Commercial Laws 1: R.A. No. 11057 — Personal Property Security Act

Commercial Law

TITLE XVI

Personal Property Security Act

Micro, Small and Medium Enterprises are sources of growth and innovation.

They contribute to and benefit from future growth.

Their increased participation in global trade "can have significant impact in reducing poverty through employment creation, productivity improvements and economies of scale."
Congress passed the Personal Property Security Act in order to provide Micro, Small and Medium Enterprises (MSMEs) more access to "credit at the least cost through the establishment of a unified and modern legal framework for securing obligations with personal property."
It was explained:

According to the 2015 Philippine Statistics Authority data, there are 896,839 micro-small and medium enterprises (MSMEs) that established in the Philippines.

These MSMEs generated a total of 4,784,870 jobs in 2015 versus 2,181,819 for the large enterprises.
This indicates that the MSMEs contributed almost 61 % of the total jobs generated by all types of business establishments.

The MSME industry has been termed as the engine of growth of developing countries.

In our country, this growth is challenged by the lack of funding and an ineffective system to secure these funds.
It must be noted that banks are weary of lending to MSMEs because of the operational costs and risks of agreements secured by personal property loan.
Further, MSMEs usually do not own real property needed as security in bank loans when these financial institutions prefer real property over chattels.
It is therefore the objective of this bill to increase access by MSMEs to more credit at the least cost through the establishment of a unified and modern legal framework for securing obligations with personal property.

1. Applicable Law.

Republic Act No. 11057

otherwise known as the Personal Property Security Act (PPSA)
took effect on February 9, 2019
overhauled the law on personal property security.

Implementing Rules and Regulations

signed by the Secretary of Finance on October 10, 2019 (PPSA IRR).

1.01 Effect on Existing Laws.

The PPSA itself does not categorically state the laws that it expressly repealed.
Section 66 of the PPSA instead enumerates the provisions of laws, decrees, orders and issuances or portions thereof that are either repealed, or amended, or modified by it.

Section 66 of the PPSA: it "repealed, amended or modified"

specified provisions of the Chattel Mortgage Law (Act No. 1508), and
provisions on pledge and chattel mortgage under the New Civil Code.

In particular, the new law "repealed, amended or modified" insofar as they involve personal properties:

New Civil Code Articles:

2085-2123
2127
2140-2141
2241
2243
2246-2247

The Implementing Rules and Regulations of the PPSA (PPSA IRR) is, however, clearer on this matter because the PPSA IRR specifies the laws that are repealed (not simply modified or amended) in so far as movable properties are concerned and the laws that are merely modified.

SECTION 9.01. Repealing Clause.

The following laws are hereby repealed:

Sections 1 to 16 of Act No. 1508, otherwise known as "The Chattel Mortgage Law";
Articles 2085-2092 of the "Civil Code of the Philippines," insofar as movable property is concerned;
Articles 2093-2123 and 2140-2141 of the Civil Code of the Philippines;
Section 13 of Republic Act No. 5980, as amended by Republic Act No. 8556, otherwise known as the "Financing Company Act of 1998";
Sections 114-116 of Presidential Decree No. 1529, otherwise known as the "Property Registration Decree";
Section 5 (e) of Republic Act No. 4136, otherwise known as the "Land Transportation and Traffic Code."

The following laws are hereby amended insofar as the provisions thereof are inconsistent with the PPSA:

Section 10 of Presidential Decree No. 1529;
Article 2127 of the Civil Code of the Philippines;
Articles 2241, 2243, and 2246-2247 of Civil Code of the Philippines, insofar as the preferences created by these provisions are inconsistent with the priority rights of the secured creditor perfected pursuant to the PPSA and these Rules;

All laws, decrees, orders, and issuances or portions thereof, which are inconsistent with the provisions of the PPSA, are hereby repealed, amended, or modified accordingly.

1.02. Effect on Common Provisions.

Articles 2085 to 2092 of the Civil Code of the Philippines are the provisions that apply to pledge and mortgage.

Hence, the applicability of the provisions is now confined to real estate mortgages.

Nevertheless, it is believed that it is not correct to state that the statutory principles under Articles 2085 to 2092 are completely inapplicable to security contracts involving movables that are now covered by the PPSA: STS-API

The requirement in Article 2085 that the security must be constituted to secure the fulfillment of a principal obligation is obviously applicable to any personal property security contract.

A grantor must be the owner and must have free disposal of the property.

No reason not to apply the rule in Article 2085 that a third person who is not a party to the principal obligation may secure the same by creating and perfecting a security interest over his own personal property.

A grantor under the PPSA also includes a person "who grants a security interest or collateral to secure its own obligation or that of another person.

It is also believed that Article 2086 of the New Civil Code, in relation to Article 2062 thereof, is applicable to security agreements under the PPSA.

The PPSA does not specify the kind or type of obligation that may be secured, although there is no doubt that as a rule, a security agreement cannot exist without a principal obligation.
Like pledge and mortgage under the New Civil Code, principal obligations that security agreements under the PPSA may secure the performance of should likewise be deemed to include voidable as well as unenforceable obligations.

With respect to unenforceable contracts which can be secured by pledge or mortgage under Article 2086, in relation to Article 2052 of the Civil Code, the existence of a security agreement under the PPSA will convert an unenforceable contract for non-compliance with the statute of frauds into an enforceable contract because the security agreement must be in writing.

Similarly, the security agreement under the PPSA may likewise secure a natural obligation and, in fact, convert said natural obligation into a civil obligation if the parties sign the security agreement.
In the same manner, the rule under Article 2091 of the New Civil Code that the security may be for a pure or conditional obligation should also be applicable to transactions under the PPSA, notwithstanding its repeal as provided in Section 9.01 of the PPSA IRR.

The rule in Article 2087 of the New Civil Code is also believed to be still applicable despite its repeal. Applying Article 2087, it should also be of the essence of the security agreement under the PPSA that when the principal obligation becomes due, the things in which the personal security agreement consists may be alienated for the payment to the creditor.

Section 49 of the PPSA expressly confers upon the secured creditor the right to dispose of the collateral:

"after default, a secured creditor may sell or otherwise dispose of the collateral, publicly or privately, in its present condition or following any commercially reasonable preparation or processing."

Article 2088 of the New Civil Code expresses the prohibition against pactum commissorium.

It believed that the prohibition against automatic appropriation remains to be the general rule under the PPSA.

Remedy of the creditor:

Disposition of the collateral.

The PPSA allows retention of the collateral under Section 54 but retention is not a purely unilateral action.

Nevertheless, there are instances when no sale or disposition is required based on the nature of the personal properties involved.

Thus, Section 48 of the PPSA provides the rules on recovery in special cases, which includes appropriation or application of the amount in deposit accounts in payment of the obligation.

Example:
In a deposit account maintained by the secured creditor, the secured creditor may apply the balance of the deposit account to the obligation secured by the deposit account.

Victoria Yau Chu u. Hon. Court of Appeals, et al. G.R. No. 78519, September 26, 1989:

It should be pointed out, however, that the same rule already existed under the New Civil Code where the assignment of deposit was considered pledge.
The Supreme Court explained that the assignment of deposit by way of security is in the nature of pledge. However, a public auction is no longer necessary to satisfy the obligation because the collateral is money.

Finally, the principle of indivisibility of the security under Articles 2089 and 2090 of the New Civil should also still be applicable to transactions covered by the PPSA.

The indivisibility of the security interest is reflected in Section 39 of the PPSA:

A grantor (of a security interest) may give a written demand to the secured creditor to amend or terminate the effectiveness of the notice (of security interest) if the secured creditor has agreed to release part of the collateral described in the notice.
Release in part of the collateral must therefore be by agreement.

Section 3.12 of the PPSA IRR is also explicit:

"A security interest is extinguished when all secured obligations have been discharged and there are no outstanding commitments to extend credit secured by the security interest."

1.03 Effect on Pledge and Mortgage.

The PPSA IRR is clear that the following provisions are repealed by the PPSA:

Pledge under Articles 2093 to 2123 of the New Civil Code and Articles 2140 to 2141
Chattel Mortgage under Articles 2140 to 2141.

Exception:

PPSA did not remove what is known as a "legal pledge," which is oftentimes referred to as the Right of Retention.

The legal pledge is one provided for by law.

Examples under the New Civil Code are those provided in Articles 546, 612, 1707 and 1731, 1914, 1994 and 2004.
Legal pledge is one of the real rights known as the right of retention.
Article 2121 of the New Civil Code provides that pledges created by operation of law, such as those referred to in Articles 546, 1731, and 1994, are governed by the same statutory provision on the possession, care and sale of the thing as well as on the termination of the pledge. This part of the rule under Article 2121 is submitted to be still good law.

Art. 1994. The depositary may retain the thing in pledge until the full payment of what may be due him by reason of the deposit.

However, Article 2121 is already modified with respect to the enforcement of the legal pledge, as it is believed that the PPSA is already applicable.

1.04. Effect on Rules on Concurrence and Preference.

Under Section 66 of the PPSA, Articles 2241, 2243, and 2246 to 2247 of the New Civil Code are included in the provisions that are "repealed, amended, or modified."
Section 9.01 of the PPSA IRR elaborates that Articles 2241, 2243, and 2246 to 2247 are deemed amended insofar as the preferences created by these provisions are inconsistent with the priority rights of the secured creditor perfected pursuant to the PPSA and the IRR.

1.05. Effect on Other Provisions.

The PPSA did not expressly repeal or modify other specific provisions of the New Civil Code relating to pledge or mortgage.
However, the PPSA provides that all laws, decrees, orders, and issuances or portions thereof, which are inconsistent with the provisions of the PPSA, are hereby repealed, amended, or modified accordingly.
Civil Code:

Thus, Articles 934, 936, 1274, 1365, 1438, 1484, 1627, 2083 of the New Civil Code are deemed modified by the PPSA in so far as they refer to chattel mortgage and pledge.
It is believed that reference to chattel mortgage and pledge should be deemed replaced by security interest under the PPSA.
The following provisions were not repealed but are deemed modified:

Art. 934. If the testator should bequeath or devise something pledged or mortgaged to secure a recoverable debt before the execution of the will, the estate is obliged to pay the debt, unless the contrary intention appears. The same rule applies when the thing is pledged or mortgaged after the execution of the will.
Art. 936. The legacy referred to in the preceding article shall lapse if the testator, after having made it, should bring an action against the debtor for the payment of his debt, even if such payment should not have been effected at the time of his death. The legacy to the debtor of the thing pledged by him is understood to discharge only the right of pledge.
Art. 1274. It is presumed that the accessory obligation of pledge has been remitted when the thing pledged, after its delivery to the creditor, is found in the possession of the debtor, or of a third person who owns the thing.
Art. 1365. If two parties agree upon the mortgage or pledge of real or personal property, but the instrument states that the property is sold absolutely or with a right of repurchase, reformation of the instrument is proper.
Art. 1438. One who has allowed another to assume apparent ownership of personal property for the purpose of making any transfer of it, cannot, if he received the sum for which a pledge has been constituted, set up his own title to defeat the pledge of the property, made by the other to a pledgee who received the same in good faith and for value.
Art. 1627. The assignment of a credit includes all the accessory rights, such as a guaranty, mortgage, pledge or preference.
Art. 2083. If the person bound to give a bond in the cases of the preceding article, should not be able to do so, a pledge or mortgage considered sufficient to cover his obligation shall be admitted in lieu thereof.

Art. 1484 of the New Civil Code known as the "Recto Law" is also modified because one of the alternative remedies provided therein is foreclosure of chattel mortgage.

Chattel Mortgage Law:

With the repeal of the provisions of the law on Chattel Mortgage, it is submitted that enforcement of the security interest takes the place of foreclosure of mortgage in Article 1484.

2. Effect on Existing Personal Property Securities.

The law provides for a transitional period whereby "a prior interest that was perfected under prior law continues to be perfected" under the PPSA until the earlier of:

the time the prior interest would cease to be perfected under prior law; and
the expiration of the transitional period.

Transitional period

means the period from the date of effectivity of the PPSA until the date when the Registry has been established and operational.

Registry

The centralized and nationwide electronic registry established in the Land Registration Authority (LRA) where notice of a security interest and a lien in personal property may be registered.

