Asian Development Bank - International Insolvency Institute

Draft Country Report for Singapore Conference Intersection of Secured Transactions andInsolvency Law Regimes – Indonesia, Korea,Philippines and Thailand

Indonesia

Part One – Creation, Registration andEnforcement of Secured TransactionsAsia Business Corporation (“ABC”) is a company incorporated in your country and conductsits business from there.

First Scenario – the creation/registration of security by ABC overimmovable property – landB Bank is a bank/financier. It agrees to lend/provide a finance facility to ABC and ABC agrees toprovide security for the loan/finance over land owned by ABC.

BLAKE DAWSON WALDRONL A W Y E R S

RETA 5975

Asian Development BankPromoting Regional Cooperation in theDevelopment of Insolvency Reform


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Issues:

1. Question: In your country would theusual nature of the ownership or title ofABC to the land be freehold, leaseholdor other (e.g. land use right)?

Answer: The ownership of land in Indonesia isbasically regulated by Law No.5 of 1960regarding the Basic Agrarian Law (“BAL”). TheBAL does not recognise the legal concept offreehold and long lease hold. Rights over landcomprise of the following:

● the right of ownership (hak milik);

● the right to utilise (hak guna usaha);

● the right to build (hak guna bangunan);

● the right to use (hak pakai);

● the right to rent (hak sewa);

● the right to open the land (hak membukatanah); and

● the right to collect of forest product (hakuntuk memungut hasil hutan).

2. Question: Is it the case theownership/title of the land of ABCwould be registered in a landregistration system?

Answer: Yes, in Indonesia such a right over theland is registered in the Land Registrar Office(Kantor Pendaftaran Tanah). See GovernmentRegulation No.24/1997 dated 8 July 1997regarding the Registration of Land.

3. Question: Would it be easy/difficult forB Bank to determine that ABC was theowner/had title to the land in question?[Please expand by commenting on thereliability and certainty of theregistration system and the nature andstate of the land registration system –single or multiple registry;centralised/local registry;manual/computer based; reliability ofregistered information; difficulties ofsearching etc]

Answer: It is not difficult to obtain suchinformation, providing that the land has beenregistered, since the certificate of the land clearlyincorporates the name of the owner, the right ofthe owner over the land and the history of theland. Problems will arise if the land has notbeen registered, and if the land does not have acertificate. It is also advisable to double checkthe status of the land with regard to the LandRegistrar Office.

4. Question: Does any landownership/title registration systemextend to the registration of theproposed security that ABC will create infavour of B Bank?

Answer: Yes, for land with the right ofownership, the right to utilise, the right to buildand the right to use, the registration of “haktanggungan” (mortgage, security right orhypothec) shall be made at the Land RegistrarOffice. Land which has no certificate (includingland with the right to rent, right to open land,and the right to collect forest product) can besubject to the “fiduciary register security”, andthe registration of these types of securities shallbe with the Fiduciary Registrar Office.

5. Question: What formal requirementsdoes the law impose upon ABC and BBank for the creation of a security overland?

Answer: Articles 10 and 11 of Law No.4/1996regarding the security right on Land and LandRelated Object (“Law No.4/1996”) regulate theprocedure for the establishment, registration,transfer and waiving of a mortgage.

The establishment of a security right shall bepreceded by a pledge to bestow a mortgage assecurity for the satisfaction of the relevant debt,which shall be expressed in, and form aninseparable part of a debit and credit agreementconcerned with other agreements which shallgive rise to the debt.

The mortgage shall be commenced by thedrawing up of a mortgage deed by a Land DeedOfficer in accordance with the prevailing laws.

If the object of a mortgage takes the form of aland title which is derived from the conversion ofan old title, and the requirements forregistration have not been fulfilled, themortgage shall be established at the same timeas the completion of an application for theregistration of the land concerned.

The deed of the establishment of a mortgageshould mention the following:

● the name and the identity of the holder(grantee) and the bestowal (grantor) of themortgage;

● the domicile party. (note that if one of theparties is domiciled outside Indonesia, thena chosen domicile in Indonesia must also bementioned in his favour, and the Land DeedOfficer where the deed on the bestowal of amortgage is drawn up shall be considered asthe chosen domicile if the chosen domicile isnot being mentioned in the deed;)

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● the value of the security; and

● a description of the object of mortgage.

The deed of a mortgage may incorporate thefollowing terms and conditions:

● unless there is prior written approval fromthe mortgagee, a pledge which restricts theauthority of the mortgagor lease which isthe object of the mortgage/”security right”,and/or determines or changes the leaseperiod and/or rent received in advance;

● a pledge which restricts the authority of amortgagor to change the model or thearrangement of the object of a mortgage,unless there is a prior written approval fromthe mortgagee;

● a pledge covert authority to a mortgagee tomanage the object of a mortgage on thebasis of a ruling of the chairman of a courtof law whose jurisdiction encompasses thesite of the object of the mortgage if thedebtor defaults with respect to his pledge;

● a pledge conferring authority to a mortgageeto save the object of a mortgage, requiredfor the implementation of the execution orto prevent the waiver or the cancellation ofthe right which shall become the object of amortgage because of non-fulfilment of, or aviolation against, the law;

● a pledge that the first mortgagee shall receivethe right to sell by virtue of his own power theobject of a mortgage if the debtor defaults;

● a pledge given to the holder of the firstmortgagee to the effect that the object of amortgage shall not be cleared from themortgage;

● a pledge that the mortgagor shall notrelinquish his right over the object of amortgage without prior written approvalfrom the mortgagee;

● a pledge that the mortgagor shall receive allor part of the compensation received by themortgagor for the satisfaction of the claimto his receivables if the mortgagorrelinquishes his right over the object or amortgagor if the said right is revoked in theinterest of the public;

● a pledge that the mortgagee shall receive allor part of the insurance money received bythe mortgagor for the satisfaction of theclaims to his receivables if the object of amortgage is insured; and

● a pledge that the mortgagor shall vacate theobject of a mortgage at the time when themortgage is executed.

6. Question: What requirements does thelaw impose upon ABC and B Bank forthe registration of a security over land?In particular, if registration is required,what is the effect of non-registration inrelation to:

(a) the parties, and

(b) third parties?

Answer: The security right over land can onlybe established with the right of ownership, theright to utilise, the right to build and the right touse. Land which has other rights accorded to itcan only be subject to the fiduciary transfersecurity.

The registration of a security over land can onlybe established by the land owner or his proxyproviding a special power of attorney made innotarial deed form.

The security right may be a first security right,second security right, third security right, etc.The fiduciary transfer security, however, can onlybe established once. Therefore there will be nosecond or third fiduciary security.

The establishment of a security right should bein a special form used by the Land Deed Officer(“Pejabat Pembuat Akta Tanah”), or, in the eventthat the certain plot of land is located in a regionwhich has no Land Deed Officer, by the Head ofSub District (“Camat”).

An official fee will be imposed in theestablishment of this land security. Anadditional fee should be paid to the Land DeedOfficer or the Head of Sub District, as the casemay be, and also for the lawyer handling thecase.

7. Question: Is a building erected uponthe land treated as part of the land (sothat if ABC takes security over the landit also includes/covers the building) or, ifnot, what must ABC do to take securityover the building?

Answer: Yes, the building erected upon theland is treated as part of the land. Article 4,paragraph 4 of Law No.4/1996.

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8. Question: Is plant and equipment (e.g.heavy plant and equipment that isclearly fixed or attached in a permanentway to the land or buildings) treated aspart of the land (so that if ABC takessecurity over the land it alsoincludes/covers the plant andequipment) or, if not, what must ABC doto take security over the plant andequipment?

Answer: Yes, any plant and equipment that isclearly fixed or attached in a permanent way tothe land or to buildings is treated as part of theland: Article 4 paragraph 4 of the LawNo.4/1996. However, if the plant andequipment are easily removed, then such plantand equipment will not be deemed to be part ofthe land. It will therefore not be subject tosecurity right, but instead to fiduciary transfersecurity.

Second Scenario –creation/registration of multiplesecurity interests by ABC over thesame landNext, assume that B Bank has taken security overthe land of ABC. C Bank, anotherbank/financier, agrees to make a loan/financefacility available to ABC. ABC agrees to providesecurity to C Bank over the same land that BBank has taken security.

Issues:

1. Question: Does the law in any wayprevent, prohibit (or does it simply notprovide for) multiple secured interestsover land?

Answer: There are two possible ways ofdealing with this situation. First, the new banklender may establish another security right, e.g.a second security right, which will rank lowerthan the previous security right, i.e. the firstsecurity right. Otherwise, the sharing securityarrangement is advisable. The problem is thatthis sharing security agreement can only beconcluded with the consent of the holder of theprevious security right.

2. Question: Would it be easy/difficult forC Bank to discover that B Bank had anexisting security over the land?

Answer: C Bank could discover that B Bankhad an existing security over the land byexamining the original certificate of land, anddoing a direct assessment of the Land RegistrarOffice or the Fiduciary Registrar Office, as thecase may be.

3. Question: Assuming that C Bank tooksecurity over the land, how will prioritybetween B Bank and C Bank bedetermined?

Answer: As the security holder, the bankcannot directly take title over land which issubject to any security right, if there is morethan one security right. The rank among thosesecurity rights will be determined based on thedate of the registration of each of the securityrights. Those registered earlier will rank higher.

In any event, it is possible that the second rankwhich took over the land as security establishedits security earlier than the first rank having thefirst security right over the same plot of land.However, in practice the establishment and theregistration of the second security right can bedone only with the knowledge and consent ofthe first security holder. The fact that theoriginal certificate will normally be in the handsof the first security holder, unless a fake landcertificate has been provided to the new bank,means that the establishment of the secondsecurity cannot be done by the new bank alone.

4. Question: Assuming that C Bank tooksecurity over the land, would the answerto Issue 3 be any different if the securitythat B Bank took over the land was notregistered and C Bank had noknowledge of that security?

Answer: See answer to Second Scenario, Issue3.

Third Scenario – enforcement ofsecurity over landNext, assume that ABC has defaulted in respectof the loans/finance facilities made available to itby B Bank and C Bank such that either or bothof B Bank and C Bank were able to enforce theirrespective security over the land.

Issues:

1. Question: What means or process ofenforcement is available to either orboth of B Bank and C Bank?

Answer: The bank can sell the plots of land,subject to any security right, through publicauction, or by private auction, if the possibility ofprivate auction is clearly stated in theagreement.

2. Question: Assuming that the default ofABC is quite clear, could ABC easilydelay, obstruct or prevent any suchprocess of enforcement?

