local branch of the international women lawyers’ association, FIDA) or NGOs promoting women’s rights are often well placed to provide assistance in analyzing these issues. The country’s international treaty obligations (see Box 8.9) and any guarantees of equality contained in the constitution should be examined. If legal restrictions on women’s property rights or ability to participate in secured lending conflict with these overarching obligations, the case for reform may be stronger. Box 8.9 The Convention against the Elimination of All Forms of Discrimination Against Women (CEDAW) requires states to ensure that women have equal rights to obtain bank loans, mortgages, and other forms of credit. The Beijing Platform for Action commits to providing women with access to finance and credit and eliminating biases against women in finance laws. The Protocol to the African Charter on Human and People’s Rights on the Rights of Women in Africa commits states to create conditions to promote and support the occupations and economic activities of women. Step 2. Solution Design The diagnostic undertaken in step 1 will reveal the particular barriers that women face when seeking secured lending. Step 2 provides possible solutions to address them. These are not one-size-fits-all solutions, but, rather, examples of approaches that will need to be adapted for particular contexts. The diagnostic may reveal barriers that are beyond the scope of secured-lending reform. For example, underlying social issues, such as intrahousehold relationships and allocation of resources, may affect women’s willingness or ability to apply for loans. A secured-lending program cannot address these issues directly, but it can mitigate these factors by providing an enabling legal, regulatory, and administrative environment. Step 2.1 is the starting point for solution design: a clear determination and agreement of the impact the reforms seek to achieve in relation to gender. 2.1. Agree on Gender-Related Program Results The starting point for solution design is to be clear about what the planned package of reforms aims to achieve for women. It may be helpful to formulate these goals in discussion with female entrepreneurs and women’s business associations. The key desired outcome is likely to be an increase in the amount of secured lending to female-owned businesses, in terms of the numbers of women receiving loans as well as the value of the loans. SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 147 2.2. Undertake Legal and Regulatory Reform to Enable and Encourage Lending to Women If the Legal questions reveals discriminatory laws relating to banking, lending, or property rights, these provisions should be repealed. In addition, proactive legal reform should be considered as a method to enhance women’s ability to access secured lending. This may include amending the regulatory framework for credit reference agencies to enable women to establish their own credit history, separate from their husbands’. Reform to prohibit gender discrimination in relation to credit applications may also improve women’s access to secured lending (see Box 8.10). If this course is taken, careful consideration should be given to a realistic and sustainable enforcement mechanism. Box 8.10 Many countries’ constitutions (or other overarching law) outlaw discrimination on the grounds of gender. But such provisions may not apply to private transactions (such as banking). If this is the case, consideration should be given to extending nondiscrimination provisions so that they apply in the private sphere: • The UK Sex Discrimination Act, 1975 (as amended), prohibits gender discrimination in private transactions to supply goods, facilities, and services, including credit. • The USA Equal Credit Opportunity Act, 1974, prohibits discrimination on the grounds of gender (or race) in relation to credit applications. It was extended by the Women’s Business Act, 1988, to include business loans. Developing partnerships with organizations already providing credit to women may facilitate reform 2.3. Undertake Awareness Raising Directed at Women If the diagnostic revealed that women have limited knowledge of or access to information about accessing finance for their businesses, a program of awareness raising may be necessary. This could include financial literacy schemes and education for women on the benefits of accessing finance (see Box 8.11). Box 8.11 In the United States the Women’s Business Act provided government funding for women’s business center “demonstration sites” to provide training and access to capital exclusively for women. Now more than 100 centers exist across the United States.88 Women’s access to commercial credit increased from 20 percent of women business owners to 34 percent between 1996 and 2003. By 2006 majority female-owned firms accounted for two in five of all businesses. They generate US$1.9 trillion in annual sales and employ 12.8 million people nationwide.89 Possible partners for these types of initiatives include • commercial banks (see Box 8.5); • institutions involved in administering the new secured lending regime; 88. U.S. Small Business Administration, http://www.sba.gov/aboutsba/sbaprograms/onlinewbc/index.html. 89. National Women’s Business Council, Center for Women’s Business Research. For more information about women’s business centers, see http:// www.sba.gov/aboutsba/sbaprograms/onlinewbc/index.html. 148 Annex 8: Impact of Secured Lending in Gender Financing • institutions familiar with lending to women—even if in a different context—such as microfinance institutions; and • women’s business associations. 