The Transitional Provisions of the PPSA are implemented by the following provisions in the PPSA IRR:

Sec. 8.01. Interpretation of Transitional Provisions. — For this Rule, unless the context otherwise requires:

Existing secured creditor

means a secured creditor with a prior security interest;

Prior law

means any law that existed or in force before the effectivity of the PPSA;

Prior interest

means a security interest created or provided for by an agreement or other transaction that was made or entered into before the effectivity of the PPSA and
that had not been terminated before the effectivity of the PPSA,
but excludes a security interest that is renewed or extended by a security agreement or other transaction made or entered into on or after the effectivity of the PPSA;

Transitional period

means the period from the date of effectivity of the PPSA until the date when the Registry has been established and operational.

2.01. Rules Before the Effectivity of the PPSA.

The PPSA IRR provides for the following rules on "prior interests," as defined in Section 8.01 thereof:

Sec. 8.02. Creation of Prior Interest.

Creation of prior interest shall be determined by prior law.
A prior interest remains effective, subject to Section 8.03 of these Rules, between the parties notwithstanding that its creation did not comply with the creation requirements of the PPSA and these Rules.

Sec. 8.03. Perfection of Prior Interest.

A prior interest that was perfected under prior law continues to be deemed perfected under the PPSA and these rules until the earlier of: CP-FI

The time the prior interest would cease to be perfected under prior law; and
The beginning of full implementation of the PPSA.

Sec. 8.04. Priority of Prior Interest.

The priority of a prior interest as against the rights of a competing claimant is determined by the prior law if: BE-NC

The security interest and the rights of all competing claimant arose before the effectivity of the PPSA; and
The priority status of these rights has not changed since the effectivity of the PPSA.

For purposes of subsection (a) (ii) of this Rule, the priority status of a prior interest has changed only if: CP-OP

It was perfected when the PPSA took effect, but ceased to be perfected; or
It was not perfected under prior law when the PPSA took effect, and was only perfected under the PPSA.

Sec 8.05. Enforcement of Prior Interest.

If any step or action has been taken to enforce a prior interest before the effectivity of the PPSA and these Rules, and such prior interest falls within Section 8.02 (b) also of this Rule, enforcement may continue under the prior law or may proceed under the PPSA and these Rules.
Subject to subsection (a) of this Rule, prior law shall apply to a matter that is the subject of proceedings before a court before the effectivity of the PPSA.

2.02. Rules During the Transitional Period.

On the other hand, the PPSA IRR provides for these rules that would apply during the transitional period:

Sec. 8.06. Date of Effectivity of the Transitional Period.

The transitional period shall begin on February 9, 2019, which is the date of effectivity of the PPSA pursuant to Section 67 thereof.

Sec. 8.07. Creation of Security Interest.

All security interests created during the Transitional Period are governed by the PPSA.

Sec. 8.08. Perfection of Security Interest.

The perfection of all existing security interests created during the Transitional Period shall be governed by the PPSA.
Provided, however, that during the Transitional Period, registration of the security agreement with the LRA shall be in accordance with Section 4 of Act No. 1508, otherwise known as "The Chattel Mortgage Law."
The LRA shall also determine a system of provisional registration of such agreements during such Transitional Period.

A written agreement between a grantor and a secured creditor creating a prior interest is sufficient to constitute authorization by the grantor of the registration of a notice covering assets described in that agreement under these Rules.
If the perfection requirements of these Rules are satisfied before the perfection of a prior interest ceases in accordance with Rule 8.03, the prior interest continues to be perfected under these Rules from the time when it was perfected under the prior law
If a prior interest referred to in subsection (b) of this section was perfected by the registration in the registry of a notice under prior law, the time of registration under the prior law shall be the time to be used for purposes of applying the priority rules of these Rules.
If the perfection requirements of these Rules are not satisfied before the perfection of a prior interest ceases in accordance with Rule 8.03, the prior interest is perfected only from the time it is perfected under these Rules.

Sec. 8.09. Priority of Security Interest.

The priority of competing security interests shall be determined during the Transitional Period by applying the PPSA.

Sec. 8.10. Enforcement of Security Interest.

The enforcement of all existing security interests during the Transitional Period shall be governed by the PPSA.

Sec. 8.11. Rules on Enforcement Procedure.

Subject to Section 47 of the PPSA and its corresponding Chapter in these Rules, the expedited hearing/proceedings shall be conducted in a summary manner consistent with the declared policies of the law and these Rules and in accordance with the rules of procedure that the Supreme Court may promulgate

3. Rationale.

The reason for the passage of the PPSA is reflected in the sponsorship speeches in the Senate and the Explanatory Notes in the Bills filed in Congress.
Both the Senate and the House of Representatives were focused on the "critical role of micro, small and medium enterprises (MSMEs) in reducing poverty and achieving inclusive development."
The Explanatory Notes to House Bill No. 3682 authored by Representative Arthur Yap state:

This bill aims to create a framework for secured transactions, to further improve MSMEs access to financing by expanding the number of acceptable collaterals and improving the existing legal and regulatory framework f or movable collaterals and improving the existing legal and regulatory framework for movable collaterals. MSMEs have (movable) properties that can be used as collateral to facilitate access to credit but are currently not acceptable due to lack of legal framework that governs these assets.
The existing legal and regulatory framework for secured transactions in the Philippines is provided for under the Chattel Mortgage Law (Act 1608). However, this law was enacted way back in 1906 and clearly needs to b e revisited as it lacks the requirements of an effective and efficient modern secured transactions law.
Philippines needs an integrated or unified legal framework for secured transactions that extends to the creation, publicity and enforcement of functional equivalents to security interests in movable assets. There is a need for a unified electronic registry system that can deter the use of one particular (movable) asset as collateral in several loan transactions."

The Explanatory Notes to House Bill No. 3818 authored by Representative Anthony M. Bravao, Ph.D., further state that:

"although the current regime recognizes a diverse set of movable assets acceptable as collateral for loan purposes, these assets are not being fully utilized nor preferred by ban.ks as loan collateral, except motor vehicles. This leaves the efficacy of the law to increase trade or facilitate access to finance for MSME's in serious question, and underscores the need to modernize these laws governing movable asset lending in the country."

It was further explained:

The Secured Transaction measure seeks to enable financial institutions to rethink how they view collateral and reduce the perceive risks, by providing protection to both the lender and borrower.
It also seeks to establish a comprehensive legal framework to govern lending transactions that involve the use of personal property as collateral, as well as the design, establishment, and operation of a unified, centralized, online notice-based national collateral registry to assure banking institutions that collaterals are clean and were not previously utilized for another loan.

Similarly, Senator Francis G. Escudero, the sponsor of the bill in the Senate, focused on the role of MSMEs and the need to overhaul the legal framework for secured transactions:

Under this proposed measure, an obligation may be secured by any of the following:

Any type of personal property; Parts of property and undivided rights and personal property;
Generic categories of personal properly; and
All of the grantor's personal property.

Further, this measure shall provide protection for both lenders and borrowers by bringing about a streamlined and simplified process of registering security interests over a personal property and the subsequent disposal of these properties after default.
The proposed measure comes at a perfect time when investment demand is growing and the desire for self-sufficiency by Filipinos is strong.
With this overriding objective of promoting economic growth, I humbly implore my colleagues to immediately help in the passage of this bill so that we, in one concerted action can unequivocally declare our support to create more jobs, raise more money, enhance technologies and promote a sustainable economic environment for all Filipino.

On the other hand, the co-sponsor of the Bill, Senator Paolo Benigno Aquino IV, had this to say about the need for the PPSA:

Before I delve into the bill, I would like to share some trivia about basketball superstar, LeBron James, in the wake of today's loss.
Alam ninyo ba na noong high school pa si LeBron, nais po syang regaluhan ng kanyang ina ng mamahaling sasakyan na Hummer para sa kanyang 18th birthday? Ang problema, ang Hummer ay nagkakahalaga ng $50,000 at walang pambili ang kanyang nanay na si Gloria. Dahil wala pang pambili, lumapit si Gloria James sa isang bangko sa Ohio at nangutang. Ang ginamit po niyang collateral ay ang future earnings ng kanyang anak kung siya ay magiging NBA superstar. Kapag napasok na raw si LeBron sa NBA, milyun-milyon naman ang kanyang kikitain. At ang kagulat-gulat po dito, tinanggap ng bangko ang kanyang future earnings bilang collateral. Ang tiningnan po nila ay ang talento ni LeBron at ang posibilidad na ito ay maging isang NBA superstar. Ang ending po ay win-win-win! Gloria got her loan. LeBron got his car, and the bank was paid back with interest. But this would not have happened in the Philippines.
Currently, it is land and real property that banks consider to be the most favored form of collateral and this is not just because of its value. Financial institutions see land and real estate as low-risk because it is easy to ascertain that the piece of land has not been used as collateral for any other loan.
But with lenders fixated on real property, they miss out on the opportunity to provide loans to a broader group of MSMEs and even our farmers. Consequently, many of our countrymen have a difficult time accessing loans from banks and result to borrowing from friends and family or, worse, resorting to informal loans like the 5/6 system with exorbitant interest rates. This is particularly heartbreaking for micro, small and medium enterprises.
Sa aking pag-iikot, ang laging tanong sa atin ng mga nagnenegosyo, "Saan po kami makakautang na mababa lang ang interes?" Sayang talaga
Many of our small businesses have so much potential, potential for success and potential to lift families out of poverty. We need to address our MSME's lack of access to loans, and this Personal Property Security Act is one of our possible remedies. This measure will encourage financial institutions to lend to more F i lipinos by, one, expanding what banks consider as acceptable collateral and, two, reducing the risk, associated to movable collaterals.
First, this measure will broaden the utilization of movable assets like bank accounts, accounts receivable, inventory, equipment, vehicles, agricultural products, and even intellectual property rights. Imagine a farmer using his livestock or a craftsman using a contract f or a bulk order as collateral for a loan. But we already recognize a diverse set of movable assets acceptable as collateral for loan purposes, like motor vehicles, equipment, and standing crops, such as rice or sugarcane.
The major challenge of this measure, and those tasked to implement it, would be to reduce the risk of accepting movable collaterals through an efficient, comprehensive, and centralized registry. The Personal Property Security Act pursues the design, establishment, and operation of a unified centralized, online notice-based national collateral registry to assure banks that the collateral being submitted has not been utilized for another loan.
This is not new. In other countries, a simple but effective registry has boosted financing for their local entrepreneurs. In Mexico, the creation of a national Accounts Receivable Finance Platform by the government's development bank supported at least 130,000 SMEs through accounts receivable financing. In China, loans with movable assets as collateral now amount to US$3 trillion per year. Access to a centralized repository of information for movable assets w ill encourage financial institutions to lend to our MSMEs and may even speed up the loan application process.
With the Personal Property Security Act, our financial institutions increase their income by issuing more loans, Filipinos will have better access to lower interest loans, and more Filipino families can grow their business and livelihood for a brighter future.
The Personal Property Security Act seeks to replicate this win-win win scenario for the James family in Ohio — not to help parents necessarily purchase luxury vehicles for their children — but to help parents provide a better life and a better future for their children through sustained livelihood. Ipasa po natin ang Secured Transaction Act, now known as the Personal Property Security Act, at suportahan natin ang mga maliliit na negosyanteng Pilipino na magtagumpay at umasenso ang buhay."

4. Security Interest.

Security interest

It means a:

property right in collateral
that secures payment or other performance of an obligation,
regardless of whether the parties have denominated it as a security interest, and
regardless of the type of asset, the status of the grantor or secured creditor, or the nature of the secured obligation;
including the right of a buyer of accounts receivable and a lessor under an operating lease for not less than one year.

a. Continuity of Security Interest.

The security interest is a lien on the property.

A lien under the PPSA is a qualified right or a proprietary interest, which may be exercised over the property of another.

The interest follows the property.

Section 9 of the PPSA:

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

Section 21. Transferee Exceptions.

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

b. Purchase Money Security Interest.

Purchase money security interest is a:

security interest in goods
taken by the seller to secure the price or
by a person who gives value to enable the grantor to acquire the goods
to the extent that the credit is used for that purpose.

Example:

A consumer wants to purchase a motorcycle from a retailer.
The retailer allowed the consumer to buy the motorcycle on credit.
The motorcycle itself serves as collateral for the loan—the PMSI.
If the consumer defaults on the payments, the retailer has the right to repossess the motorcycle before other creditors are satisfied.