Answer: No, it cannot.


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3. Question: In general, what period oftime might it take for B Bank or C Bankto complete the process ofenforcement?

Answer: The period of time for completion ofthe process of enforcement is not clearlyregulated by Law No.4/1996. Article 20,paragraph 3 of Law No.4/1996 only provides forthe protection of parties having interest in thesame plots of land. The auction sale can beimplemented only after the lapse of one month’swritten notification made by the security holder,or by the buyer to the parties concerned, and itmust be announced in at least two newspaperscirculating in the area concerned, and/or in thelocal mass media, without any parties statingtheir objection.

4. Question: Assuming that no formalinsolvency proceedings have yet beencommenced/opened in respect of ABC,does a law (other than an insolvencylaw) provide for the payment of ‘priorityclaims’ (for example employee, revenueclaims owed by ABC) out of theproceeds of the sale of the land and inpriority to the secured claims of B Bankand C Bank?

Answer: See answer to Third Scenario, Issue 1.

5. Question: Is it possible that a securityarising by ‘operation of law’ mightintervene upon the secured propertyentitlements of B Bank and C Bank tothe proceeds of the sale of the land?

Answer: Pursuant to Article 1131 of the ICC,any and all movable and immovable property ofa debtor, and present and future debt, shallaccount for his or her personal obligations.However, if a certain plot of land has beenencumbered with a security right or fiduciarytransfer security, as the case may be, then Article1131 of the ICC shall intervene such that thesecurity right or fiduciary transfer security isenforced.

Fourth Scenario – creation/registration/enforcement of apossessory security by ABC overmovable propertyNext, assume that D Bank, anotherbank/financier has agreed to lend/provide afinance facility to ABC. ABC has agreed to giveD Bank security for the loan/finance facility by a‘pledge’ of certain movable property owned byABC (e.g. shares). The result is that D Bank willhave actual possession of the property.

Issues:

1. Question: Does a law govern thecreation of the type of security proposedbetween ABC and D Bank?

Answer: Yes, according to Article 1150 of theICC, a pledge is a right obtained by the creditoron movable properties.

2. Question: What formal requirementsdoes any such law impose upon ABC andD Bank for the creation of this form ofsecurity?

Answer: The pledge arrangement must complywith the provisions of Indonesian Company Law,Law No.1/1995 (in particular Articles 53 and 54),Articles 1150-1160 of the ICC, and the Articlesof Association of the relevant pledgor company.

3. Question: Does a law require that sucha security must be registered?

Answer: This matter is regulated only by Article1153 of the ICC, which states that a pledge willbe effective only upon notification of thatpledge arrangement to the main obligor. Forevidentiary purposes, this pledge of arrangementwill be registered at the share register andspecial share register of the company issuing thepledged shares.

The registration requirement of a pledge ofshares was confirmed by the proposedAmendment to the Company Law, LawNo.1/1995. In the proposed Article 55 of LawNo.1/1995, it is stated that a pledge of sharesmust be registered at the share register andspecial share register, provided for in Article 45of Law No.1/1995.

4. Question: If yes, what requirementsdoes the law impose upon ABC and DBank for the registration of such asecurity interest? [Please refer back toFirst Scenario, Issue 6 in advising on thisissue].

Answer: See answer to Fourth Scenario, Issue 3.

5. Question: Is the registration system safeand reliable? [Please refer back to FirstScenario, Issue 3 for the informationrequired in relation to this issue].

Answer: The registration done by publiccompanies is more safe and reliable incomparison with that done by private/closecompanies. The problem with private/closecompanies is not that not all private companieshave produced/printed their share certificates,and not all private/close companies maintain ashare register and special share register.


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6. Question: Assuming that ABC hasdefaulted in respect of the repayment ofthe loan/finance facility made availableto it from D Bank, what means orprocess of enforcement is available to DBank?

Answer: In case of default by a pledgor, thepledgee shall be entitled to exercise his or herright to sell the pledged shares, but is notentitled to directly take over the pledged sharesand own them: Article 1154 of the ICC. Thepledgee bank may only own the pledged sharesif the sale of the pledged shares is done throughpublic auction or private auction (if it isagreeable by parties and clearly stated in theagreement), or authorised by a court decision.Where the shares being pledged are shares of apublic company, the sale of such shares can bedone through the stock exchange.

7. Question: Could ABC easily delay,obstruct or prevent that enforcementprocess?

Answer: Most likely not.

8. Question: In general, what period oftime might it take for D Bank tocomplete the process of enforcement?

Answer: This matter is not regulated by eitherthe ICC or the Company Law. In practice, theperiod of time that it might take for D Bank tocomplete the process of enforcement willdepend on how this arrangement is reflected inthe terms and conditions of the share pledgeagreement, on good faith and co-operationfrom the pledgor’s side.

9. Question: Assuming that no formalinsolvency proceedings have yet beencommenced/opened in respect of ABC,does a law provide for the payment of‘priority claims’ (e.g. employee, revenueclaims owed by ABC) out of theproceeds of the pledged property and inpriority to the secured claim of D Bank?

Answer: Yes. Article 1149 of the ICC whichsets out general priorities as follows:

● legal fees exclusively arising from auctionand the safeguarding of estates (these costshave priority over pledges, mortgages,security rights and fiduciary transfersecurity);

● reasonable claims for burial costs;

● claims for medical and hospital expenses inconnection with a terminal illness;

● employee wage claims for the current andpreceding year;

● claims for the supply of basic necessities tothe debtor and his family for the precedingsix months;

● claims of boarding schools; and

● claims relating to debts of minors andpersons under guardianship, and claimsrelating to expenses incurred in themaintenance and education of minors.

10. Question: Is it possible that a securityarising by ‘operation of law’ mightintervene upon the entitlement of DBank to the pledged property?

Answer: In general, the debtor will be in aposition to intervene upon the entitlement ofthe bank creditor to the pledged property, only ifthe pledge agreement of the pledged property isdeemed as not yet being effective, e.g. thepledge of shares has not been registered at theshare register or special share register of thecompany issuing the shares.

Fifth Scenario –creation/registration of a non-possessory security by ABC overmovable propertyNext, assume that E Bank, anotherbank/financier, agrees to lend/provide a financefacility to ABC. ABC agrees to provide E Bankwith a non-possessory security over someequipment it owns. The result is that ABCwould retain possession of the equipment.

Issues:

1. Question: Does the law provide/permitsecurity to be taken over equipment?

Answer: Yes. The security will be in the formof a fiduciary transfer security, as referred to inLaw No.42/1999 concerning the Registration ofFiduciary Transfer.

2. Question: How would E Bankdetermine that the equipment is ownedby ABC and is not subject to an existingsecurity interest?

Answer: E Bank would determine this byreviewing the underlying agreement of theequipment, e.g. sale of goods, hire purchaseagreement, purchase by instalment and othertypes of agreement, with similar effect.

It is not easy to decide whether or not certainequipment has been subject to any fiduciarytransfer security. As a guide, investigationsshould begin at the Registrar Office of FiduciarySecurity at the debtor’s domicile, or where theassets are located, and also directly at the site ofthe assets.


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3. Question: What formal requirementsdoes the law impose on ABC and E Bankfor the creation of this form of security?

Answer: Under Article 5 of Law No.42/1999,the formal requirements include the following:

● the identity of the party granting andreceiving fiduciary;

● data on the master agreement guaranteedby the fiduciary;

● specification of the property being theobject of the fiduciary transfer;

● the value of security; and

● the value of the property that is the objectof the fiduciary transfer.

4. Question: What requirements does thelaw impose upon ABC and E Bank forthe registration of this form of security?[Please refer back to First Scenario, Issue6 in advising on this issue]

Answer: The requirements are clearly stated inArticles 11 to 18 of Law No.42/1999 regardingthe Registration of Fiduciary Transfer.

The property with the fiduciary transfer must beregistered at the Fiduciary Registrar Office. Thisprovision also applies to the property which islocated outside the territory of the Republic ofIndonesia. The first Fiduciary Registrar Officewas established in Jakarta and covered the entireterritory of the Republic of Indonesia.

Pursuant to Article 13, paragraph 1 of LawNo.42/1999, the application of Fiduciary Transfershall be submitted by the parties who receivedthe fiduciary. The application of the FiduciaryTransfer shall comprise of the following:

● the identity of the party granting andreceiving fiduciary;

● the date, number of the deed of fiduciarytransfer, and name and domicile of the notarydrawing up the fiduciary transfer deed;

● data on the master agreement guaranteedby fiduciary;

● description of the property being the objectof fiduciary transfer;

● value of security; and

● value of the property that is the object ofthe fiduciary transfer.

The Fiduciary Registrar Office shall issue andsubmit to the party receiving fiduciary a fiduciarytransfer certificate, which includes records ofmatters as intended pursuant to Article 13,paragraph 1 of Law No.42/1999.

If a change arises in respect of the mattersindicated in the fiduciary transfer certificate,then the party receiving fiduciary transfer shallapply for the registration of such changes in theFiduciary Registrar Office, and the FiduciaryRegistrar Office shall register such changes in thefiduciary registry, and shall issue an amendmentstatement which shall form an inseparable partof the proof of fiduciary transfer.

All information concerning the property which isthe object of fiduciary transfer, and is at theFiduciary Registrar Office shall be available to thepublic.

5. Question: Is the registration system safeand reliable? [Please refer back to FirstScenario, Issue 3 for the informationrequired in relation to this issue]

Answer: Yes, the registration is safe andreliable. The Fiduciary Certificate will be issuedby the Fiduciary Registration Office: Article 14,paragraph 1 of Law No.42/1999.

6. Question: Assume that the ‘equipment’mentioned above comprised motorvehicles. Does that alter any of theadvice given above? In particular, apartfrom any general requirement toregister a security over motor vehicles,does such a security have to be alsoregistered at, for example, a motorvehicle registration/licensing office?

Answer: Fiduciary transfer security can be appliedand established over motor vehicles. There aretwo scenarios to consider, namely where there aremotor vehicles still at the warehouse, and wherethere are motor vehicles which have already beensold under a hire purchase or purchase byinstalment arrangement. In the first scenario, therequirement for detailed information for each ofthe individual motor vehicles may be waived byproviding a general description on the number ofstock and types of motor vehicles, year ofproduction, and stock of related spare parts. Inthe second scenario, details of individual motorvehicles must be provided.

Sixth Scenario –creation/registration of multiplenon-possessory securities by ABCover the same movable propertyNext, assume that E Bank has taken security overthe equipment of ABC. F Bank, anotherbank/financier, agrees to make a loan/financefacility available to ABC. ABC agrees to provideF Bank with a non-possessory security over thesame property that has been secured to E Bank.