2.4. Undertake Capacity Building for Financial Institutions and Implementers of New Laws The diagnostic may reveal a lack of familiarity on the part of financial institutions with the female market segment. Regulatory and other institutions involved in implementing, monitoring, and evaluating the new regime may similarly not be attuned to gender issues, so capacity building in relation to gender issues with these institutions may be appropriate (see Box 8.12). Box 8.12 In 2000 four banks that had been recognized by the Organisation for Economic Co-operation and Development as “best practice” banks in reaching the women’s market in their countries formed a consortium called the Global Banking Alliance for Women. Member banks collaborate on identifying and sharing global best practices in financial service delivery to women. Initially started by banks from Australia, Canada, New Zealand, the United Kingdom, and the United States, the alliance now includes 15 members, including members from Africa, the Middle East, and Latin America.90 Step 3. Implementation and M&E The general points on implementation and monitoring and evaluation in core module should be applied to secured- lending reform programs. In addition, the following points should be considered in relation to M&E. 3.1. Ensure Key Information Can Be Gender Disaggregated Although potentially challenging, it is vital to ensure that key data can be gender disaggregated so that the impact of reforms on women can be monitored and evaluated. The central bank and commercial lending institutions may not gather gender-disaggregated statistics on lending patterns. And it may be difficult with loans to determine whether a family business is owned by the husband or wife. Despite possible difficulties, to the extent possible without imposing undue costs, data should be gender disaggregated. At the minimum it will be important to gather information about levels of lending to women following the institution of reforms. Discussions should be held with the central bank, with new institutions administering the new regime (such as movable property registries), and with commercial lending institutions to develop a suitable system. Institutions already focusing on lending to women may have useful knowledge to share about gender-disaggregated data collection systems. 90. U.S. Small Business Administration, http://www.sba.gov/aboutsba/sbaprograms/onlinewbc/index.html. SECURED TRANSACTIONS SYSTEMS AND COLLATERAL REGISTRIES I january 2010 149 3.2. Incorporate Output and Outcome Indicators That Highlight Gender Aspects of the Program Gender issues should be incorporated within the program’s M&E framework at the output and outcome levels. Table 8.1 provides a template for incorporating gender in indicators typically used in secured lending reform programs. Table 8.1. Gender Focus (Gender- Indicator/Data Required Source of Data Disaggregation) Output Indicators • Number of operational • Qualitative indicator: gender-inclusive • Manuals produced manuals produced focus (customer service); gender • Agency management • Training and outreach issues articulated and addressed • FGDs • Core indicator: number and/or • Interviews with businesswomen percentage of men and women participating or benefiting Workshops and outreach events • Gender disaggregate the data on • FGDs to disseminate the new secured participants • Agency management transactions reform and registry • Women’s business associations • Sample surveys Outcome Indicators Changes in laws, regulationsand • Do women have to obtain husband • FGDs procedures that discriminate or other male permission to engage • Women’s business associations against women in business transactions (including • Women’s legal rights opening a bank account or securing • NGOs a loan)? • Country legal and social analysis Average number of days to file a • Number of days disaggregated by • Tracking survey security interest gender of business owner • Agency management • Regulatory Impact Assessmen Survey • FGDs • Women’s businesses and associations Average official cost to file a • Cost disaggregated by gender of • Tracking survey security interest business owner (to capture corruption • Agency management or other differences) • Regulatory Impact Assessment Survey • Corruption incidence disaggregated • FGDs by gender of business owner • Women’s businesses and associations Movable property registry • Percentage of filings of borrower • Agency management established or became operational • FGDs • Women’s businesses and associations Improved user perceptions of • Disaggregate by gender • Agency management services provided • Regulatory Impact Assessment Survey • FGDs • Women’s businesses and associations 150 Annex 9: Bibliography Annex 9: Bibliography Albanian Law on Securing Charges. 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