5. Personal Properties.

As its title suggests, PPSA covers only transactions that secure obligations with personal properties or movables as collateral.
Section 2.03 of the PPSA IRR states that a security interest may be created over all forms of tangible or intangible asset or personal property as defined by the Civil Code, including but not limited to: REID-NN-CILF

Rights arising from contracts, including but not limited to: SCL

Securities
Commodity contracts
Lease of goods including financial leases and operating leases for a period of not less than one year

Equipment
Inventory
Deposit accounts
Negotiable instruments
Negotiable documents of title
Consumer goods
Intellectual property
Livestock Fixtures, accessions, and commingled goods, or
Future property or after-acquired assets.

a. Security.

Securities together with Commodity Contracts are included in what is known as "Investment Property."

Investment property means any property right arising from an investment.

Security includes:

shares, participation or interests in a corporation or in a commercial enterprise or
profit-making venture and evidenced by a certificate, contract, instruments, whether written or electronic in character.

Security includes the securities enumerated hereunder but is not limited to:

Shares of stocks, bonds, debentures notes as evidence of indebtedness, asset-backed securities;
Investment contracts, certificates of interest or participation in a profit-sharing agreement, certificates of deposit for a future subscription;
Fractional undivided interests in oil, gas or other mineral rights;
Derivatives like options and warrants;
Certificates of assignments, certificates of participation, trust certificates, voting trust certificates or similar instruments;
Proprietary or nonproprietary membership certificates in corporations; and
Other instruments as may in the future be determined by the Securities and Exchange Commission.

b. Commodity Contract.

As previously mentioned, commodity contracts fall under the term "Investment Property."
A commodity contract is a commodity futures contract, an option on a commodity futures contract, a commodity option, or another contract if the contract or option is:

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

Example:

As of today (May 22, 2024), there isn't a functioning commodity futures exchange in the Philippines (?)
On #1: Entering into a contract on a mercantile exchange which is a designated contract market for agricultural commodities.
On #2: A coffee importer in the US wants to hedge against potential price fluctuations for their upcoming coffee bean purchases from the Philippines. They cannot directly access the futures market in the Philippines, but they can work with a US-based commodity intermediary.

c. Lease of Goods.

Lease of goods includes:

Operating Lease and
Financial Lease.

Operating lease

an agreement by which the owner temporarily grants the use of his property to another who undertakes to pay rent therefor.
The requirement is that the lease should be more than one year.

Financial lease

"financial leasing'' of movable properties as defined in Section 3(d) of Republic Act No. 5980, as amended by Republic Act No. 8556, or the "Financing Company Act of 1998."

d. Equipment.

Equipment means a tangible asset other than inventory or consumer goods, or livestock that is primarily used or intended to be used by the grantor in the operation of its business.
Thus, although the machinery and equipment may be considered real property under Article 415(5) of the New Civil Code, these machinery and equipment may be considered personal property under PPSA.
Examples: Construction Equipment

Bulldozers
Cranes
Excavators
Forklifts
Scaffolding

e. Inventory.

Inventory means tangible assets held by the grantor for sale or lease in the ordinary course of the grantor's business, including raw materials and work in process.
Even machinery and equipment may come under this definition if the grantor is a seller of the machineries and equipment.
Examples:
- Raw Materials — unprocessed materials used to create a finished product.
- Work-in-Process (WIP) — partially finished goods that are still in the production process and not yet ready for sale.

f. Deposit Account.

Deposit account consists of deposits in deposit-taking institutions.
Deposit-taking institution refers to a:

bank as defined under Republic Act No. 8791, otherwise known as the "General Banking Law,"
a non-stock savings and loan association as defined under Republic Act No. 8367, or the ''Revised Non stock Savings and Loan Association Act of 1997," or
a cooperative as defined under Republic Act No. 9520 otherwise known as the "Philippine Cooperative Code."

Section 3.10 of the PPSA IRR states that:

a security interest in a right to payment of funds credited to a bank account is effective notwithstanding an agreement between the grantor and the deposit-taking institution limiting in any way the grantor's right to create a security interest.

g. Negotiable Instrument.

Under the Negotiable Instruments Law, a negotiable instrument is an:

unconditional promise
of the maker or order to a drawee,
in writing,
signed by the maker or the drawer,
to pay a sum certain in money,
on demand, or at a fixed or determinable future time,
to order or to bearer.

A negotiable instrument is also an evidence of the right to collect a sum certain in money which is considered personal property under Article 417(1) of the New Civil Code.
It should be noted that the treatment of the instrument is different from the right represented in the the instrument itself.
The negotiable instrument is considered a tangible asset under the PPSA.

However, if the security interest is constituted over a negotiable instrument, the security interest extends to the proceeds of the negotiable instrument if the latter was disposed:

If the instrument is not negotiable, the personal property shall be treated as a "Receivable" which is a right to payment of a monetary obligation, excluding a right to payment evidenced by a negotiable instrument.
If the instrument is negotiable, a security interest that is perfected by possession of the instrument shall have priority over a security interest in the instrument that is perfected by registration of a notice in the Registry.

h. Negotiable Document of Title.

Article 1636 of the New Civil Code states that Document of title to goods includes:

any bill of lading, dock warrant, "quedan," or warehouse receipt or order for the delivery of goods, or
any other document used in the ordinary course of business in the sale or transfer of goods, as proof of the possession or control of the goods, or authorizing or purporting to authorize the possessor of the document to transfer or receive, either by endorsement or by delivery, goods represented by such document."

"Goods"

It includes all chattels personal but not things in action or money of legal tender in the Philippines.
The term includes growing fruits or crops.

Article 1507 of the New Civil Code:

A document of title in which it is stated that the goods referred to therein will be delivered to the bearer, or to the order of any person named in such document is a negotiable document of title.

Section 19 of the PPSA:

Applies to a negotiable document under which a security interest that is perfected by possession of the negotiable document shall have priority over a security interest in the negotiable document that is perfected by registration of a notice in the Registry.

Section 48 of the PPSA:

Includes negotiable documents in the rules on recovery in special cases.
Upon default, the secured creditor may without judicial process, proceed as to the negotiable document or goods covered by the negotiable document in a negotiable document that is perfected by possession.

It should likewise be noted that documents of title need not be negotiable in other jurisdictions like the United States and Australia.

Bills of lading and warehouse receipts are personal properties under their laws even if the goods are to be delivered to specified persons.

In this jurisdiction, PPSA requires the document to be negotiable.

However, even if non negotiable documents of title like non-negotiable bills of lading and warehouse receipts are not personal properties under the PPSA, the goods that are in the possession of the warehouseman and the carrier may still be used as collateral under the PPSA subject to the notice requirement to the bailee (carrier and the warehouseman) in order to acquire the direct obligation of the bailee to hold the goods for the secured creditor.
Notice to the bailee is necessary in order to perfect the security interest through transfer of possession of the goods.

i. Consumer Goods.

Consumer goods are goods that are used or acquired for use primarily for personal, family or household purposes.

Broadly speaking, every buyer is a consumer.

However, the fact that an item is personally used does not mean it was for "personal use." In borderline cases of classifying collateral, the principal use of the property is determinative.

Example:

A lawnmower principally used by a landscaper for their business is equipment, even though the owner might also use it occasionally at home.

It is the actual use to which the equipment is put and not the occupational status of the owner which is determinative.

When a debtor would benefit if the collateral consists of "consumer goods," the debtor has the burden of proving the nature of the collateral.

Davenport v. Bates, No. M2005-02052-COA-R3-CV (Tenn. Ct. App. Dec. 12, 2006):

In one case, just because Buyer is a landscaper does not mean he could not use the Corvette for commercial purposes. Buyer himself acknowledged the peculiarity of his using the Corvette in his landscaping business.
He explained, "of course, I didn't haul dirt in it, it was a Corvette. I went and looked at jobs in it, went and collected money in it, and went and done proposals in it, things like that." He hauled dirt and materials in the dually. His testimony demonstrates that he had a need for another vehicle in which he could easily travel to potential job sites and interact with customers, and he used the Corvette for those purposes."

j. Intellectual Property.

Intellectual property shall refer to "intellectual property rights" defined in Section 4.1 of Republic Act No. 8293 or the ''Intellectual Property Code of the Philippines."
It shall include:

copyright,
trademarks,
service marks,
patents,
industrial designs and
trade secrets.

Section 3.11 of the PPSA IRR:

A security interest in a tangible asset with respect to which intellectual property is used does not extend to the intellectual property and
A security interest in the intellectual property does not extend to the tangible asset.

Example:

Tangible Asset with IP:

If the security is on (tangible) computer and use of a patented software system with the computer, it only covers the computer, not the patented software itself.

If the security is on the value of the patented software system, it does not extend to the computer.

k. Livestock.

Under existing laws, livestock means and includes:

horses,
cattle,
carabaos,
sheep,
goats,
swine,
rabbits,
poultry and
such other animals or birds.

However, Article 415 of the New Civil Code provides that farm animals and even pigeons may be considered real property.
Under the PPSA IRR, livestock are considered personal property.

Livestock is not covered by the term equipment even if it is primarily used or intended to be used by the grantor in the operation of its business.

Section 24 of the PPSA:

A perfected security interest in livestock securing an obligation incurred to enable the grantor to obtain food or medicine for the livestock shall have priority over any other security interest in the livestock, except for a perfected purchase money security interest in the livestock, if the secured creditor providing credit for food or medicine gives written notification to the holder of the conflicting perfected security interest in the same livestock before the grantor receives possession of the food or medicine."

l. Fixtures, accessions, and commingled goods.

Fixtures are properties attached to an immovable or a movable.
Section 25 of the PPSA:

A perfected security interest in a movable property which has become a fixture, or has undergone accession or commingling shall continue provided the movable property involved can still be reasonably traced.

In determining ownership over fixtures, accessions, and commingled goods, the provisions of Book II of Republic Act No. 386 or the "Civil Code of the Philippines" shall apply."

Book II of the New Civil Code is the law on Property, Ownership and its Modification and the basic rule on accession is to the effect that ownership gives the right by accession to everything which is incorporated or attached thereto either naturally or artificially.

Specific rules on accession with respect to personal property are provided for under Articles 466 to 475 of the New Civil Code.
With respect to fixtures, the applicable rules are the rules on:

Conjunction (union of two things) and
Specification (transformation of the thing by application of labor).

m. Future Property.

Future property means any movable property which does not exist or which the grantor does not have rights in or the power to encumber at the time the security agreement is concluded.
It should be recalled that the Chattel Mortgage Law cannot include after-acquired properties because the mortgaged property should be specifically described in the mortgage.
The rule is not the same under the PPSA because the new law expressly allows agreements to create security interest in future property.
Section 5 of the PPSA:

A security agreement may provide for the creation of a security interest in a future property, but the security interest in that property is created only when the grantor acquires rights in it or the power to encumber it.

Section 3.05 of the PPSA IRR provides for the rules on the acquisition of security interest in future properties.

5.01. Time of Determination.

In the United States, "the generally accepted rule is that the debtor's stated intended use at the time of the attachment of the security interest, defines the nature of the goods for purposes of ascertaining the proper place for perfecting the security interest."
The relevant time to classify collateral for determining the requirement and consequences of perfection is the time surrounding the transaction that originally gave rise to the security."
Thus, the nature of the goods either as consumer goods, fixture, livestock or inventory is determined at the time of the creation of the security interest.

5.02 Classification of Personal Properties.

Other classifications of properties are important because of the different applicable rules under the PPSA.

Tangible and Intangible Personal Properties.

Section 1.05(m) of the PPSA IRR defines "Intangible asset" as:

that referring to any movable property other than a tangible asset including, but not limited to, investment property, deposit accounts, commodity contracts and receivables.

Section 1.05(kk) of the PPSA IRR provides that "Tangible asset" means:

any tangible movable asset.
Except in Rules 3.07, 3.08, 4.09, and 6.05 of the PPSA IRR, tangible asset includes:

money,
negotiable instruments,
negotiable documents and
certificated non-intermediated securities

but only if the mere possession of such instruments results in the ownership of the underlying rights or property embodied by them, in accordance with the laws governing such instruments.

Tangible Asset includes products.