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Issues:

1. Question: Does the law prevent,prohibit (or does it simply not providefor) multiple non-possessory securedinterests over the same property?

Answer: According to Article 8 of LawNo.42/1999, the fiduciary transfer may only begranted to one fiduciary security holder.However, fiduciary security may be granted tomore than one party jointly receiving fiduciary, orto the proxies or representatives of such partiesreceiving fiduciary. This means that grantingfiduciary to more than one party jointly receivingfiduciary shall be in the context of the jointreceiver being in a joint consortium credit.

2. Question: Would it be easy/difficult forF Bank to discover that E Bank had anexisting non-possessory security over theequipment?

Answer: It is not easy. As a guide, the partywhich wants to know whether certainequipment has been subject to any fiduciarytransfer security should begin investigations atthe Registrar Office of Fiduciary security at thedomicile of the debtor, at the domicile of thegrantor of fiduciary security, or where theequipment is located.

3. Question: Assuming that F Bank tooksecurity over the equipment, how willpriority between E Bank and F Bank bedetermined?

Answer: In the case of joint receivers under acertain joint consortium, the priority between EBank and F Bank will depend upon the termsand conditions agreed on by parties to the jointconsortium. Otherwise, they will be determinedin accordance with the pari pasu principle.

4. Question: Assuming that F Bank takessecurity over the equipment, would theanswer to Issue 3 be any different if thesecurity that E Bank took over theproperty was not registered and F Bankhad no knowledge of that security?

Answer: See answer to Sixth Scenario, Issue 3.

Seventh Scenario – enforcement ofnon-possessory security overmovable propertyNext, assume that ABC has defaulted in respectof the loans/finance facilities made available to itby E Bank and F Bank such that either or both ofE Bank and F Bank were able to enforce theirrespective securities over the equipment.

Issues:

1. Question: What means or process ofenforcement is available to either orboth of E Bank and F Bank?

Answer: Article 29 of Law No.42/1999regulates the procedure for the execution of thefiduciary transfer, which is as follows:

● the enforcement execution is done only bythe party receiving fiduciary;

● the sale of the property being the object offiduciary transfer to be implementedthrough public auction, and the collectionproceeds to be made available to the partyreceiving fiduciary security; and

● private sale can only be conducted if it isclearly stated in the terms of agreementconcluded between the party granting andthe party receiving fiduciary, if the highestpossible price favourable for the parties canbe reached.

2. Question: Could ABC easily delay,obstruct or prevent that process ofenforcement?

Answer: In general, the company grantingfiduciary security will have no right to intervene,obstruct or prevent the process of enforcement.

3. Question: In general, what period oftime might it take either E Bank or FBank to complete the process ofenforcement?

Answer: See answer to Third Scenario, Issue 3.The sale of the property which is subject to afiduciary security will be implemented only onemonth after written notice is given by thegrantee of fiduciary security to the grantor:Article 29, paragraph 2 of Law No.42/1999.

4. Question: Assuming that no formalinsolvency proceedings have yet beencommenced/opened in respect of ABC,does a law (other than an insolvencylaw) provide for the payment of ‘priorityclaims’ (e.g. employee/revenue claimsowed by ABC) out of the proceeds ofthe sale of the equipment and in priorityto the secured claims of E Bank and FBank?

Answer: Pursuant to Article 27 of LawNo.42/1999, the ranks of priority are as follows:

● the party receiving fiduciary shall have theright of priority over the creditors;

● the priority right shall be the right of theparty receiving fiduciary to collect paymentof his other account receivable from the


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proceeds of the execution of property beingthe object of the fiduciary transfer; and

● the priority right of the party receivingfiduciary shall not be revoked for reason ofbankruptcy and or liquidation of the partygranting fiduciary.

5. Question: Is it possible that a securityarising by ‘operation of law’ mightintervene upon the entitlements of EBank and F Bank to the proceeds of thesale of the equipment?

Answer: See answer to Fourth Scenario, Issue10.

Eighth Scenario –creation/registration of a non-possessory security by ABC over‘inventory’, possibly includinginventory acquired in the futureNext, assume that G Bank, anotherbank/financier, has agreed to lend/provide afinance facility to ABC. ABC has agreed to giveG Bank a non-possessory security for theloan/finance facility over its inventory of rawmaterials and finished goods, an inventory thatwill change from time to time as finished goodsare manufactured and sold and new rawmaterials are supplied.

Issues:

1. Question: Does the law providefor/permit security to be taken overinventory?

Answer: The fiduciary law, Law No.42/1999,provides that the object of the fiduciary securitycan be any property that is capable of beingowned and disposed of. It can be tangible orintangible property, registered or unregisteredproperty, and movable or immovable property,provided that such property does not qualify forencumbrance with a security right (“HakTanggungan”). This is regulated by LawNo.4/1996, and by a hypothec as provided inArticle 314 of the ICC, and Article 1162 of theICC. Based on this definition, inventory isincluded within the meaning of property, asdefined by Law No.4/1999.

2. Question: What formal requirementsdoes the law impose upon ABC and GBank for the creation of this form ofsecurity?

Answer: See answer to Fifth Scenario, Issue 3.

3. Question: What requirements does thelaw impose upon ABC and G Bank forthe registration of a security overinventory? [Please refer back to FirstScenario, Issue 6 in advising on thisissue]


4. Question: Is the registration systemsafe and reliable? [Please refer back toFirst Scenario, Issue 3 for theinformation required in relation to thisissue]

Answer: Yes, it is safe and reliable.

5. Question: Is it possible for ABC and GBank to create the security in such a waythat it will apply both to raw materialsand finished goods?

Answer: Yes, it is possible. See answer toEighth Scenario, Issue 1.

6. Question: Is it possible for ABC and GBank to create the security in such a waythat it will apply to a constantlychanging inventory of raw materials andfinished goods (i.e. a security over afteracquired/future property)?

Answer: Pursuant to Article 9, paragraph 1 ofLaw No.42/1999, in addition to property that isalready owned at the date a fiduciary security isgranted, the property that will be owned in thefuture can also be encumbered with a fiduciarysecurity. In this regard, it is not necessary toconclude a new and separate fiduciary securityagreement, since title to the said property hasalready been transferred in anticipation. Thepossibility of encumbering future property withfiduciary securities will facilitate the financing ofstock purchase of raw materials and ancillarymaterials.

Ninth Scenario – enforcement of anon-possessory security overinventoryNext, assume that ABC has defaulted in respectof the loan/finance facility made available to itby G Bank, such that H Bank is entitled toenforce its security over the inventory.

1. Question: What means or process ofenforcement is available to G Bank?

Answer: See below where the answers forNinth Scenario, Issues 1 to 6 are combined.


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2. Question: Can such process ofenforcement be easilydelayed/obstructed/prevented by ABC?


3. Question: In general, what period oftime might it take G Bank to completethe process of enforcement?


4. Question: Assuming that no formalinsolvency proceedings have yet beencommenced/opened in respect of ABC,does a law provide for the payment of‘priority claims’ (e.g. employee, revenueclaims owed by ABC) out of theproceeds of the sale of the inventoryand in priority to the secured claim of GBank?


5. Question: Is it possible that a securityarising by ‘operation of law’ mightintervene upon the entitlement of GBank to the proceeds of the sale of theinventory?


6. Question: If JS, a supplier, supplied rawmaterials to ABC under a ‘retention oftitle’ contract (such that JS was entitledto claim ownership of or a security overthe raw materials until ABC had paid forthem in full), what would be theposition between G Bank and JSregarding entitlement/priority to thoseraw materials? [Note: to avoidunnecessary complication, assume thatthe raw materials as supplied by JS toABC continue to exist in their ‘raw’ stateand that they have not beenincorporated into finished goods]

Answer: Ninth Scenario, Issues 1 to 6combined – see the answers provided for theEighth Scenario. They shall mutatis mutandisapply herein.

Tenth Scenario – creation/registration/enforcement of asecurity by ABC over ‘receivables’(book debts)Next, assume that H Bank, another bank/financier,has agreed to lend/provide a finance facility toABC. ABC has agreed to give H Bank security forthe loan/finance facility over receivables (bookdebts) owed to ABC by its trade debtors.

Issues:

1. Question: Is the creation of such asecurity possible? [Note: If such acommercial arrangement would not beregarded as a security but rather as afactoring/absolute assignment/transferof ownership arrangement, please stateso and take that into account inaddressing the following issues]

Answer: As described above, the coveragedefinition of property under the Fiduciary Law of1999 is very wide. It can include tangible andintangible, registered and unregistered property,movable and immovable property, property thathas already been obtained, and property thatwill be obtained in the future. As a result,receivables are included in the definition ofproperty, and can therefore can be subject tofiduciary security.

2. Question: What formal requirementsdoes the law impose on ABC and H Bankfor the creation of a security overreceivables?

Answer: See answer to Eighth Scenario, Issue 2.

3. Question: What requirements does thelaw impose on ABC and H Bank for theregistration of a security overreceivables? [Please refer back to FirstScenario, Issue 6 in advising on thisissue]




5. Question: Is it possible for ABC and HBank to create the security in such a waythat it will apply to and be valid over aconstantly changing ‘stock’ ofreceivables?

Answer: It is regulated by Articles 29 to 34 ofLaw No. 42/1999.


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6. Question: Assuming that ABC hasdefaulted in repayment of theloan/finance facility made available to itby H Bank, such that H Bank is entitledto enforce its security over thereceivables, what means or process ofenforcement is available to H Bank?

Answer: In the event of default by the debtoror the party granting fiduciary, the execution ofproperty being the object of fiduciary transfermay be carried out in the following manner:

● enforcement of execution title by the partyreceiving fiduciary;

● sale of the property being the object offiduciary transfer at the sole discretion of theparty receiving fiduciary through publicauction and collecting settlement of accountreceivables from the proceeds of sale; and

● private sale based on an agreementbetween the party granting and the partyreceiving fiduciary, if the highest possibleprice favourable in the party concerned canbe reached.

The party granting fiduciary shall be obliged tosubmit the property that is the object offiduciary transfer in the context of execution ofthe fiduciary transfer concerned.

In the event that the property being the objectof fiduciary transfer consists of commodities orsecurities tradeable on the market or the stockexchange, the sale may be conducted at theaforementioned place in accordance with theprevailing laws and regulations.

Article 34 of Law No.42/1999 provides that inthe event that execution exceeds the securedamount, the party receiving fiduciary shall beobligated to return the excessive amount to theparty granting fiduciary. In the event that theexecution proceeds are not sufficient to coverthe settlement of the debt, the debtor shallremain liable for the outstanding debt.