As provided in Section 1.05(aa) of the PPSA IRR, a "Product" is a tangible asset which results:

when a tangible asset is so physically associated or united with one or more other tangible asset of a different kind, or
when one or more tangible assets are so manufactured, assembled or processed, that they have lost their separate identities;

Examples:

Combined:

Laptop: The monitor, keyboard, battery, and internal components are all separate tangible assets, but when assembled, they lose their individual identities and become a single functioning laptop.

Manufactured:

Paint: Various pigments, binders, and solvents are separate components, but when mixed and processed, they become a new tangible product — paint.

Intangible Properties include Receivable.

It include ''Receivable" which means:

a right to payment of a monetary obligation, excluding a right to payment evidenced by a negotiable instrument,
a right to payment of funds credited to a bank account and
a right to payment under a non-intermediated security.

Intermediated and Non-Intermediated Securities.

There are special rules on intermediated and non-intermediated securities.

Intermediated securities

means securities credited to a securities account and
rights in securities resulting from the credit of securities to a securities account
Example: Shares held in a brokerage account (COL Financial).

In stocks bought through a brokerage firm, the shares are not registered directly in the name of the buyer.
They are held in a custodial account by the broker.
Ownership rights to the shares are reflected in the account balance, but the physical certificate is not in your possession.

Non-intermediated securities

means securities other than securities credited to a securities account and rights in securities resulting from the credit of securities to a securities account.

Intermediary

a person, including, but not limited to, a bank, trust entity, depositary, broker, or central securities depositary, that in the ordinary course of business or regular activity maintains an account for such securities or assets, for another person, and is acting in that capacity.

Securities account

an account maintained by an (2) intermediary to which securities may be credited or debited.

Example:

Stock Brokerage Account held with a stockbroker, like COL Financial.

5.03 Personal Properties Under the Civil Code.

The following are personal or movable properties under the New Civil Code:

Those movables susceptible of appropriation, which are not included in the preceding article

that is, Article 415 of the New Civil Code providing an enumeration of immovable property;

Real property which by any special provision of law is considered as personal property

Example: growing crops under the Chattel Mortgage Law;

Forces of nature which are brought under control by science

Examples: electricity and gas;

In general, all things which can be transported from place to place without impairment of the real property to which they are fixed;
Obligations and actions which have for their object movables or demandable sums; and
Shares of stock of agricultural, commercial and industrial entities, although they may have real estate.

a. Tests to Determine if Property is Movable.

Test by Exclusion

The primary test under the New Civil Code.
It is contemplated under par. (1) of Article 416 — to determine if the property is included in the enumeration in Article 415.
If the property is included in Article 415, the property is real and if the property is not one of those enumerated under Article 415 then the property is personal or movable.

Test by Description

Under which a property is considered personal if, by its nature, it can be moved from place to place and can be removed f rom the real property without impairment of the real property.

However, the Test by Exclusion is the more superior test.

b. Estoppel

It is settled jurisprudence under the New Civil Code that parties to the contract are estopped from claiming that an immovable like a building is real if they treated the same in the contract as personal.
However, third parties are not affected.
It is believed that this rule still applies even with the passage of the PPSA.
The Security Agreement should be valid between the parties even if the property involved is a real property.

However, in such case, the parties must still comply with the applicable formalities, particularly for a Real Estate Mortgage, in order to:

affect third persons and
in order to avail of the remedies for real property security.

c. Personal Property for Purposes of PPSA.

There are real properties that are considered personal property for purposes of chattel mortgage.

It is believed that the same rule applies under the PPSA.

Example:

growing crops should be considered personal property for purposes of constituting security interest under the PPSA.
animals, machineries, fixtures and accessories are also personal properties under the PPSA even if they are real properties under Article 415 of the New Civil Code.

In fact, the security interest continues even if the personal property, like fixtures, is attached to another property.

5.04 Not Applicable to Airplane and Vessel.

General Rule:

The PPSA shall apply to all transactions of any form that secure an obligation with movable collateral.

Exceptions:

Interests in aircrafts

subject to RA No. 9497, or the "Civil Aviation Authority Act of 2008"

Interests in ships

subject to PD No. 1521, or the "Ship Mortgage Decree of 1978"

5.05 Legal Right.

New Civil Code: Only the owner who has free disposal of the property can mortgage or pledge a property.
PPSA: A security interest can only be created on the asset over which the grantor has a legal right.
While the law does not limit the grantor to the owner, in effect, the rule is consistent with the New Civil Code because a person cannot convey or has no legal right to convey what he does not own unless he is authorized by the owner.

a. Right in the Collateral.

The concept of right in the collateral in the United States was explained in this wise:

"... The phrase 'rights in the collateral' describes the range of transferable interests that a debtor may possess in property. For example, such rights may be as comprehensive as full ownership of property with legal title or as limited as a license. ...
Essentially, the debtor normally can only convey something once it has something and that something may be less than the full bundle of rights that one may hold in such property. ... Formal title is not required for a debtor to have rights in collateral.
✅An equitable interest can suffice.

Example:

Debtor possessed rights in collateral because he had equitable interest in the airplane, such as purchase agreement, even though he had not recorded his ownership interest.

❌ Mere naked possession does not create rights in the collateral.

Ownership where the right to use and enjoy the property’s fruits (such as rent, interest, or profits) has been denied to the owner.
Example:

A owns a piece of land. However, he has granted a usufruct (the right to use and enjoy the property) to his neighbor, B.
A retains the naked ownership of the land. He has the legal title and can dispose of the property, but he cannot use it or enjoy its fruits

b. Estoppel.

Generally, if an:

owner of property effectively allows a debtor to appear as the owner of that property, and
that appearance misleads a creditor
the owner may be estopped to deny the effectiveness of a security interest taken on the property by the creditor.

If the owner of the collateral allows another to appear as the owner or to dispose of the collateral, such that a third party is led into dealing with the apparent owner as though he were the actual owner, then the owner will be estopped from asserting that the apparent owner did not have rights in the collateral.
In that regard, "control rather than ownership of collateral determines a debtor's rights to collateral."

c. Buyer in Good Faith.

General Rule: Article 559 of the New Civil Code — possession of movables in good faith is equivalent to title.
Exception: The owner may recover the movable from the possessor in good faith if:

he has lost the thing or
he has been unlawfully deprived of it — meaning taking that is criminal in nature.
Thus, it is settled that the owner can recover the movable if the agent wrongfully pledged the thing keeping it or selling it for the owner.
Thus, the agent has no legal right to pledge or mortgage the movable property.
In the same manner, the mortgagee or the pledgee has no legal right in this situation.

However, even under the New Civil Code, there are cases when a transferee in good faith and for value may acquire title over the thing.
This transferee has a legal right to execute a security agreement under the PPSA.
Thus, Articles 1505 and 1506 of the New Civil Code provide:

Art. 1505.

Subject to the provisions of this Title, where goods are sold by a person who is not the owner thereof, and who does not sell them under authority or with the consent of the owner, the buyer acquires no better title to the goods than the seller had, unless the owner of the goods is by his conduct precluded from denying the seller's authority to sell.
Nothing In this Title, however, shall affect:

The provisions of any factors' act, recording laws, or any other provision of law enabling the apparent owner of goods to dispose of them as if he were the true owner thereof;
The validity of any contract of sale under statutory power of sale or under the order of a court of competent jurisdiction;
Purchases made in a merchant's store, or in fairs, or markets, in accordance with the Code of Commerce and special laws.

Art. 1506.

Where the seller of goods has a voidable title thereto, but his title has not been avoided at the time of the sale, the buyer acquires a good title to the goods, provided he buys them in good faith, for value, and without notice of the seller's defect of title.

d. Instruments and Documents.

With respect to negotiable instruments, a holder in due course is also:

free from the defect of title of prior parties and
free from the personal defenses of prior parties.

A holder in due course can enter into a security agreement over the negotiable instrument.
On the other hand, holders in good faith and for value of negotiable documents of title likewise have legal right to execute a security agreement.
Article 1518 of the New Civil Code provides that:

The validity of the negotiation of a negotiable document of title is not impaired by the fact that the negotiation was a breach of duty on the part of the person making the negotiation, or by the fact that the owner of the document was deprived of the possession of the same by loss, theft, fraud, accident, mistake, duress, or conversion, if the person to whom the document was negotiated or a person to whom the document was subsequently negotiated paid value therefor in good faith without notice of the breach of duty, or loss, theft, fraud, accident, mistake, duress or conversion."

6. Parties.

The parties in a Security Agreement are the Grantor and the Secured Creditor.

Grantor — may be the debtor or he may be a third party.

may be any one of the following: OTTL

the person who grants a security interest in collateral to secure its own obligation or that of another person;
a buyer or other transferee of a collateral that acquires its right subject to a security interest;
a transferor in an outright transfer of an accounts receivable; or
a lessee of goods.

Secured Creditor

It is a person that has a security interest.
For the purposes of registration and priority only, it includes a: BL

buyer of account receivable and
a lessor of goods under an operating lease for not less than one year.

7. Obligations Secured.

A security agreement is an accessory contract.

It requires the presence of a principal obligation, that is, the secured obligation.

The principal obligation is not limited to loans; it covers obligations arising from sale or contract to sell.
The secured creditor is granted the right of disposition of the collateral if there is default.

Default means the failure of a debtor to pay or otherwise perform a secured obligation, and any other event that constitutes default under the terms of an agreement between the grantor and the secured creditor.

a. Future Advances or After-Incurred Obligations.

There is no categorical statement in the PPSA to the effect that the security may be for future obligations.
However, this is implicit from Section 39 of the PPSA which provides that:

A grantor may give a written demand to the secured creditor to amend or terminate the effectiveness of the notice (of security interest) if all the obligations under the security agreement to which the registration relates have been performed and there is no commitment to make future advances.

It follows that a commitment to make future advances may be secured by a security agreement with movables as collateral.
That future obligations/advances may be secured by personal property security contracts is likewise implicit in Section 3.12, Rule III of the PPSA IRR. Section 3.12 provides that:

That security interest on personal property is extinguished when all secured obligations have been discharged and there are no outstanding commitments to extend credit secured by the same security interest.

The model security agreement attached as Annex to the PPSA IRR contains the following provisions:

2.2 Secured Obligations

The security interest hereby created secures all present and future obligations of the GRANTOR to the SECURED CREDITOR under or contemplated by the CREDIT AGREEMENT and this agreement ("Obligations")

8. Stages in the Life of Security Interest.

The security interest of a secured creditor passes through the following stages in its life: CPE

Creation
Perfection
Enforcement

a. Creation.

A security interest is created under the PPSA by a security agreement.

The security agreement creates and makes enforceable the security interest.

It is also therefore upon the execution of the security agreement that the security interest attaches to the collateral; a lien on the property is created.
Lien means a qualified right or a proprietary interest, which may be exercised over the property of another.

b. Perfection.

A security interest that has been created under the PPSA becomes effective against third parties the moment it is perfected.
Thus, perfection serves as notice to third persons.
It puts third persons on notice of the existence of the security interest.
Section 11 of the PPSA states that:

On perfection, a security interest becomes effective against third parties.

c. Enforcement.

Enforcement of the right under the security agreement refers to the exercise of the proprietary remedy to dispose, retain or apply the collateral to satisfy the obligation.
Principal Remedy: Disposition of the collateral.

The PPSA does not limit such disposition to public auction.
Private sale is allowed under the PPSA.
For certain kinds of personal property like a deposit account, the PPSA even allows direct application of the money in the account to the satisfaction of the secured principal obligation.

8.01 Priority

Inextricably linked to the stages in the life of security interest are the rules on priority:

if there are two or more creditors and
if two or more security interests are created.

If one creditor is unsecured and the other creditor is secured under the PPSA, then the secured creditor will naturally have priority interest over the collateral.

However, the mere fact that the lien or security interest is created does not mean that the secured creditor can fully enforce his right because his interest may be subordinate to that of other security interest holder/s.
While the secured creditor's interest must be created and perfected, a created and perfected security interest is not a guaranty that the security holder will be able to enforce his right if the debtor defaults.
In fact, a higher-ranking secured creditor may even take over the enforcement process that may have already been initiated by a junior secured creditor.
Hence, it is necessary to determine who among the secured creditors are higher-ranked, compared to other creditors, in accordance with the priority rules under the PPSA.