7. Question: Can ABC easily delay,obstructed or prevent such enforcementprocess?

Answer: No, they do not have any legal rightto do so.

8. Question: In general, what period oftime might it take H Bank to completethe process of enforcement?

Answer: See answer to Seventh Scenario, Issue3.

.9. Question: Assuming that no formalinsolvency proceedings have yet beencommenced/opened in respect of ABC, doesa law provide for the payment of ‘priorityclaims’ (e.g. employee, revenue claims owedby ABC) out of the proceeds of thecollection of the receivables ahead of theclaim of H Bank?

Answer: See answer to Fourth Scenario, Issue9, and Seventh Scenario, Issue 4.

10. Question: Is it possible that a securityarising by ‘operation of law’ mightintervene upon the entitlement of HBank to the proceeds of the collection ofthe receivables?

Answer: See answer to Third Scenario, Issue 5,Fourth Scenario, Issue 10 and Seventh Scenario,Issue 5.

Eleventh Scenario – supply ofgoods to ABC by a supplier on a‘retention of title’ contractNext, assume that JS, a supplier of goods, hasagreed to supply goods to ABC on credit and onterms that, although possession of the goods isgiven to ABC, title in the goods remains with JSuntil payment for the goods has been made in full.

Issues:

1. Question: Would such a commercialarrangement be treated as a security?

Answer: Article 1, paragraph 2 of LawNo.42/1999 states that a fiduciary securityconstitutes a collateral for the repayment ofdebt. The types of debt that can be secured bya fiduciary security is described in Article 1,paragraph 7 and Article 7 of Law No.42/1999.It is clear that the types of debt that can besecured by a fiduciary security are not limited tothe types of debt referred to in those twoarticles. A debt can be the result of anobligation arising out of contract.

Article 1234 of the ICC consists of contractualobligations to give something, to do something,or an obligation to refrain from doingsomething. An obligation on the part of asupplier to deliver the goods sold to a purchasertherefore falls under the definition of debt, andcan therefore be secured by a fiduciary security.

2. Question: If yes, what formalrequirements does the law impose onABC and JS for the creation of such asecurity?

Answer: See answer to Eighth Scenario, Issue 2and Tenth Scenario, Issue 2.


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3. Question: What requirements does thelaw impose on ABC and JS for theregistration of such a security? [Pleaserefer back to First Scenario, Issue 6 inadvising on this issue]

Answer: See answer to Eighth Scenario, Issue 3and Tenth Scenario, Issue 3.

4. Question: How does the law resolve asituation in which a supplier of goodsclaims retention of title in those goods(whether by way of security orotherwise) and another person claims anon-possessory security over inventory?[Note: Please refer back to NinthScenario, Issue 6]

Answer: A fiduciary security can only beestablished once over certain property. If thefiduciary security has become effective due to itsregistration at the Registrar Office of FiduciarySecurity, then the fiduciary holder is the partyhaving privilege rights on the property being thesubject of a fiduciary security.

5. Question: Assuming that ABC defaultsin payment of the price payable for thegoods supplied by JS, what process ofenforcement is available to JS?

Answer: See answer to Tenth Scenario, Issue 6.

6. Question: In general, what period oftime might it take JS to complete theprocess of enforcement?

Answer: See answer to Seventh Scenario, Issue3.

7. Question: Assuming that no formalinsolvency proceedings have yet beencommenced/opened in respect of ABC,does a law provide for the payment of‘priority claims’ (e.g. employee, revenueclaims owed by ABC) out of thevalue/proceeds of the goods ahead ofthe claim of JS?

Answer: See answer to Third Scenario, Issue 4,Fourth Scenario, Issue 9 and Seventh Scenario,Issue 4.

8. Question: Is it possible that a securityarising by ‘operation of law’ mightintervene upon the entitlement of JS tothe goods?

Answer: See answer to Third Scenario, Issue 5,Fourth Scenario, Issue 10, and Seventh Scenario,Issue 5.

Twelfth Scenario –creation/registration of a lease toABC of movable propertyNext, assume that ABC wants to acquireequipment for use in its business operations butdoes not want to purchase the equipment. KL,a lease/finance company, has agreed to purchasethe equipment and then to lease the equipmentto KL for a term of years. A provision of theagreement provides that ABC may become theowner of the equipment upon the payment ofthe full lease and other charges.

Issues:


Answer: The essence of a fiduciary security isthat there is a transfer of right of ownership.Such transfer of the right of ownership,however, is done in a fiduciary transfer with theexpress agreement that the property of the titlewhich has been transferred to the fiduciarysecurity grantee will remain in the possession ofthe fiduciary security grantor, in the interest of,and on behalf of, the fiduciary security grantee.The commercial arrangement referred to in thetwelfth scenario would not be covered andtreated as a fiduciary security.

2. Question: If yes, what formalrequirements does the law impose onABC and KL for the creation of such asecurity?

Answer: Given that the commercialarrangement is not a fiduciary security, Issues 2to 7 are no longer relevant.

3. Question: What requirements does thelaw impose on ABC and KL for theregistration of such a security? [Pleaserefer back to First Scenario, Issue 6 inadvising on this issue]

Answer: N/A

4. Question: Assuming that ABC defaultsin payment of the lease charges, whatprocess of enforcement is available toKL?

Answer: N/A

5. Question: In general, what period oftime might it take KL to complete theprocess of enforcement?

Answer: N/A


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6. Question: Assuming that no formalinsolvency proceedings have yet beencommenced/opened in respect of ABC,does a law provide for the payment of‘priority claims’ (e.g. employee, revenueclaims owed by ABC) ahead of the claimof KL to the equipment?

Answer: N/A

7. Question: Is it possible that a securityarising by ‘operation of law’ mightintervene upon the entitlement of KL tothe equipment?

Answer: N/A

Thirteenth Scenario –creation/registration of a securityby ABC over ‘foreign’ propertyNext, assume that ABC owns movable propertysituated in a foreign jurisdiction and agrees togive security over that property to L Bank, abank/financier that carries on business in theplace in which ABC is incorporated.

Issues:

1. Question: Does a law of the place ofincorporation of ABC in any wayintervene upon or seek to regulate thecreation of such security?

Answer: The answer will depend on the kindof movable goods that are being referred to, thesecurity that can be placed on the movablegoods, the location of such goods, whether thegoods are owned by a public or privatecompany, how the law of the countries

governing such goods will regulate the matter,and whether there is any bilateral or multi lateralagreement which relates to the issues concludedupon by Indonesia.

2. Question: Does a law of the place ofincorporation of ABC impose anyrequirement for the registration of sucha security in the place of incorporationof ABC?

Answer: It will also depend on the type ofmovable property. A satellite owned by anIndonesian company in its business activities isnot governed by the laws and regulations ofIndonesia alone.

3. Question: Does a law of the place ofincorporation of ABC seek to regulatethe process of enforcement that isavailable to L Bank?

Answer: A sufficient response to this questionrequires the provision of more detailedinformation.


A. Issues relating to informationabout secured property andsecurity holders1. Question: Would it be easy/difficult to

determine, by reference to a publicregister, the security interests that hadbeen created by ABC, the property thatwas the subject of those securityinterests and the identity of the holdersof those security interests?

Answer: A distinction must be made betweensecurity interests established prior to theissuance of the Security Right Law, LawNo.4/1996, and the Fiduciary Transfer SecurityLaw, Law No.42/1999; and security interestsestablished after the enactment of those newlaws on security.

Prior to the enactment of Law No.4/1996, landwith the right of ownership, the right to utiliseand the right to build were subject to hypothec.This hypothec was registered at the NationalLand Agency (“Badan Pertanahan Nasional” –“BPN”). Other types of land title, including land

Part Two – Commencement/Opening ofInsolvency Proceedings and the Effect onSecured Transactions

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with the right to use, the right to rent and theright to cultivate forest products, cannot behypothecated. They may be subject to fiduciarytransfer of ownership for security purposes. It isdifficult to determine this type of fiduciarysecurity, as it is not required to be registered,and is not available at the public registrar. Afterthe issuance of Law No.4/1996, hypothec onland is to be replaced by a security right (“HakTanggungan”). This right can be established onland with the right of ownership, the right toutilise, the right to build and the right to use.Hak Tanggungan is registered at BPN, and isavailable to public security on land not coveredby Hak Tanggungan that is not registered, andas such is difficult to determine.

After the issuance of Law No.42/1999, propertywhich is owned by the debtor, including landnot covered by Hak Tanggungan, can be subjectto fiduciary security. Unlike the old fiduciarysecurity, their fiduciary security is registered atthe Fiduciary Registrar Office, and is available tothe public. The old fiduciary security is notrequired to be registered and is not available atthe public registrar, and is therefore difficult todetermine.

Pledges are only required to be registered at theShare Registrar and Special Share Registrar ofthe company issuing such shares. Accordingly,the data and information are not available at thepublic registrar, and become difficult todetermine.

2. Question: Would it be easy/difficult todetermine whether the security/propertyinterests involving ABC were in thenature of security interests or non-security interests?

Answer: We believe that it is not difficult todetermine whether a certain property is coveredby the terms of a security interest or non securityinterest.

3. Question: In cases where ABC hascreated multiple security interests inrespect of the same property, would itbe easy/difficult to determine thepriority between the competing securityholders?

Answer: Unless the transactions involve fakeland certificates, it is not difficult to determinethe ranks of a number of Hak Tanggungan thatmay be placed on the same plot of land. This isbecause all those other subsequent HakTanggungan must be consented to by theprevious holder of Hak Tanggungan, and alsoregistered at the BPN.

B. Issues relating to validity ofsecured property interests1. Question: Does the Insolvency Law

provide for the possible invalidity oravoidance of any of the securityinterests created by ABC as a result ofsome imperfection in the creation ofsecurity interest (e.g. for failure toobserve the formalities imposed by thelaw for the creation of a security interestor failure to observe the requirementsof the law relating to registration)?

Answer: The Bankruptcy Law does not regulatethis matter.

2. Question: Does the insolvency lawprovide for the possible invalidity oravoidance of any of the securityinterests created by ABC (despite that asecurity interest may have been createdand perfected in accordance with otherrelevant law) by the application ofprovisions relating to creditorpreferment, transactions at anundervalue or fraudulent transactions?