9. Security Agreement.

Definition:

It is the written contract
signed by the parties
that expresses the intent of the parties
to create a security interest over the collateral
to secure the payment
of the obligation of the grantor to the secured creditor.

The agreement states the:

terms and conditions of the agreement, including the
description of the collateral.

Section 5. Creation of a Security Interest.

A security interest shall be created by a security agreement.
A security agreement may provide for the creation of a security interest in a future property, but the security interest in that property Is created only when the grantor acquires rights in it or the power to encumber it.

Section 6. Security Agreement.

A security agreement must be contained in a written contract signed by the parties.
It may consist of one or more writings that, taken together, establish the intent of the parties to create a security interest.
The security agreement shall likewise provide for the language to be used in agreements and notices. The grantor shall be given the option to have the agreement and notices in Filipino. The Department of Finance (DOF) shall prepare model agreements in plain English and Filipino.

Section 7. Description of Collateral.

A description of collateral shall be considered sufficient, whether it is specific or general, if it reasonably identifies the collateral.
A description such as "all personal property," "all equipment," "all inventory," or "all personal property within a generic category" of the grantor shall be sufficient.

a. Provisions of the IRR.

The provisions of the PPSA IRR that implement Sections 5, 6 and 7 of the PPSA state as follows:
Section 2.02. Forms of Security Arrangements.

Contracting parties are free to enter into any form of security arrangements over movable property, as long as the security arrangement covering the same is not inconsistent with the PPSA or these Rules.
Subject to existing law, parties may also apply these Rules to other functional equivalents of security interest, including fiduciary transfers of title:

financial lease;
assignment or transfer of receivables; and
sale with retention of title.

Section 3.03. Form of Security Agreement.

A security agreement must be contained in a written contract signed by the parties.
It must identify the collateral and the secured obligation.
It may consist of one or more writings that, taken together, establish the intent of the parties to create a security interest.
The security agreement shall likewise provide for the language to be used in agreements and notices. The grantor shall be given the option to have the agreement and notices in Filipino. The Department of Finance (DOF) shall prepare model security agreements in plain English and Filipino provided in Annex "A" of these Rules.

Section 3.04. Description of Collateral.

A description of collateral in the security agreement and/ or in registration notices shall be considered sufficient if reasonably identifies the collateral.
A specific description of the collateral shall not be required in constituting the security interest. A description such as "all personal property," "all equipment," "all inventory," or "all personal property within a generic category" of the grantor shall be sufficient.

b. Requisites.

The following are the requisites of a security agreement based on the PPSA and its IRR:
EI-WS-SC

The debtor must have an existing obligation to the creditor
There is intent by the parties, including the grantor, to create a security interest to secure performance of the principal obligation;
The agreement to create a security interest must be in writing;
The parties must sign the security agreement;
The security agreement must identify the secured obligation; and
The security agreement must identify the property that will serve as the collateral.

c. Required to be in Writing

A security agreement is a formal contract.

The PPSA requires a written instrument for its perfection.

Even under the Uniform Commercial Code, some form of writing or record is required in order to satisfy the requirements of the law.
State of Alabama v. Holcomb Blake Pressley et al. 100 So.3d 1058 (2012):

A security agreement requires a writing that clearly demonstrates the debtor's intent to transfer an interest in personal property as security to a creditor.
Case law examples:

Ex parte People's Cmty. Bank of Ashford (2000):

Without a signed security agreement, a party cannot enforce a claim against disputed proceeds.

General Elec. Credit Corp. v. Strickland Div. of Rebel Lumber Co. (1983):

An oral agreement is not enforceable as a security agreement.

McDonald v. Peoples Auto. Loan & Fin. Corp. of Athens (1967):

A security interest is not enforceable without a writing satisfying legal requirements unless the secured party possesses the collateral.

Legal requirements for enforceable security agreements:

Debtor must sign a written security agreement.
Value must be given by the secured party.
Debtor must have rights in the collateral.

Hoc, Inc. v. McAllister (In re McAllister) (1996):

Citing Alabama Code, an enforceable security agreement requires a signed writing, given value, and debtor’s rights in the collateral.

First Nat'l Bank of Baldwin Cnty. v. Taylor (In re Modern Mix, Inc.) (1982):

A security interest without a written agreement describing the collateral is unenforceable.

d. Substance Test.

Section 2.02 of the PPSA IRR applies the substance test in determining if the agreement is a security agreement or some other contract.

While a written agreement is mandatory, the contracting parties are free to enter into any form of security arrangements over movable property, as long as the security arrangement covering the same is not inconsistent with the PPSA or the IRR.

The nature of the agreement is to be determined by the facts of each case and it is what the agreement does rather than what it is formally called that governs.

However, "while there are no magic words which create a security interest there must be a language in the instrument which leads to the logical conclusion that the intention of the parties is that security interest be created."

Example:

A mere financing statement that merely identifies the parties and describes the collateral will not necessarily amount to a security agreement if the intent to create a security interest is not reflected.

e. Functional Equivalents of Security Interest.

Section 2.02 of the PPSA IRR likewise provides that subject to existing law, parties may also apply these Rules (the IRR) to other functional equivalents of security interest, including:

Fiduciary transfers of title;
Financial lease;
Assignment or transfer of receivables; and
Sale with retention of title.

9.01. Description of the Personal Property.

The law does not require a detailed description of the property.
Section 7 of the PPSA provides that:

A description of collateral shall be considered sufficient, whether it is specific or general, if it reasonably identifies the collateral.
A description such as "all personal property," "all equipment," "all inventory," or "all personal property within a generic category" of the grantor shall be sufficient.

Illustration:

The description is not enough if the agreement merely identifies the collateral as the "car that the grantor is using" if the grantor has a number of cars because the collateral cannot be reasonably identified.
If the credit to the grantor covers after-incurred obligations or future obligations, it is enough to state that security covers "all accounts receivable" of the grantor because anybody who will go over the agreement would be alerted that the parties intended to include after-acquired accounts.

It is believed that the rules on the description of the property under the Uniform Commercial Code in the United States may be adopted in this jurisdiction.
In re Southern Illinois Railcar Co., Bankruptcy Case No. 02-30456, (Jointly Administered with 02-30457), (Bankr. S.D. Ill. Dec. 10, 2002):

A property description in a security agreement is adequate if it "reasonably identifies" the collateral.
The identity of the collateral must be objectively determinable.
Case Law:

In re Bennett Funding Group, Inc. (2000):

Description must allow a third party to distinguish between the collateral and similar items owned by the debtor.

In re Niles (1987):

Description is inadequate if a third party cannot identify the collateral without additional information.

Aronson Furniture Co. v. Johnson (1977):

Description must be specific enough for creditors to distinguish between the goods subject to the security interest and similar items not subject to it.

If a debtor owns numerous similar items, a more specific description including serial numbers is necessary.

Bennett Funding (2000):

Required serial numbers for office equipment.

In re Keene Corp. (1995):

Required detailed descriptions of Treasury notes.

Descriptions in security agreements are inadequate if they have unfilled blanks or lack necessary attachments.

In re Kevin W. Emerick Farms, Inc. (1996):

Agreements with blanks or missing attachments were inadequate.

Rusch Factors, Inc. v. Passport Fashion Limited (1971):

Agreement unenforceable without attached documents that were meant to describe the collateral.

In this case, the agreement states that "Seller (SIRC) hereby grants to Buyer (Wells Fargo) a first priority security interest in the Equipment," which description is to be "more fully described on the Schedule of Equipment and Agreements annexed hereto and made a part hereof."
The Description of Agreements and Equipment attached to the agreement then describes railcars as "Twenty (20) flat-bottom gondola railcars, each having a capacity of 4,000 cubic feet, bearing reporting marks as more fully described on attached Schedule."

However, no Schedule 'A' is attached to the agreement.
As a result, it would be impossible for any third party to determine which of the Debtor's railcars were to be pledged as security under agreement.
Hence, the agreement cannot be enforced for failure to adequately describe the personal property over which the security interest is supposed to attach.

The security agreement may provide that all present personal properties of the grantor are included therein.

Thus, the model security agreement attached to the PPSA IRR contains the following sample provision:
2.1 Creation of the security interest

The GRANTOR creates in favor of the SECURED CREDITOR a security interest in all of the GRANTOR's present and future assets which are within the following categories of assets (the "Encumbered Assets'’)

Inventory;
Receivables;
Equipment;
Funds credited to a bank account;
Negotiable documents, including without limitation, bills of lading and warehouse receipts;
Negotiable instruments, including without limitation, bills of exchange, cheques and promissory notes;
Intellectual property and rights as licensee;
(insert other assets as applicable)
To the extent not listed above, all proceeds and products of all of the foregoing.

9.01 Requirement for Specific Types of Property.

The provisions of the PPSA IRR involving future property, receivables and commingled funds are as follows:

Section 3.05. Security Interests Over Future Property.

(a) A security agreement may provide for the creation of a security interest in future property or after acquired assets, but the security interest in that property is created only when the grantor acquires rights In it or the power to encumber it.
(b) A security agreement may provide that a security interest in a tangible asset that is transformed into a product extends to the product. A security interest that extends to a product is limited to the value of the encumbered asset immediately before it became part of the product.
(c) A security agreement may provide that a security interest in a tangible asset extends to its replacement. A security interest that extends to a replacement is limited to the value of the encumbered asset immediately before it was replaced.

Example:

(a) A business takes out a loan and grants the lender a security interest in any equipment it purchases in the future. This interest is created only when the business actually buys the new equipment.
(b) A manufacturer pledges raw materials as collateral, and the security interest extends to the finished product made from those materials, but only up to the value of the raw materials.
(c) A trucking company secures a loan with its fleet of trucks, and the security interest extends to any new trucks that replace the old ones, limited to the value of the trucks being replaced.

Section 3.06 Security Interests Over Right to Proceeds and Commingled Funds.

(a) A security interest in personal property shall extend to its identifiable or traceable proceeds.
(b) Where proceeds in the form of funds credited to a deposit account or money are commingled with other funds or money:

(i) The security interest shall extend to the commingled money or funds, notwithstanding that the proceeds have ceased to be identifiable to the extent they remain traceable;
(ii) The security interest in the commingled funds or money shall be limited to the amount of the proceeds immediately before they were commingled; and
(iii) If at any time after the commingling, the balance credited to the deposit account or the amount of the commingled money is less than the amount of die proceeds immediately before they were commingled, the security interest against the commingled funds or money shall be limited to the lowest amount of the commingled funds or money between the time when the proceeds were commingled and the time the security interest in the proceeds is claimed.

Example:

(a) A farmer secures a loan with harvested crops. If the crops are sold, the lender's security interest extends to the sale proceeds.
(b) If the sale proceeds are deposited into a bank account and mixed with other funds:

(i) The lender's security interest extends to the mixed funds if traceable.
(ii) If $10,000 in crop sale proceeds are deposited and mixed with other funds, the lender's interest is up to $10,000.
(iii) If the account balance drops to $5,000 at some point, the lender’s interest is limited to that amount until it increases.

Section 3.07. Security Interest Over Tangible Assets Commingled in a Mass.

(a) A security interest in a tangible asset that is commingled in a mass extends to the mass.
(b) A security interest that extends to a mass is limited to the same proportion of the mass as the quantity of the encumbered asset bore to the quantity of the entire mass immediately after the commingling.

Example:

(a) A bakery secures a loan with bags of flour. If the flour is mixed with other flour, the lender's interest extends to the entire mixed flour mass.
(b) If 100 bags of flour are pledged and mixed with 200 other bags, the lender’s interest is in one-third of the mixed flour mass.

Section 3.08. Security Interest in Certain Accounts Receivable.

(a) A security interest in an account receivable shall be effective notwithstanding any agreement between the grantor and the account debtor or any secured creditor limiting in any way the grantor's right to create a security interest;

Provided: Nothing in this section affects the right of a buyer to create a security interest over the account receivable.
Provided, further. that any release of information is subject to agreements on confidentiality.

(b) Nothing in this section shall affect any obligation or liability of the grantor for breach of the agreement in subsection (a).
(c) Any stipulation limiting the grantor's right to create a security interest shall be void.
(d) This section shall apply only to accounts receivable arising from:

(i) A contract for the supply or lease of goods or services other than financial services;
(ii) A construction contract or contract for the sale or lease of real property; and
(iii) A contract for the sale, lease or license of intellectual property.

Example:

(a) A software company secures a loan with its accounts receivable from customers, regardless of agreements with those customers that might limit this.
(c) A construction firm pledges its receivables from a building project, and any attempt to prevent this pledge is void.
(d) This applies to receivables from:

(i) Selling or leasing office equipment.
(ii) Contracts for building a new office complex.
(iii) Licensing software.

Section 3.09. Protection of Account Debtor

Except as otherwise provided in the PPSA and these Rules, the creation of a security interest in a receivable does not, without the consent of the debtor of the receivable, affect its rights and obligations, including the payment terms contained in the contract giving rise to the receivable.
A payment instruction may change the person, address or account to which the debtor of the receivable is required to make payment.

Example:

A retailer secures a loan with its accounts receivable.
The customers (account debtors) still owe payments under the same terms unless they agree otherwise.
The retailer can instruct customers to make payments to a new account if the lender requires it.

10. Perfection.

A security interest may be perfected by: RPC

Registration of a notice of security interest with the Registry (established in the Land Registration Authority (LRA);
Possession of the collateral by the secured creditor; and
Control of investment property and deposit account.

10.01 Tangible Assets and Intangible Assets

A security interest in any tangible asset may be perfected: RP

by registration or
by possession.

A security interest in investment property and deposit account may be perfected: RC

by registration or
by control.

The PPSA IRR provides:

Section 4.02. Means of Perfection - Tangible Assets.

A security interest in tangible assets may be perfected by either:

(a) Registration of a notice as defined under these Rules with the Registry:

Provided, that a security that is not registered remains valid between the parties; or

(b) Possession, whether actual or constructive, of the tangible asset either by the secured creditor or a depositary acting for the secured creditor.

Provided, that the debtor or the grantor cannot possess the collateral on behalf of the secured creditor for purposes of perfecting and maintaining the security interest over such collateral.

If a security interest in a tangible asset is effective against third parties, a security interest in a mass to which the security interest extends is effective against third parties without any further act.

Section 4.03. Means of Perfection - Intangible Assets.

A security interest in intangible assets may be perfected by either:

Registration of a notice as defined under these Rules with the Registry:

Provided, that a security that is not registered remains valid between the parties; or

Conclusion of a control agreement.

For purposes of determining the time of perfection of the security interest, the control agreement shall be executed under oath, and shall indicate the date and time of its execution.

a. Possession.

Possession under the PPSA may be:

actual or
constructive.

The PPSA IRR adopts the definition under the New Civil Code that "possession" is the holding of a thing or the enjoyment of a right.
However, constructive possession does not include transfer of possession through all types of constructive delivery under the New Civil Code.

Section 4.02 of the PPSA IRR provides that:

A security interest in tangible assets may also be perfected by possession, whether actual or constructive, of the tangible asset either by:

the secured creditor or
a depositary acting for the secured creditor."

Section 4.02, however, also provides that:

The debtor or the grantor cannot possess the collateral on behalf of the secured creditor for purposes of perfecting and maintaining the security interest over such collateral.

Thus, there must be actual transfer of possession of the collateral from the grantor to either the creditor or a depositary. The grantor cannot retain actual physical possession.
Hence, transfer of possession cannot be done through:

❌ Execution of public instrument
❌ Traditio Longa Manu — delivery by mere consent, or
❌ Traditio Constitutum Possessorium — the transferor remains in possession in some other capacity for the transferee.

However, it is believed that transfer of possession can be through:

✅ Traditio Brevi Manu — meaning the secured creditor is already in possession in some other capacity as in the case where the secured creditor is the lessee or depositary of the thing.
✅ Traditio Symbolica — delivery may be made by the delivery of the keys of the place or depository where it is stored or kept which means that there is transfer of actual control.

Since the debtor or the grantor cannot possess the collateral on behalf of the secured creditor for purposes of perfecting and maintaining the security interest over such collateral:

it follows that the secured creditor will no longer have his priority interest if he returns the goods to the grantor.
Remedy: The secured creditor can retain his interest even if he will return the collateral to the grantor by availing of the other means of perfection of the security interest.

Section 15 of the PPSA provides that:

A security interest shall remain perfected despite a change in the means for achieving perfection if there was no time when the security interest was not perfected.

Thus, the secured creditor's security interest perfected through possession shall remain perfected if he registers a notice with the registry before returning the property.
Section 4.02 of the PPSA IRR provides that:

If a security interest in a tangible asset is effective against third parties, a security interest in a mass to which the security interest extends is effective against third parties without any further act.

10.02 Deposit Account and Investment

A security interest in a deposit account or investment property may be perfected by control through: CCN

The creation of the security interest in favor of the deposit-taking institution or the intermediary;
The conclusion of a control agreement; or
For an investment property that is an electronic security not held with an intermediary, the notation of the security interest in the books maintained by or on behalf of the issuer for the purpose of recording the name of the holder of the securities.

a. Control Agreement

Control agreement refers to any of the following: SDC

With respect to securities, means an:

agreement in writing among the issuer or the intermediary, the grantor and the secured creditor,
according to which the issuer or the intermediary agrees to follow instructions from the secured creditor with respect to the security,
without further consent from the grantor;

With respect to rights to deposit account, means an:

agreement in writing among the deposit-taking institution, the grantor and the secured creditor,
according to which the deposit-taking institution agrees to follow instructions from the secured creditor with respect to the payment of funds credited to the deposit account
without further consent from the grantor;

With respect to commodity contracts, means an:

agreement in writing among the grantor, secured creditor, and intermediary,
according to which the commodity intermediary will apply any value distributed on account of the commodity contract as directed by the secured creditor
without further consent by the commodity customer or grantor.

b. Formalities of the Control Agreement

Section 4.07 of the PPSA IRR provides the formalities of the Control Agreement

Section 4.07. Parties to, Form and Contents of a Control Agreement.

With respect to intermediated securities, a control agreement shall:

Be executed in writing by the issuer or the intermediary, the grantor and the secured creditor;
Stipulate that the issuer or the intermediary agrees to follow instructions from the secured creditor with respect to the security, without further consent from the grantor.

With respect to rights to deposit account, a control agreement shall:

Be executed in writing among the deposit taking institution, the grantor and the secured creditor;
Stipulate that the deposit-taking institution agrees to follow instructions from the secured creditor with respect to the payment of funds credited to the deposit account without further consent from the grantor.

With respect to commodity contracts, a control agreement shall:

Be executed in writing among the grantor, secured creditor, and intermediary;
Stipulate that the commodity intermediary will apply any value distributed on account of the commodity contract as directed by the secured creditor without further consent by the commodity customer or grantor.

10.03 Specific Rules on Securities and Deposit.

Section 4.04. Perfection of Security Interest in Intermediated Securities or Deposit Accounts.

A security interest in intermediated securities or deposit accounts may be perfected by: RCC

Registration of a notice as defined under these Rules with the Registry:

Provided, that a security that is not registered remains valid between the parties;

Creation of a security interest in favor of the deposit-taking institution or the intermediary; or
Conclusion of a control agreement.

For purposes of determining the time of perfection of the security interest, the security agreement or control agreement shall be executed under oath, and shall include the date and time of its execution.
Nothing in these Rules shall require a deposit taking institution or an intermediary under sub-section (b) to enter into a control agreement, even if the grantor so requests.
A deposit-taking institution or an intermediary that has entered into such an agreement shall not be required to confirm the existence of the agreement to another person unless requested to do so by the grantor.

Section 4.05. Perfection of Security Interest in Electronic Securities.

A security interest in electronic non-intermediated securities may be by: RCC

Registration of a notice as defined under these Rules with the Registry:

Provided, that a security that is not registered remains valid between the parties;

The execution of a control agreement between the grantor and secured creditor; or
Control, through notation of a security interest in the books maintained by or on behalf of the issuer for the purpose of recording the name of the holder of the securities.

Section 4.06. Perfection of Security Interest in Intermediated Electronic Securities.

A security interest in investment property that is electronic (i.e., a scripless or uncertificated) security held by an intermediary may be by:

Registration of a notice as defined under these Rules with the Registry:

Provided, that a security that is not registered remains valid between the parties;

The execution of a control agreement between the intermediary, the grantor and secured creditor.

For purposes of determining the time of perfection of the security interest, the control agreement shall be executed under oath, and shall include the date and time, specifying the hour and minute of Its execution.

10.04 Notice

The notice of security interest that perfects the security interest is the notice to the National Electronic Registry established in and administered by the Land Registration Authority.
The Registry shall provide electronic means for registration and searching of notices.

Section 28. Sufficiency of Notice.

An initial notice of security interest shall not be rejected: INA-DF

If it identifies the grantor by an identification number, as further prescribed in the regulations;
If it identifies the secured creditor or an agent of the secured creditor by name;
If it provides an address for the grantor and secured creditor or its agent;
If it describes the collateral; and
If the prescribed fee has been tendered, or an arrangement has been made for payment of fees by other means.

If the Registry rejects to register a notice, it shall promptly communicate the fact of and reason for its rejection to the person who submitted the notice.
Each grantor must authorize the registration of an initial notice by signing a security agreement or otherwise in writing.
A notice may be registered before a security agreement is concluded. Once a security agreement is concluded, the date of registration of the notice shall be reckoned from the date the notice was registered.
A notice of lien may be registered by a lien holder without the consent of the person against whom the lien is sought to be enforced.

Section 29. One Notice Sufficient for Security Interests Under Multiple Security Agreements.

The registration of a single notice may relate to security interests created by the grantor under one (1) or more than one security agreement.

Section 30. Effectiveness of Notice.

A notice shall be effective at the time it is discoverable on the records of the Registry.
A notice shall be effective for the duration of the term indicated in the notice unless a continuation notice is registered before the term lapses.
A notice substantially complying with the requirements of this Chapter shall be effective unless it is seriously misleading.
A notice that may not be retrieved in a search of the Registry against the correct identifier of the grantor shall be ineffective with respect to that grantor.

Section 31. Seriously Misleading Notice.

A notice that does not provide the identification number of the grantor shall be seriously misleading.

Section 32. Amendment of Notice.

A notice may be amended by the registration of an amendment notice that:

Identifies the initial notice by its registration number; and
Provides the new information.

An amendment notice that adds collateral that is not proceeds must be authorized by the grantor in writing.
An amendment notice that adds a grantor must be authorized by the added grantor in writing.
An amendment notice shall be effective only as to each secured creditor who authorizes it.
An amendment notice that adds collateral or a grantor shall be effective as to the added collateral or grantor from the date of its registration.

Section 33. Continuation of Notice.

The period of effectiveness of a notice may be continued by registering an amendment notice that identifies the initial notice by its registration number.
Continuation of notice may be registered only within six (6) months before the expiration of the effective period of the notice.

Section 34. Termination of Effectiveness of a Notice.

The effectiveness of a notice may be terminated by registering a termination notice that:

Identifies the initial notice by its registration number; and
Identifies each secured creditor who authorizes the registration of the termination notice.

A termination notice terminates effectiveness of the notice as to each authorizing secured creditor.

Section 39. When the Grantor May Demand Amendment or Termination of Notice.

A grantor may give a written demand to the secured creditor to amend or terminate the effectiveness of the notice if: PANNE

All the obligations under the security agreement to which the registration relates have been performed and there is no commitment to make future advances;
The secured creditor has agreed to release part of the collateral described in the notice;
The collateral described in the notice includes an item or kind of property that is not a collateral under a security agreement between the secured creditor and the grantor;
No security agreement exists between the parties; or
The security interest is extinguished in accordance with this Act.

Section 40. Matters That May be Required by Demand.

Upon receipt of the demand submitted under Section 39, the secured creditor must register, within fifteen (15) working days, an amendment or termination notice:

Terminating the registration in a case within subsections (a), (d) or (e) of Section 39;
Amending the registration to release some property that is no longer collateral in a case within subsection of Section 39 or that was never collateral under a security agreement between the secured creditor and the grantor in a case within subsection (c) of Section 39.

Section 41. Procedure for Noncompliance with Demand.

If the secured creditor fails to comply with the demand within fifteen (15) working days after its receipt, the person giving the demand under Section 39 may ask the proper court to issue an order terminating or amending the notice as appropriate.