Answer: It is clearly stated in Article 41 toArticle 42 of Law No.4/1998, that:

In the interest of the bankruptcy estate,annulment may be requested of all legal acts ofa debtor who has been declared bankrupt,which were performed one year before thedeclaration of bankruptcy was rendered; and

Annulment may only be effected if it can beproven that at the time of the performance ofsuch acts the debtor and the party involved in thetransaction knew, or should have known that thesaid legal act would result in damage to creditors.

C. Issues relating to interferencewith substantive secured propertyrights1. Question: In a case of insolvency, how

is ‘secured property’ (or other‘proprietary’ interests in property)treated in relation to the estate of thedebtor (i.e. is the property included inthe estate of the debtor or excludedfrom the estate) and how are the claimsof the secured creditors treated?

Answer: In general, creditors will rank paripasu. They therefore have equal rights to saleproceeds of the bankrupt estate in property.However, pursuant to Article 56 of LawNo.4/1998, any creditor holding a hypothec, apledge or other security right in rem may enforcetheir rights as if there were no bankruptcy.


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It is further stated in Article 56 that theenforcement right of such creditors shall be stayedfor a time period of at most 90 days. Theenforcement of secured creditors and rights(referred to in Article 56 of Law No.4/1998) withinthe said 90 days can only be implemented withthe approval of the receiver or supervisory judge.

2. Question: If the actual or anticipatedproceeds or value from thesale/foreclosure of the secured propertyis less than the amount of the debt claimof the secured creditor, can the securedcreditor claim the balance in theinsolvency proceedings as an unsecuredclaim?

Answer: The distribution of the sale proceedsamong the unsecured creditors will depend onthe decision of the unsecured creditors. Securedcreditors shall have no right to cast votes at thatmeeting, and as such, decisions taken byunsecured creditors in most cases will not haveregard to the position of the secured creditor, andwill therefore not favour the secured creditors.

3. Question: Other than as mentioned inB1 & 2 above, does the insolvency law inany way provide for the invalidity/non-recognition of any of the securedproperty interests created by ABCdespite that such interest has beenvalidly created and perfected under therelevant secured transactions law?

Answer: See answer, to B1 and B2.

D. Issues relating to stay/suspension of enforcement powersin relation to secured propertyinterests1. Question: Does the insolvency law

provide for any type of stay/suspensionupon the enforcement rights of any ofthe secured creditors of ABC?

Answer: Yes.

2. Question: If so, at what point in timewould such stay/suspension operate?

Answer: Pursuant to Article 56A of LawNo.4/1998, the stay/suspension would operatefor 90 days, counted from the date thebankruptcy decision is rendered.

3. Question: Does such stay/suspensionoperate ‘automatically’ (e.g. throughforce of a law in consequence of sometriggering event such as thecommencement/opening of insolvencyproceedings) or may it be only imposedby a court order?

Answer: The stay/ suspension operatesautomatically.

4. Question: If such stay/suspension doesnot operate automatically or until acourt order has been made, does theinsolvency law provide for the possibilityof an ‘interim’ or ‘temporary’stay/suspension?

Answer: Since the Bankruptcy Law applies anautomatic stay/suspension of enforcementrights, no interim suspension of enforcement isregulated.

5. Question: If some of the transactionsreferred to in Part One of the case studyare not regarded as secured propertyinterests (but rather asproprietary/ownership rights), does anystay/suspension of enforcement rightsextend to and apply to thosetransactions?

Answer: The suspension of enforcement rightsapplies only to the secured creditors, who shallhave the right to enforce their rights as if therewere no bankruptcy. See Article 56 of LawNo.4/ 1998.

6. Question: Does the stay/suspensionapply even though a security holder hascommenced/almost completed theenforcement process?

Answer: Generally yes, but exemption ispossible if it is approved by a Receiver or theSupervisory Judge.

E. Issues relating to liquidationAssume that ABC is to be liquidated under theInsolvency Law:

1. Question: Does any stay/suspension ofthe enforcement powers of a securedcreditor apply or continue to apply?

Answer: Pursuant to Article 57 of LawNo.4/1998, a secured creditor must, at thelatest, enforce its right within 2 months of thecommencement of the state of insolvencyreferred to in Article 168 of Law No.4/1998.


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2. Question: For what period of timewould such stay/suspension operate?

Answer: See answer to E1. After the expiry ofsuch a period, the receiver shall claim the assetswhich were subject to security rights to be soldin accordance with the normal proceedingswithout prejudice to the secured creditors rightto receive proceeds from the sale of such assets.

3. Question: Does the law provide that anaffected security holder may apply forsuch stay to be lifted?

Answer: The Bankruptcy Law is silent on thisissue.

F. Issues relating to priority claims1. Question: Does the insolvency law

provide for ‘priority claims’ to be paidahead of the claims of a security holder?

Answer: The Bankruptcy Law does notspecifically regulate this matter. However, if welook at the provisions of Articles 1138 to Article1139, and Article 1149 of the ICC, the rank ofpriority claims to be paid to the secured creditorsis below the priority payment to the court andauction costs and expenses, and taxes.

2. Question: If so, what are these priorityclaims and is there any conflict betweenthem and any priority claims asmentioned in Part One of the case study(for example in scenarios 3, 4, 7, 9 & 10)?

Answer: In summary, the assets of thebankrupt estate will be applied to creditors’claims in the following order of priority:

● court and auction costs and expenses;

● taxes;

● claims of secured creditors;

● privileged creditors; and

● unsecured creditors.

G. Issues relating to enforcement1. Question: Does the insolvency law

provide for the enforcement of securedproperty interests or does it leave this tobe determined by other law?

Answer: The Indonesian Bankruptcy Lawcontains certain specific rules relating to theenforcement of secured property, e.g. Articles56, 57 and 58 of the Law No.4/1998. For otherrelated matters not specifically regulated in theBankruptcy Law, the Indonesian Civil Code andthe Indonesian Commercial Law shall apply.

2. Question: Does the insolvency lawprovide for the enforcement/realisationof secured property interests throughthe insolvency representative (officeholder)?

Answer: The Indonesian Bankruptcy Law alsoregulates matters relating to the enforcement ofsecured property by insolvency representatives.Articles 63-66 are concerned with theSupervisory Judge, Articles 67-70B areconcerned with the Receiver, and Articles 71-76,are concerned with the Creditors’ Committee.

H. Issues relating to corporaterescue processes [rehabilitation;reorganisation; restructuring]Assume that ABC is under the ‘rescue’ processof the insolvency law, but has not yet reachedthe point of approval of a plan of reorganisation

1. Question: Does any stay/suspension ofthe enforcement powers of securedcreditor apply or continue to apply?

Answer: Any petition of suspension ofpayment of debt shall be submitted by thedebtor to the competent Commercial Court.The petition shall be accompanied by acomposition plan which includes an offer ofpayment of all or part of the debts to theunsecured creditors: Article 213, paragraph 1 ofLaw No.4/1998. Based on the submission of thisby the debtor, the court shall immediately granta provisional suspension of obligation forpayment of debt.


Answer: The stay/suspension would operatefor 45 days from the issuance of the suspensionof payment of debt by the Commercial Court:Article 214, paragraph 2 of Law No.4/1998.

3. Question: Does the law provide for thelength of the stay to be extended?

Answer: Immediately after the issuance of theprovisional suspension of payment debt by thecourt, the court shall summon the debtor andthe creditor to appear at the court session at thelatest 45 days from the date on whichprovisional suspension of debt is granted: Article214, paragraph 3 of Law No.4/1998.

If, after the hearing, a permanent suspension ofpayment is approved, the said suspension andthe extension thereof may not exceed 270 daysfrom the granting date of the provisionalsuspension of payment: Article 217, paragraph 4of Law No.4/1998.


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Answer: Prior to the granting of a provisionalpayment obligation of debt, there is no possibleway for creditors to lift such a suspension ofpayment. The chance is available at the hearingat the court discussing possible permanentsuspension to the petition.

5. Question: If so, what conditions must beestablished before such stay may be lifted?

Answer: There are no specific provisionsregulating the conditions to enable theprovisional suspension of payment obligations tobe lifted. However, Article 217A of the LawNo.4/1998 stipulates that if the period of timefor suspension of payment expires because theunsecured creditors do not approve the grantingof a permanent suspension of payment of debt,or the permanent suspension or the extensionthereof has been granted, but no agreement canbe reached on the composition plan up to thetime limit stated in the Bankruptcy Law, i.e. 270days from the granting of the provisionaldecision on the suspension of payment debtobligation, then the administrator shall, on theday of expiration, notify the court, and the courtshall declare the debtor bankrupt by the nextday at the latest.

6. Question: Does the law provide thatsecured property may be used duringthe period of stay?

Answer: Pursuant to Article 226(1) of LawNo.4/1998, the debtor may not, without theadministrator’s approval, take actions for themanagement or the transfer of rights to any partof his other assets during the suspension ofpayment obligation of debt.

7. Question: Does this ‘use’ extend to thesale or other disposal of the securedproperty?

Answer: See answer to H6.

8. Question: What conditions must befulfilled before secured property may besold?

Answer: The obligations of the debtor arisingfrom acts performed without obtainingauthorisation from the administrator may onlybe imposed upon the estate of the debtor in sofar as the act benefits the debtor: Article 226,paragraph 2 of Law No.4/1998.

9. Question: If a plan is proposed in respectof ABC, what voting rights and powers dothe security holders mentioned in PartOne of the case study have?

Answer: As stated in Article 217, paragraph 5of Law No.4/1998, a permanent suspension ofpayment obligation shall be granted by the courtif it is approved by more than half of theunsecured creditors whose rights areacknowledged in attendance, and representingat least two thirds of all claims which areacknowledged in attendance of the session.Any dispute arising between the unsecuredcreditors and the administrator regarding thevoting rights of the said unsecured creditors shallbe resolved by the supervisory judge.

10. Question: Does the law provide thatany of the secured creditors mentionedin Part One of the case study form aseparate class of creditors for voting andplan approval matters?

Answer: The secured creditors without theright to cast votes at the meeting form aseparate class of creditors for voting and planapproval matters, unless the said securedcreditors have waived their rights as securedcreditors, and become unsecured creditors.

11. Question: If a majority vote in favourdoes this bind all security holders?

Answer: See answer to H9.

I. Issues relating to ‘new money’financing of an insolventcorporation1. Question: Does the law provide for the

possibility of raising additional workingcapital to enable ABC to continue inbusiness?

Answer: Pursuant to Article 226, paragraphs 1,3 and 4 of Law No.4/1998, the debtor mayobtain loans from third parties in the frameworkof increasing the value of the estate debtor uponauthorisation being granted by the administrator.

2. Question: If so, does this permit therepayment of such ‘new credit’ to rankas a ‘super priority’, ahead of thesecurity holders mentioned in Part Oneof the case study?