Section 42. Compulsory Amendment or Termination by Court Order.—

The court may, on application by the grantor, issue an order that the notice be terminated or amended in accordance with the demand, which order shall be conclusive and binding on the LRA:

Provided, That the secured creditor who disagrees with the order of the court may appeal the order.

The court may make any other order it deems proper for the purpose of giving effect to an order under subsection (a) of this section.
The LRA shall amend or terminate a notice in accordance with a court order made under subsection (a) of this section as soon as reasonably practicable after receiving the order.

Section 43. No Fee for Compliance of Demand.

A secured creditor shall not charge any fee for compliance with a demand received under Section 39.

11. Priority Interest

General Rule:

Section 17 of the PPSA states that:

the priority of security interests and liens in the same collateral shall be determined according to time of registration of a notice or perfection by other means, without regard to the order of creation of the security interests and liens.

Hence, it is:

❌ not the date of execution of the security agreement that is material;
✅ the date of perfection of the security interest that is controlling in determining the priority of two or more security interests.

Exception:

However, there are cases when the execution of the security agreement also marks the perfection of the security interest.

11.01 Priority of Perfection by Control

The following are special rules on priority for security interest in a deposit account and/or investment property. (Under Sec 18 of the PPSA)

Super-Priority in Favor of Deposit-Taking Institutions and Intermediaries.

Greater protection is given to deposit-taking institutions and intermediaries under the PPSA.
Examples: banks

First, the security interest may be perfected when it is created through a security agreement. The act that creates the security interest perfects it as well.
Secondly, a security interest in a deposit account with respect to which the secured creditor is the deposit taking institution or the intermediary shall have priority over a competing security interest perfected by any method

There is preference in favor of the deposit-taking institution over the security interest perfected through control agreement.
The right to set-off is also preferred over the security interest perfected through control agreement.
The priority given to the security interest of banks is not qualified as to time unlike the rule on the security interest perfected through control agreement.
This type of priority interest is referred to in other jurisdictions as Super-Priority.

A security interest in a deposit account with respect to which the secured creditor is the deposit-taking institution or the intermediary shall have priority over a competing security interest perfected by any method.
A security interest in a deposit account or investment property that is perfected by a control agreement shall have priority over a competing security interest except a security interest of the deposit-taking institution or the intermediary.

Illustration:

A has a deposit account with Bank X.
A grants Bank X a security interest in the deposit account as collateral for a loan.
A grants another security interest in the same deposit account to Y through a control agreement.
Bank X’s security interest will have priority over Y’s, even though Lender Y perfected its interest through a control agreement.

The order of priority among competing security interests in a deposit account or investment property that were perfected by the conclusion of control agreements shall be determined on the basis of the time of conclusion of the control agreements.

Illustration:

B has a deposit account and grants a security interest to Z through a control agreement on January 1.
Later, B grants another security interest in the same account to W through a control agreement on February 1.
Z’s security interest has priority over W’s because Z’s control agreement was concluded first.

Any rights to set-off that the deposit-taking institution may have against a grantor's right to payment of funds credited to a deposit account shall have priority over a security interest in the deposit account.

Illustration:

C has an outstanding loan with Bank Y and also holds a deposit account at Bank Y.
C grants a security interest in this deposit account to X through a control agreement.
Later, C defaults on its loan with Bank Y.
Bank Y can exercise its right to set off the funds in the deposit account to satisfy the loan before X’s security interest is considered.
Bank Y’s right to set-off has priority over X’s interest.

Bank ➡ Control Agreement

Securities

For securities, there are also special rules on priority security interest in Section 18 of the PPSA:

A security interest in a security certificate perfected by the secured creditor's possession of the certificate shall have priority over competing security interest perfected by registration of a notice in the Registry.

Illustration:

A pledges its physical stock certificates to Bank X as collateral for a loan.
Bank X takes possession of the certificates.
Later, A grants a security interest in the same stock to Y, who perfects the interest by registering a notice in the Registry.
Bank X’s security interest has priority over Y’s because Bank X perfected its interest by possessing the physical certificates.

A security interest in electronic securities not held with an intermediary perfected by a notation of the security interests in the books maintained for that purpose by or on behalf of the issuer shall have priority over a security interest in the same securities perfected by any other method.

Illustration:

B issues electronic shares.
Z perfects a security interest in these shares by having a notation made in the books maintained by the issuer.
Later, another lender, W, perfects a security interest in the same shares by registering a notice in the Registry.
Z’s security interest has priority over W’s because Z’s interest was perfected by a notation in the issuer’s books.

A security interest in electronic securities not held with an intermediary perfected by the conclusion of a control agreement shall have priority over a security interest in the same securities perfected by registration of a notice in the Registry.

Illustration:

C’s electronic shares are pledged to M, who perfects the security interest through a control agreement.
Later, C grants a security interest in the same shares to N, who perfects the interest by registering a notice in the Registry.
M’s security interest has priority over Lender N’s because Lender M perfected the interest through a control agreement.

The order of priority among competing security interests in electronic securities not held with an intermediary perfected by the conclusion of control agreements is determined on the basis of the time of conclusion of the control agreements.

Notation ➡ Control Agreement ➡ Registration

11.02 Priority Interests on Personal Properties.

Priority for instruments and negotiable documents.

A security interest in an instrument or negotiable document that is perfected by possession of the instrument or the negotiable document shall have priority over a security interest in the instrument or negotiable document that is perfected by registration of a notice in the Registry.
Illustration:

A grants X a security interest in its negotiable warehouse receipt, which X perfects by taking possession of the receipt.
Later, A grants a security interest in the same receipt to Y, who perfects the interest by registering a notice in the Registry.
X’s security interest has priority over Y’s because it was perfected by possession.

Possession ➡ Registration

Priority and right of retention by operation of law.

A person who provides services or materials with respect to the goods, in the ordinary course of business, and retains possession of the goods shall have priority over a perfected security interest in the goods until payment thereof.
Illustration:

A mechanic repairs a vehicle and retains possession until payment is made.
The vehicle is subject to a perfected security interest held by a lender.
The mechanic’s right to retain possession and receive payment has priority over the lender’s security interest.

Right to Retention ➡ Security Interest

Livestock.

A perfected security interest in livestock securing an obligation incurred to enable the grantor to obtain food or medicine for the livestock shall have priority over any other security interest in the livestock, except for a perfected purchase money security interest in the livestock, if the secured creditor providing credit for food or medicine gives written notification to the holder of the conflicting perfected security interest in the same livestock before the grantor receives possession of the food or medicine.
Illustration:

Bank A holds a perfected security interest in the livestock.
Bank C holds a perfected PMSI for the purchase of livestock.
Feed Supplier B provides credit for feed and medicine and perfects the security interest.
Feed Supplier B notifies Bank A about this new security interest.
Bank C's PMSI has the highest priority.
Feed Supplier B's interest has priority over Bank A’s interest, due to the proper notification and specific use for feed and medicine.

PMSI ➡ Food and Medicine with notification ➡ Others

A perfected security interest in a movable property which has become a fixture, or has undergone accession or commingling shall continue provided the movable property involved can still be reasonably traced. In determining ownership over fixtures, accessions, and commingled goods, the provisions of Book II of the New Civil Code shall apply.

Illustration:

Company D secures a loan with machinery that later becomes a permanent fixture in a factory.
The machinery was originally subject to a perfected security interest.
The security interest continues as long as the machinery can be traced as part of the fixture.

A security interest in a security certificate perfected by the secured creditor's possession of the certificate shall have priority over a competing security interest perfected by registration of a notice in the Registry.

Illustration:

E grants M a security interest in its physical stock certificates, which M perfects by taking possession of the certificates.
Later, E grants a security interest in the same certificates to N, who perfects the interest by registering a notice in the Registry.
M’s security interest has priority over N’s because it was perfected by possession.

Possession ➡ Registration

11. Purchase Money Security Interest.

A purchase money security interest in equipment and its proceeds shall have priority over a conflicting security interest, if a notice relating to the purchase money security interest is registered within three business days after the grantor receives possession of the equipment.
A purchase money security interest in consumer goods that is perfected by registration of notice not later than three business days after the grantor obtains possession of the consumer goods shall have priority over a conflicting security interest.

Illustration:

Company A is a small business owner who needs equipment to expand operations.
Bank X agrees to finance the purchase of the equipment by providing a loan secured by a Purchase Money Security Interest (PMSI) in the equipment.
Company B is another lender who already holds a conflicting security interest in the same equipment.
Bank X ensures timely registration of notice within three business days after Company A receives possession of the equipment, as required by law.
Bank X’s PMSI in the equipment takes priority over Company B’s conflicting security interest because Bank X registered notice within the timeframe.

A purchase money security interest in inventory, intellectual property or livestock shall have priority over a conflicting perfected security interest in the same inventory, intellectual property or livestock if: PN

The purchase money security interest is perfected when the grantor receives possession of the inventory or livestock, or acquires rights to intellectual property, and
Before the grantor receives possession of the inventory or livestock, or acquires rights in intellectual property, the purchase money secured creditor gives written notification to the holder of the conflicting perfected security interest in the same types of inventory, livestock, or intellectual property. The notification sent to the holder of the conflicting security interest may cover multiple transactions between the purchase money secured creditor and the grantor without the need to identify each transaction.

Illustration:

Company A is a retail business looking to expand its inventory of goods.
Bank X agrees to provide financing for the purchase of inventory by offering a loan secured by a Purchase Money Security Interest (PMSI) in the inventory.
However, Company B is another lender who already holds a conflicting security interest in the same inventory.
Bank X perfected its security interest when Company A received possession of the inventory, as required by law. Bank X also provided written notification to Company B, the holder of the conflicting security interest.
Bank X's PMSI in the inventory takes priority over Company B's conflicting security.

The purchase money security interest in equipment or consumer goods perfected timely in accordance with (1) and (2) above, shall have priority over the rights of a buyer, lessee, or lien holder which arise between delivery of the equipment or consumer goods to the grantor and the time the notice is registered.
Illustration:

Company A is a small business owner who needs equipment to expand operations.
Bank X agrees to finance the purchase of the equipment by providing a loan secured by a Purchase Money Security Interest (PMSI) in the equipment.
Company B is another lender who already holds a conflicting security interest in the same equipment.
Bank X ensures timely registration of notice within three business days after Company A receives possession of the equipment, as required by law.
Bank X’s PMSI in the equipment takes priority over Company B’s conflicting security interest because Bank X registered notice within the timeframe.

11. Transferee Exceptions.

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

11.05. Effect of Grantor's Insolvency.

Subject to the applicable insolvency law, a security interest perfected prior to the commencement of insolvency proceedings in respect of the grantor shall remain perfected and retain the priority it had before the commencement of the insolvency proceedings.
During insolvency proceedings, the perfected security interest shall constitute a lien over the collateral.

12. Enforcement.

The personal security may be enforced after default through sale or disposition of the collateral publicly or privately.
Thus, the enforcement of security interest under the PPSA is different from the enforcement of security interest under the Chattel Mortgage Law and the law on pledge because of the following: STECR

The PPSA provides for a simplified and expedited private and public disposition of collateral;
The PPSA provides for the right to take over the enforcement process by a higher-ranking secured creditor;
There is a remedy for expedited repossession of collateral in the PPSA;
Under the PPSA, collection and application is expressly allowed for deposit accounts and negotiable instruments;
Retention of the collateral is allowed under the PPSA in certain cases.

12.01. Disposition.

The sale or disposition of the collateral as provided in the PPSA must be done in a commercially reasonable manner.

Section 50. Commercial Reasonableness Required.—

In disposing of collateral, the secured creditor shall act in a commercially reasonable manner.
A disposition is commercially reasonable if the secured creditor disposes of the collateral in conformity with commercial practices among dealers in that type of property.
A disposition is not commercially unreasonable merely because a better price could have been obtained by disposition at a different time or by a different method from the time and method selected by the secured creditor.
If a method of disposition of collateral has been approved in any legal proceeding, it is conclusively commercially reasonable.

The grantor and any other secured creditor (who holds security interest in the collateral at least five days before the date of notification) are entitled to receive notice 10 days before the disposition of the collateral.

Any other person from whom the secured creditor received notification of a claim of an interest in the collateral prior to the service of a notification of disposition to the grantor is also entitled to the notice required under Section 51(a) of the PPSA.