Answer: Super priority shall not rank ahead ofthe security holders rights as secured creditors.


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3. Question: Is the raising of such ‘newcredit’ subject to the consent of securedcreditors, approval of creditors generallyor an order of the court?

Answer: Approval from secured creditors shallmean approval from secured creditors generally.


A. General issues relating to ofsecurity interests – rating, interestrate factor, barriers to securedlending, intersection problemareas.1. Question: In terms of quality and

quantity, what rating would lendersapply between the forms of securityinterest examined in Part One (i.e. whichare the most popular and why)?

Answer: No general rating shall be applied inall types and circumstances of transactions. Therating which is applied will depend on theparties involved, good faith, the reputation ofthe parties, the nature of transactions, thenature of the businesses involved, prospect ofbusiness, and the role and functions expectedfrom the collateral security.

2. Question: If it is possible, pleaseprovide average term of loan andinterest rates charged by lenders tocorporate borrowers for loans securedby:

● Mortgage over land;

● Pledge over movable property;

● Security over inventory;

● Security over receivables;

● Security over equipment; and

● Security over motor vehicles.

Answer: Though it is not easy to determine,the rank will generally be as follows:

● security right;

● hypothec/mortgage;

● fiduciary security;

● pledge; and

● other types of security.

3. Question: Having regard to the issuesraised in Parts One and Two, whatwould the banking/finance sectorconsider are the mainbarriers/drawbacks to secured lending?

Answer: The banking/ finance sector wouldconsider the main barriers/drawbacks to securedlending to be:

● Fake certificate, which cause the establishmentof security rights without the knowledge ofthe previous securities rights holder;

● The bad faith of the debtor to establishmore than one fiduciary security;

● The absence of a public registrar for pledgeof shares;

● The lack of clear regulations on the possibleestablishment of fiduciary security by aforeign grantor;

● Corruption issues;

● Weaknesses in law enforcement whichcreate legal uncertainty; and

● The absence of regulations on cross-bordersecured transactions.

4. Question: What areas of the‘intersection’ cause the most problemsor are most problematic in thebanking/finance sector?

Answer: See A3.

5. Question: What areas are consideredto be the main areas of target forreform or improvement?

Answer: The main areas for improvement are:

● The quantity and quality of human resourcesinvolved;

● Increasing socialisation of laws and regulations(especially new laws and regulations);

● Law enforcement and legal certainty;

● Co-ordination/co-operation between thetechnical department and/governmentagencies;

Part Three

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● The degree of wealthy civil servants; and

● Minimising corruption.

6. Question: Do any of the issuesmentioned in Parts One or Two causeproblems in relation to informalworkout processes?

Answer: All of the issues mentioned in A5 areclosely related to the problems faced by theinformal workout process.

B. Issues relating to internalcorporate record of creation ofsecured property interests1. Question: Regardless of the

requirements of any law to registersecured property interests in a publicregister, does any law require that ABCmust maintain an internal register or bookof every security interest created by ABCand, if so, is such register or book availablefor inspection by a prospective creditor?

Answer: The Indonesian Company Law, LawNo.1/1995; the Capital Market Law, LawNo.8/1995; and their proposed amendments;and the Foundation Law, Law No.16/2001,indirectly require the company/foundation tomaintain an internal register or book of securityinterest, by requesting the company to provideFinancial Reports to be submitted, discussed andpossibly approved at a shareholders meeting.

The internal registration of pledge shares hasbeen imposed by the Indonesian Civil Law, theCompany Law and the Capital Market Law.

C. Issues concerning law reformand development1. Question: In relation to the areas

covered in the case study, are there anyproposed reforms/developments to thelaw/s in your country that might affectany of the issues raised in Parts One andTwo of the case study?

Answer: The proposed reforms/developmentsthat might affect issues raised in Parts One andTwo of the case study are:

● Amendment to Company Law, LawNo.1/1995;

● Amendment to Capital Market Law, LawNo.8/1998;

● Amendment to Law on Foundation, Law No.16/2001;

● Amendment to the Bankruptcy Law, LawNo.4/1998;

● New draft Law on Financial ServicesAuthority.

D. Issues concerning domestic andinternational investment andfinance1. Question: In relation to the remedy of

‘foreclosure’, are there any restrictionsthat intrude upon the power of aforeign lender to take possession, sell,become the ‘owner’ of or otherwisedispose of secured property?

Answer: There are restrictions in the case ofland. The eligibility of foreigners is limited tobeing the owner of land, with the right to useand the right to rent, and does not extend toland with the right of ownership, the right toutilise and the right to build.

2. Question: Is it considered thatdomestic/foreign lending might beincreased by reform/improvements tothe secured lending and/or insolvencylaw processes?

Answer: Most likely yes.

E. Issues concerning cross-borderimplications1. Question: Assume that ABC is either:

(a) a foreign company operating in yourjurisdiction; or

(b) a wholly owned subsidiary (andincorporated and operating in yourjurisdiction) of a foreign company;and

assume further that insolvencyproceedings are commenced/opened inrespect of ABC or the parent of ABC in itsplace of incorporation (a foreignjurisdiction) and the foreign insolvencyrepresentative of ABC wishes to preventany enforcement or recovery action by thesecured creditors or property owners asmentioned in Part One of the case study.

In your jurisdiction, how might theforeign insolvency representative seekprotection from such enforcement action?

Answer: Indonesian Bankruptcy Law containsno provisions regulating matters related to cross-border insolvency. However, we believe that asuspension of payment of debt obligation can befiled by a wholly owned company established inIndonesia, if such a company is the debtorcompany, and not by the parent company as ashareholder in the wholly owned companysubsidiary.


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Draft Country Report for Singapore Conference Intersection of Secured Transactions andInsolvency Law Regimes

Korea

Part OneCreation, Registration and Enforcement of Secured TransactionsAsia Business Corporation (‘ABC”) is a company incorporated in your country and conductsits business from there.



RETA 5975



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Issues:

1. Question: In your country would theusual nature of the ownership or title ofABC to the land be freehold, leasehold orother (e.g. land use right)?

Answer: The ownership of ABC to the landwould be freehold, unless subject to any otherrestrictions.


Answer: It is necessary, rather than required bylaw, to register the ownership of the land so thatone can assert its ownership against a thirdparty.


Answer: Korea has a computerised system ofimmovable property registration in place. Eacharticle of immovable property may have singleregistry, rather than multiple registry, providedthat in the event that a single article of propertyhas multiple registry by mistake, the subsequentregistration in time becomes invalid, unless theprior registration in time is void. To determinewhether ABC is the owner of the land inquestion, one could access, with ease, theregistry of the immovable property.

In general, the owner of immovable propertystated in the relevant registry is presumed to bethe true owner of such property. Likewise, inpractice, secured transactions are made in relianceupon the registry. In a strict legal sense, however,there is no guarantee that entries in the registryare entirely true or reliable. For this reason, in theevent that a person stated as the owner of land inthe registry is not in fact the true owner, anyperson that purchased the land in reliance onentries in the registry will not be deemed to bethe owner of the land. Accordingly, strictlyspeaking, a mere entry of ABC as the owner ofthe land in the relevant registry cannot necessarilybe relied upon. Nonetheless, such a defect hardlyundermines the general reliability of Korea’sregistration system.


Answer: Yes. The proposed security that ABCwill create over the ownership of ABC to theland in question should be registered as well.


Answer: For the creation of a security overland, it is necessary that ABC and B Bank enterinto a security agreement. In addition, such anagreement should be registered so that B Bankcan assert the validity of the security rightagainst a third party.



(b) third parties?

Answer: For the registration of a security overland, both parties should submit to thecompetent registry office documentary evidenceof the security agreement mentioned above, andfile an application for registration. Although thefailure of registration does not affect the effectof the security right created between the parties,a third party’s creation and registration ofsecurity over the land in question before thesecurity right created between ABC and B Bankis registered prohibits B Bank from asserting thepriority of its security right.


Answer: Such a building is treated as acompletely separate article of immovableproperty from the land. Therefore, a securityover the land does not cover the building. Forthe creation of security over the building, bothparties should enter into and register a separatesecurity agreement for the building.

8. Question: Is plant and equipment (e.g.heavy plant and equipment that isclearly fixed or attached in a permanentway to the land or buildings) treated as


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part of the land (so that if ABC takessecurity over the land it alsoincludes/covers the plant and equipment)or, if not, what must ABC do to takesecurity over the plant and equipment?

Answer: For security purposes, any heavy plant orequipment that is clearly fixed or attached to landin a permanent way will be treated in accordancewith the Factory Mortgage Act. In practice, afactory mortgage is where land, buildings andequipment in a factory site is incorporated into afactory estate, over which a security can becreated. In such cases, it is common thatequipment, as well as land and buildings in thefactory site, are provided as security.


Issues:


Answer: No. The law does not prevent orprohibit multiple secured interests over land.


Answer: The presence of an existing securityover the land can be easily checked with therelevant registry.


Answer: Priority will be determined inaccordance with the order of registration ofsecurity.


Answer: Again, priority will be determined inaccordance with the order registered. If C Bank

registered its security before B Bank did, thenthe security interest taken by C Bank is prior tothe security interest taken by B Bank.


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Third Scenario – [enforcement ofsecurity over landNext, assume that ABC has defaulted in respectof the loans/finance facilities made available to itby B Bank and C Bank such that either or bothof B Bank and C Bank were able to enforce theirrespective security over the land.

Issues:1. Question: What means or process of

enforcement is available to either orboth of B Bank and C Bank?

Answer: Generally speaking, both B Bank andC Bank may file an application for participationin an auction of the land at issue, for thepurpose of enforcement of security with thecompetent court. Such application must beaccompanied with documents evidencing thepresence of the security interest.


Answer: If ABC is unable to repay debts, it isalmost impossible for ABC to prevent or delaythe process of enforcement.


Answer: It would generally take 6 to 8 months.However, it may take much longer if the auctionof the land continues to be unsuccessful.


Answer: The Housing Lease Protection Act, theFramework Act on National Taxes, the Local TaxAct, the Labor Standard Act and other actsprovide for the payment of priority claims,including claims to a small amount of key leasedeposit (not more than 12 to 16 million KoreanWon, as determined in each region), wagespayable to employees for the service for the lastthree months, severance payment for the lastthree months, compensation for employmentinjury and taxes under certain conditions, shallbe in priority to any secured claims.


Answer: No.


Issues:


Answer: Under the Korean Civil Code (the“KCC”), a security right by which D Bank hasactual possession of any movable propertyprovided as security is either pledge or keunpledge.