The grantor and any other secured creditor or person who are entitled to notice under Section 5l(a) of the PPSA may redeem the collateral. The exceptions are as follows: WA

when there is waiver,
the collateral is sold or disposed of, or acquired or collected by the secured creditor, or an agreement for such purpose is concluded by the secured creditor, or
the secured creditor has retained the collateral.

The secured creditor may also propose to the debtor and grantor to take all or part of the collateral in total or partial satisfaction of the secured obligation by sending a proposal to the debtor and the grantor, and such other secured creditor or lien holder or other person with interest in the collateral as specified in Section 54(a) of the PPSA. The secured creditor may retain the collateral in the case of:

A proposal for the acquisition of the collateral in full satisfaction of the secured obligation, unless the secured creditor receives an objection in writing from any person entitled to receive such a proposal within 20 days after the proposal is sent to that person; or
A proposal for the acquisition of the collateral in partial satisfaction of the secured obligation, only if the secured creditor receives the affirmative consent of each addressee of the proposal in writing within 20 days after the proposal is sent to that person.

12.02 Statutory Provisions on Enforcement:

Section 45. Right of Redemption.—

Any person who is entitled to receive a notification of disposition in accordance with this Chapter is entitled to redeem the collateral by paying or otherwise performing the secured obligation in full, including the reasonable cost of enforcement.
The right of redemption may be exercised, unless:

The person entitled to redeem has not, after the default, waived in writing the right to redeem;
The collateral is sold or otherwise disposed of, acquired or collected by the secured creditor or until the conclusion of an agreement by the secured creditor for that purpose; and
The secured creditor has retained the collateral.

Section 46. Right of Higher-Ranking Secured. Creditor to Take Over Enforcement.

Even if another secured creditor or a lien holder has commenced enforcement, a secured creditor whose security interest has priority over that of the enforcing secured creditor or lien holder shall be entitled to take over the enforcement process.
The right referred to in subsection (a) of this section may be invoked at any time before the collateral is sold or otherwise disposed of, or retained by the secured creditor or until the conclusion of an agreement by the secured creditor for that purpose.
The right of the higher-ranking secured creditor to take over the enforcement process shall include the right to enforce the rights by any method available to a secured creditor under this Act.

Section 47. Expedited Repossession of the Collateral.

The secured creditor may take possession of the collateral without judicial process if the security agreement so stipulates:

Provided, That possession can be taken without a breach of the peace.

If the collateral is a fixture, the secured creditor, if it has priority over all owners and mortgagees, may remove the fixture from the real property to which it is affixed without judicial process. The secured creditor shall exercise due care in removing the fixture.
If, upon default, the secured creditor cannot take possession of collateral without breach of the peace, the secured creditor may proceed as follows:

The secured creditor shall be entitled to an expedited hearing upon application for an order granting the secured creditor possession of the collateral.
Such application shall include a statement by the secured creditor, under oath, verifying the existence of the security agreement attached to the application and identifying at least one event of default by the debtor under the security agreement;
The secured creditor shall provide the debtor, grantor, and, if the collateral is a fixture, any real estate mortgagee, a copy of the application, including all supporting documents and evidence for the order granting the secured creditor possession of the collateral; and
The secured, creditor is entitled to an order granting possession of the collateral upon the court finding that a default has occurred under the security agreement and that the secured creditor has a right to take possession of the collateral.

The court may direct the grantor to take such action as the court deems necessary and appropriate so that the secured creditor may take possession of the collateral:

Provided, That breach of the peace shall include:

entering the private residence of the grantor without permission,
resorting to physical violence or intimidation, or
being accompanied by a law enforcement officer when taking possession or confronting the grantor.

Section 49. Right to Dispose of Collateral.

After default, a secured creditor may sell or otherwise dispose of the collateral, publicly or privately, in its present condition or following any commercially reasonable preparation or processing.
The secured creditor may buy the collateral at any public disposition, or at a private disposition but only if the collateral is of a kind that is customarily sold on a recognized market or the subject of widely distributed standard price quotations.

Section 51. Notification of Disposition.

Not later than ten (10) days before disposition of the collateral, the secured creditor shall notify:

The grantor;
Any other secured creditor or lien holder who, five (5) days before the date notification is sent to the grantor, held a security interest or lien in the collateral that was perfected by registration; and
Any other person from whom the secured creditor received notification of a claim of an interest in the collateral if the notification was received before the secured creditor gave notification of the proposed disposition to the grantor.

The grantor may waive the right to be notified.
A notification of disposition is sufficient if it:

identifies the grantor and the secured creditor;
describes the collateral;
states the method of intended disposition; and
states the time and place of a public disposition or the time after which other disposition is to be made.

The requirement to send a notification under this section shall not apply if the collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market.

Section 52. Application of Proceeds.

The proceeds of disposition shall be applied in the following order:

The reasonable expenses of taking, holding, preparing for disposition, and disposing of the collateral, including reasonable attorney's fees and legal expenses incurred by the secured creditor;
The satisfaction of the obligation secured by the security Interest of the enforcing secured creditor; and.
The satisfaction of obligations secured by any subordinate security interest or lien in the collateral if a written demand and proof of the Interest are received before distribution of the proceeds is completed.

The secured creditor shall account to the grantor for any surplus, and, unless otherwise agreed, the debtor is liable for any deficiency.

Section 53. Rights of Buyers and Other Third Parties.

If a secured creditor sells the collateral under this Chapter, the buyer shall acquire the grantor's right in the asset free of the rights of any secured creditor or lien holder.
If a secured creditor leases or licenses the collateral under this Chapter, the lessee or licensee shall be entitled to the benefit of the lease or license during its term
If a secured creditor sells, leases or licenses the collateral not in compliance with this Chapter, the buyer, lessee or licensee of the collateral shall acquire the rights or benefits described in subsections (a) and (b) of this section:

Provided, That it had no knowledge of a violation of this Chapter that materially prejudiced. the rights of the grantor or another person.

a. Surplus and Deficiency.

Section 52(b) provides that:

the secured creditor shall account to the grantor for any surplus, and,
unless otherwise agreed, the debtor is liable for any deficiency.

The rule is the same under the law on chattel mortgage but is not the same as the rule on pledge.

✅After foreclosure, the mortgagee may generally recover any deficiency that may result after applying the proceeds of the foreclosure sale to the obligation.
✅In the same manner, the Chattel Mortgage Law also provides that the debtor/ mortgagor is entitled to the excess of the proceeds of the sale.

❌In pledge, Article 2115 prevents recovery of the deficiency from the debtor after the public sale but the debtor is also not entitled to the excess of the proceeds of the sale.

b. Recto Law

One problem in connection with this rule is the effect of Section 52(b) on the Recto Law or Article 1484 of the New Civil Code.

Under the Recto Law, in a contract of sale of personal property on installment basis, the vendor may exercise any of the following alternative remedies:

Exact fulfillment of the obligation, should the vendee fail to pay;
Cancel the sale, should the vendee's failure to pay cover two or more installments; or
Foreclose the chattel mortgage.

Foreclosure of chattel mortgage on the things sold shall bar recovery of any deficiency.
After foreclosure of the chattel mortgage, the seller cannot recover from the buyer.
Recto Law seeks to prevent abuse committed in connection with the foreclosure of chattel mortgages.
The law "prevents mortgagees from seizing the mortgaged property, buying it at foreclosure sale for a low price and then bringing suit against the mortgagor for a deficiency judgment. The almost invariable result of this procedure was that the mortgagor found himself minus the property and still owing practically the full amount of his original indebtedness."

It is submitted that the effect of the PPSA on the Recto Law is merely to replace the third remedy of foreclosure with the remedy of enforcement through public or private sale of the collateral.
In view of the purpose of Recto Law, it is believed that the PPSA should not be construed as having removed the third remedy and the prohibition on recovery of deficiency in case of foreclosure.
It is believed that the cases covered by the Recto Law is an exception to Section 52(b) of the PPSA because the evil sought to be prevented by the Recto Law still exists.

12.03 Enforcement Involving Deposit Accounts and Instruments.

By the very nature of deposit accounts and negotiable instruments, it is not necessary to conduct a judicial disposition of these personal properties.
Thus, Section 48 provides for the remedies without need of judicial process:

Section 48. Recovery in Special Cases.

Upon default, the secured creditor may without judicial process:

Instruct the account debtor to make payment to the secured creditor, and apply such payment to the satisfaction of the obligation secured by the security interest after deducting the secured creditor’s reasonable collection expenses. On request of the account debtor, the secured creditor shall provide evidence of its security interest to the account debtor when it delivers the instruction to the account debtor;
In a negotiable document that is perfected by possession, proceed as to the negotiable document or goods covered by the negotiable document;
In a deposit account maintained by the secured creditor, apply the balance of the deposit account to the obligation secured by the deposit account; and
In other cases of security interest in a deposit account perfected by control, instruct the deposit-taking institution to pay the balance of the deposit account to the secured creditor’s account.

12.04. Retention of Collateral.

Automatic appropriation of the collateral is not allowed under the PPSA. However, there are cases when the law allows retention of the c ollat.eraL Section 54 provides:

Section 54. Retention of Collateral by Secured Creditor.

After default, the secured creditor may propose to the debtor and grantor to take all or part of the collateral in total or partial satisfaction of the secured obligation, and shall send a proposal to:

The grantor;
Any other secured creditor or lien holder who, five (5) days before the date notification is sent to the grantor, held a security interest or lien in the collateral that was perfected by registration; and
Any other person from whom the secured creditor received notification of a claim of an interest in the collateral if the notification was received before the secured creditor gave notification of the proposed disposition to the grantor.

The secured creditor may retain the collateral in the case of:

A proposal for the acquisition of the collateral in full satisfaction of the secured obligation, unless the secured creditor receives an objection in writing from any person entitled to receive such a proposal within 20 days after the proposal is sent to that person; or
A proposal for the acquisition of the collateral in partial satisfaction of the secured obligation, only if the secured creditor receives the affirmative consent of each addressee of the proposal in writing within 20 days after the proposal is sent to that person.

13. Electronic Registry

Characteristics of the Registry:

Information contained in a registered notice shall be considered as a public record.
Any person may search notices registered in the Registry.
The electronic records of the Registry shall be the official records.

Section 35. Registry Duties.

For each registered notice, the Registry shall:

assign a unique registration number;
create a record that bears the number assigned to the initial notice and the date and time of registration; and
maintain the record for public inspection.

The Registry shall index notices by the identification number of the grantor and, for notices containing a serial number of a motor vehicle, by serial number.
The Registry shall provide a copy of the electronic record of the notice, including the registration number and the date and time of registration to the person who submitted it.
The Registry shall maintain the capability to retrieve a record by the identification number of the granter, and by serial number of a motor vehicle.
The Registry shall maintain records of lapsed notices for a period of ten (10) years after the lapse.
The duties of the Registry shall be merely administrative in nature. By registering a notice or refusing to register a notice, the Registry does not determine the sufficiency, correctness, authenticity, or validity of any information contained in the notice.

Section 36. Search of Registry Records and Certified Report.

The Registry shall communicate the following information to any person who requests it:

Whether there are in the Registry any unlapsed notices that indicate the grantor's identification number or vehicle serial number that exactly matches the relevant criterion provided by the searcher;
The registration number, and the date and time of registration of each notice; and
All of the information contained in each notice.

If requested, the Registry shall issue a certified report of the results of a search that is an official record of the Registry and shall be admissible Into evidence in judicial proceedings without extrinsic evidence of its authenticity.

Section 37. Disclosure of Information.

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

The current amount of the unpaid secured obligation; and
A list of assets currently subject to a security interest.

The secured creditor may require payment of a fee for each request made by the grantor in subsection (a) in this section, but the grantor is entitled to a reply without charge once every six (6) months.
A security interest in a deposit account shall not:

Affect the rights and obligations of the deposit-taking institution without its consent; or
Require the deposit-taking institution to provide any information about the deposit account to third parties.

Section 38. Fees Set by Regulation

The fees for registering a notice and for requesting a certified search report shall be set by regulation issued by the DOF for the recovery of reasonable costs of establishing and operating the Registry.
The fee structure or any change thereof under subsection (a) shall further consider that the same shall not be burdensome to either lender or grantor.
There shall be no fee for electronic searches of the Registry records or for the registration of termination notices.
The Registry may charge fees for services not mentioned above.

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Commercial Laws 1: R.A. No. 11057 — Personal Property Security Act

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