Answer: ABC and D Bank must enter into apledge agreement, and ABC must deliver anymovable property to D Bank as pledgee.


Answer: There is no registration system inrespect of movable property in Korea, and anysecurity right over such movable property maynot be registered. Shares provided as pledge,however, may be registered in a shareholder’sregistry as a “registered pledge”, which seldomtakes place in practice.

4. Question: If yes, what requirementsdoes the law impose upon ABC and DBank for the registration of such asecurity interest? [Please refer back toFirst Scenario, Issue 6 in advising on thisissue]

Answer: In so far as a registered pledge of sharesis concerned, ABC and D Bank must enter into apledge agreement, and ABC must deliver therelevant shares to D Bank as pledgee, and havethe name and address of the pledgee entered in


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the relevant shareholder’s registry and such namestated on the relevant share certificates.


Answer: N/A.


Answer: If a foreclosure agreement has beenmade, D Bank may acquire the movable propertyprovided as security. Alternatively, D Bank maysell it at its discretion to apply the proceeds fromthe sale to the repayment of debt. D Bank mayalso file an application for auction of themovable property so that D Bank can share inproceeds from the auction.




Answer: It varies, depending on thecharacteristics and the difficulty in the realisationof the secured property. However, in normalcircumstances, it would generally take 6 months.




Answer: It is possible when the pledge interestis created by operation of law. Such security iscreated in favour of a lessor of land, building orother structures against ABC as lessee, if, on thebasis of its claims arising out of the lease againstthe lessee, the lessor has attached any movableproperty owned by ABC attached to such land,building or other structures. In such case,

priority in entitlement to dividends will bedetermined in accordance with the priority intime between the registration of attachment bythe lessor and the acquisition of security interestby D Bank.


Issues:


Answer: Although not expressly provided bylaw, a Korean court has acknowledged andrecognised the creation of Transfer Mortgage(Yang-do Dam-bo) over the entirety ofequipment. Under Yang-do Dam-bo, theownership of the debtor is transferred to thecreditor in order to secure the fulfilment of thedebtor’s obligation. If the obligation is fulfilled,the debtor recovers the ownership to theproperty. If not, the ownership is finally vestedin the creditor.

In addition, there is a Factory Mortgage, underwhich land, buildings and equipment in afactory site is incorporated into a factory estate,over which a security can be created. In such acase, it is generally the situation that equipment,as well as land and buildings in the factory site,are provided as security.

In respect of other company equipment,including construction equipment (heavy plant),ships, automobiles and aircraft, it is possible tocreate a mortgage over such equipment byregistering the mortgage in a separate ledger.See also the answer to Fifth Scenario, Issue 6.


Answer: In respect of a Yang-do Dam-bo, sinceKorean law does not provide a system ofregistering rights in movable property, it isimpossible for E Bank to determine whether theequipment is owned by ABC.

On the other hand, a factory estate under theFactory Mortgage Act may not include anyarticle subject to rights of others. Accordingly, E


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Bank will be able to access the registry of thefactory estate to identify a list of equipment andverify whether the equipment is owned by ABC.


Answer: For the creation of a Yang-do Dam-bo, a Yang-do Dam-bo, a creation agreementmust be entered into, and the relevantequipment must be delivered by an “agreementon possession.” An “agreement on possession”is deemed as a type of possession under Koreanlaw, in which a mere agreement on the transferof possession is deemed as transfer ofpossession to a transferee, provided that thetransferee agrees that the transferor is in directpossession of the relevant article. In otherwords, the transferee is in constructivepossession of the relevant equipment by“agreement on possession”.

For the creation of a Factory Mortgage, a factorymortgage agreement must be entered into anda list of the relevant factory estate submitted tothe competent registry office in order toeffectuate the registration for preservation ofownership, which must be followed within 10months by the registration for the creation ofmortgage.


Answer: It is impossible to register a Yang-doDam-bo over movable property.

For the creation of a mortgage over a factoryestate, a mortgage agreement must be enteredinto in respect of the factory estate and theregistration for preservation of ownership mustbe effected and followed by the registration forthe creation of mortgage within 10 monthsthereafter. In respect of an unregisteredmortgage over a factory estate, the mortgageecan not assert the presence of such a mortgageagainst a third party.


Answer: Where an application is filed forregistration for the purpose of preserving theownership, any rights or claims in connectionwith the equipment constituting the factoryestate should be reported to the registrar within

a certain period. Under the Factory MortgageAct, such rights and claims that fail to bereported during the period are deemed as notexisting. In this light, the registration system fora factory estate is considered reliable.


Answer: For the creation of a mortgage overmotor vehicles, in order for the mortgage to bevalid, such mortgage must be registered in therelevant automobile ledger. If not so registered,such mortgage is invalid notwithstanding anagreement between the creditor and the debtorto create a mortgage over the motor vehicle.However, for the creation of a Yang-do Dam-boover a motor vehicle, the relevant transfer, not amortgage, must be registered in the relevantautomobile ledger.


Issues:


Answer: Multiple non-possessory securedinterests are permissible over the same movableproperty.


Answer: As far as a factory mortgage isconcerned, one can clearly verify whether anyother mortgage is created over the relevantequipment by examining the relevant registry ofthe factory estate.

As far as a Yang-do dam-bo is concerned, it isalmost impossible to discover whether any other


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security is created over the relevant equipmentdue to the absence of a public notice system.


Answer: As far as a factory mortgage isconcerned, since priority is determined in theorder registered, the security taken by E Bankwould have priority.

As far as a Yang-do dam-bo is concerned, thebank that takes actual possession of themovable property, regardless of the order ofsecurity creation, would have priority.


Answer: As far as a factory mortgage isconcerned, priority is determined in accordancewith the order registered. If F Bank finishes theregistration of its security right before E Bankdoes, the security right taken by F Bank is priorto the security right taken by E Bank.

As far as a Yang-do Dam-bo is concerned, seethe answer to Sixth Scenario, Issue 3.


Issues:


Answer: Both E Bank and F Bank may file anapplication for participation in an auction of afactory estate for the purpose of enforcement ofits security with the competent court. Such anapplication must be accompanied withdocuments evidencing the presence of thesecurity interest. E Bank or F Bank, as the casemay be, will be then entitled to the dividends ofany proceeds from the sale of the factory estate.




Answer: In normal circumstances, it would take6 to 8 months.




Answer: Under Korean law, in the situationwhere the equipment is a ship, a holder ofmaritime lien over the ship takes priority inrepayment to both E Bank and F Bank as holdersof security interests in repayment.

Meanwhile, a holder of lien, e. g. a repairmanthat repaired the equipment, over theequipment covered by a factory mortgage orprovided as Yang-do Dam-bo, may refuse toreturn the equipment until the paymentobligation in connection with the equipment isfulfilled, and thereby is in practice entitled torepayment in priority to security holders.

Eighth Scenario –creation/registration of a non-possessory security by ABC over‘inventory’, possibly includinginventory acquired in the futureNext, assume that G Bank, anotherbank/financier, has agreed to lend/provide afinance facility to ABC. ABC has agreed to giveG Bank a non-possessory security for theloan/finance facility over its inventory of rawmaterials and finished goods, an inventory thatwill change from time to time as finished goodsare manufactured and sold and new rawmaterials are supplied.


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Issues:


Answer: Although not expressly provided bylaw, a Yang-do Dam-bo is available, by which asecurity right is created over movable propertyupon the condition of not possessing theproperty. See also the answer to Fifth Scenario,Issue 1.


Answer: A Yang-do Dam-bo agreement mustbe entered into between the parties, and therelevant inventory must be delivered to G Bankby an “agreement on possession”. See also theanswer to Fifth Scenario, Issue 3.


Answer: It is impossible to register a Yang-doDam-bo over movable property.


Answer: N/A.


Answer: It is possible to create a Yang-do Dam-bo over raw materials, as well as finished goodswith an agreement between the parties.


Answer: A Yang-do Dam-bo may be createdover a constantly changing inventory, as long asit is specified as a whole, for example, by anagreement that “a security right is created overthe inventory in No. 1 warehouse.”

Ninth Scenario – [enforcement of anon-possessory security overinventoryNext, assume that ABC has defaulted in respectof the loan/finance facility made available to itby G Bank, such that H Bank is entitled toenforce its security over the inventory.


Answer: G Bank may sell at its discretioninventory delivered from ABC, and applyproceeds from the sale to the repayment.


Answer: ABC may substantially delay theenforcement of security by rejecting the deliveryof inventory to G Bank. Even after the deliveryof inventory from ABC to G Bank, ABC mayrepay debts and collect the inventory at any timeprior to G Bank’s disposal of the inventory.


Answer: Since the sale of inventory will bemade by G Bank at its own discretion, it isimpossible to estimate the length of timerequired.


Answer: Since a Yang-do Dam-bo is not astatutory secured interest, there is no law whichprovides priority of other rights over a Yang-doDam-bo.


Answer: No, it is impossible.


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Answer: Since JS continues to retain theownership to the raw materials under theretention of title contract, the provision by ABCto G Bank of the raw materials as Yang-do Dam-bo would constitute the provision as Yang-doDam-bo of an article owned by another person,and would therefore be legally invalid.Therefore, G Bank is deemed as having acquiredfrom ABC no right in the raw materials. The factthat G Bank is a bona fide security holder willnot alter the answer in the foregoing.


Issues:


Answer: Yes, the creation of such a security ispossible. It is deemed as creating a securityinterest in the form of a pledge over receivables.


Answer: A pledge agreement must be enteredinto by and between ABC and H Bank. Also,either ABC or H Bank should obtain consentfrom ABC’s trade debtor on such pledge, or givea notice thereof to ABC’s trade debtor.


Answer: It is impossible to register a pledgecreated over receivables.


Answer: N/A.


Answer: A security may be created over aconstantly changing stock of receivables, as longas it is specified.


Answer: H Bank may demand that the tradedebtor fulfil its obligation, or the pledge may beenforced through mandatory execution by acourt.


Answer: See the answer to Third Scenario,Issue 2.


Answer: It is impossible to estimate the lengthof time required if H Bank demands the tradedebtor to fulfil the obligation. If a pledge isenforced through mandatory execution by acourt, the total length of time required dependsupon the trade debtor’s cooperation. Assumingthat the trade debtor does not take legal action,it would take about 6 months.


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9. Question: Assuming that no formalinsolvency proceedings have yet beencommenced/opened in respect of ABC,does a law provide for the payment of‘priority claims’ (e.g. employee, revenueclaims owed by ABC) out of theproceeds of the collection of thereceivables ahead of the claim of HBank?

Answer: See the answer to Third Scenario,Issue 4.


Answer: No, it is impossible.

Eleventh Scenario – supply ofgoods to ABC by a supplier on a‘retention of title’ contractNext, assume that JS, a supplier of goods, hasagreed to supply goods to ABC on credit and onterms that, although possession of the goods isgiven to ABC, title in the goods remains with JSuntil payment for the goods has been made infull.

Issues:


Answer: Although it would serve as a securityfor the payment in substance, it is treated legallyas a special type of sale, not as a security.


Answer: N/A.


Answer: N/A.


Answer: Since the title on the goods remainswith JS, and since any person that has acquireda non-possessory security for goods not ownedby the debtor is not deemed as having validlyacquired such security, then as discussed in theanswer to Ninth Scenario, Issue 6, the ownershipof JS would have priority over non-possessorysecurity.


Answer: Since the title on the goods hasremained with JS, JS could simply recover thegoods, without having to take other processesof enforcement.


Answer: N/A.


Answer: There is no law which provides for thepriority of other rights over the ownership of JS.


Answer: Any holder of lien over the goodsowned and supplied by JS may have priority inrepayment, by rejecting the delivery of goodsuntil any receivables arising in connection withthe goods are repaid in full.


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Issues:


Answer: Although it would serve as financingby way of security in substance, precedents ofthe Korean courts consider it as a special type ofagreement, rather than a security agreement.


Answer: N/A.


Answer: N/A.


Answer: Since the title on the goods wouldremain with JS, JS could simply recover thegoods from ABC until the lease and othercharges are paid in full.


Answer: N/A.


Answer: No.


Answer: Any holder of lien over the equipmentleased out by KL to ABC may take priority inrepayment, by rejecting the delivery of theequipment until any receivables arising inconnection with the equipment are repaid in full.


Issues:


Answer: Article 19(1) of the PrivateInternational Act of Korea provides: “realproperty rights concerning movables andimmovables and other rights subject toregistration shall be governed by the law of thejurisdiction where the property is situated (the“lex situs”)”. In this light, a security createdover movable property situated in a foreignjurisdiction must be governed by the law of thatforeign jurisdiction.


Answer: N/A.


Answer: Korean law provides that a securityover movable property shall be enforced underthe jurisdiction of the domicile court for thelocation of that movable property. As such,although ABC is incorporated in Korea, the lawof Korea cannot regulate the process ofenforcement of security over movable propertysituated in a foreign land.


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Answer: It would be easy to determine theproperty and identify the security interestholders.


Answer: Generally, it would be easy, but insome cases, it could be difficult.


Answer: It would be easy, because prioritybetween the competing security holders isdetermined by the order in which the security iscreated.



Answer: Although insolvency laws do notprovide for such invalidity or avoidance, anyimperfection in the creation of security interestsinvalidates such security interests under other

acts, including the KCC. Further, the CorporateRe-organisation Act provides that a receiver isentitled to dispute any secured claims reported.


Answer: Yes. Please refer to Section K of theReport produced by Lee & Ko.



Answer: In bankruptcy or compositionprocedures, although secured property isincluded in the estate of the debtor, a holder ofsecured claims may enforce its claims separatelyfrom the procedures for bankruptcy orcomposition. In the case of a corporate re-organisation, a holder of secured claims may notseparately enforce its claims, and such claims areredeemed in accordance with the re-organisation plan approved by the interestedparties’ meeting, and authorised by the court.


Answer: Yes.



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Answer: In the case of composition, a holderof composition claims may deny any actconducted by a debtor company outside theordinary course of business, or notwithstandingan objection thereto from the receiver.

In a case of bankruptcy or corporate re-organisation, the registration of the securitycreation may be denied if such registration ismade at least 15 days after the relevanttransaction becomes effective, and thebeneficiary creditor has knowledge of the factthat there was an application for paymentsuspension or insolvency procedures against thedebtor company. Further, the right of denialmay also be exercised against a subsequentpurchaser of such security having knowledge ofthe presence of reason for denial.

D. Issues relating tostay/suspension of enforcementpowers in relation to securedproperty interests1. Question: Does the insolvency law


Answer: While the Bankruptcy Act and theComposition Act are silent on that matter, theCorporate Re-organisation Act provides for suchstay/suspension with respect to the securedcreditors’ rights.


Answer: Such stay takes effect when thecompetent court issues an individual order ofstay at any time during the period from the filingof an application for re-organisation to thecommencement of re-organisation procedures.Note that the DUIA proposes a comprehensiveorder of stay. Once the re-organisationprocedures have commenced, the enforcementof all security interests and all procedures inprogress will be suspended under the CorporateRe-organisation Act.


Answer: See the answer to D2.


Answer: See the answer to D2.

5. Question: If some of the transactionsreferred to in Part One of the case studyare not regarded as secured propertyinterests (but rather asproprietary/ownership rights), does anystay/suspension of enforcement rightsextend to and apply to those transactions?

Answer: Yes.


Answer: Yes.



Answer: No. In the process of bankruptcy, norestrictions are imposed on the enforcement ofthe security interest.


Answer: N/A.


Answer: N/A.



Answer: Yes.


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Answer: Priority claims are referred to aspriority claims in the proceedings ofcomposition, bankruptcy estate claims in theproceedings of composition, and commonbenefit claims in the process of corporate re-organisation, all of which are similar in nature.

Though referred to as priority claims in Part Oneof the case study, such priority claims do nothave priority in the process of insolvency unlessprescribed by the insolvency laws. However, allclaims mentioned earlier in Part One of the casestudy are recognised as priority claims under theinsolvency laws, leaving no possibility of conflictin priority.

However, exceptionally, in the process ofcorporate re-organisation, tax claims arising priorto the commencement of corporate re-organisation procedures, except as subject towithholding at source and not due until thecommencement of such procedures, do nothave priority.



Answer: The enforcement of secured propertyinterests shall be executed in accordance withother laws.


Answer: Yes, through the trustee (inbankruptcy and composition) or the receiver (incorporate re-organisation).

H. Issues relating to corporate rescue processes[rehabilitation; reorganisation; restructuring]

Assume that ABC is under the ‘rescue’ processof the insolvency law, but has not yet reachedthe point of approval of a plan of reorganisation


Answer: Yes.


Answer: Such stay/suspension would operateuntil the conclusion of the rehabilitationproceedings. However, the stay/suspensionwould be lifted if the secured creditors obtainthe separate approval of the Court.


Answer: No.


Answer: Generally, no. Only tax collectingagencies can apply for the stay to be lifted.

5. Question: If so, what conditions mustbe established before such stay may belifted?

Answer: There are no specific requirements. Itdepends on the Court’s discretion.


Answer: It does not contain any expressprovisions on the matter, but the law is generallyconstrued such that secured property may beused to the extent necessary in the ordinarycourse of business.


Answer: Yes. However, any sale or disposal ofcertain assets outside the ordinary course ofbusiness is subject to approval of the competentcourt in the corporate re-organisationproceedings, or to approval of the trustee in thecomposition proceedings.


Answer: No uniform conditions are imposed,but it is understood in principle that the sale ofsecured property must neither infringe uponinterests of secured creditors, nor have anadverse effect upon any rehabilitation effortsmade by the debtor company.


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9. Question: If a plan is proposed inrespect of ABC, what voting rights andpowers do the security holdersmentioned in Part One of the case studyhave?

Answer: Secured creditors will have votingrights in proportion with the respective amountsof secured claims held by them. A plan ofrehabilitation may be approved with theaffirmative votes of at least ¾ of the votingrights held by the entire class of securedcreditors.


Answer: Yes.


Answer: At least ¾ of a vote in favour will bindall secured creditors, including dissentingcreditors.



Answer: Yes.


Answer: The claims of new credit extended donot have priority over the secured creditors inthe proceedings of composition or bankruptcy,but they do have priority in the corporate re-organisation proceedings as a common benefitclaims. However, the Korean Supreme Court hasruled that in applying proceeds from the disposalof the specific assets that are provided assecurity for the secured claims, the securedclaims have priority to common benefit claims.


Answer: It is subject to approval of the court.


Part ThreeA. General issues relating to ofsecurity interests – rating, interestrate factor, barriers to securedlending, intersection problemareas.1. Question: In terms of quality and

quantity, what rating would lendersapply between the forms of securityinterest examined in Part One (i.e.which are the most popular and why)?

Answer: Immovable property mortgage is mostpreferred, since immovable property has a muchhigher value as security than other securityforms.

2. Question: If it is possible, pleaseprovide average term of loan andinterest rates charged by lenders tocorporate borrowers for loans securedby:

● Mortgage over land;

● Pledge over movable property;

● Security over inventory;

● Security over receivables;

● Security over equipment; and

● Security over motor vehicles.

Answer: Assuming other conditions are thesame, an interest rate generally increases in thefollowing order:

● Mortgage over land

● Security over equipment

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● Security over receivables

● Pledge over movable property

● Security over inventory

● Security over motor vehicles


Answer: We are of the view that Korean banksdo not consider any of the issues raised in PartsOne and Two as serious drawbacks or barriers tosecured lending. Generally speaking, the mostimportant factors to banks in secured lendingwould be the sufficiency of the value of securedproperty itself. Also, a senior security interestcreated would be a major negative factormaking a bank reluctant to secure lending.


Answer: One of the problematic factors is thatthe priority between common benefit claims andsecured claims are not clearly determined, andthe fact that there is no guarantee by law that asecured creditor can realise in full the liquidationvalue of the security in the corporate re-organisation proceedings. However, asdiscussed in the Cross-Border Insolvency chapter,the DUIA has provisions to guarantee theliquidation value of a security.

In bankruptcy proceedings, the super priority oftax claims has severely prohibited securedcreditors from receiving the dividends ofproceeds.


Answer: See the answer to A4.

6. Question: Do any of the issuesmentioned in Parts One or Two causeproblems in relation to informal workout processes?

Answer: One of the most problematic issues isthat it is difficult to force those creditorsdissenting from a restructuring plan, e. g. a debtrestructuring, to be bound by the plan agreed bythe creditors. Another is that there are no legalgrounds to guarantee that the new credit shallbe repaid with priority.


requirements of any law to registersecured property interests in a publicregister, does any law require that ABCmust maintain an internal register orbook of every security interest createdby ABC and, if so, is such register orbook available for inspection by aprospective creditor?

Answer: Korean law does not require thepreparation and maintenance of such acorporate record in addition to the requirementof registration in the public register.



Answer: The DUIA, recently announced, doesnot contain any of the matters that might affectthe answers to the issues raised in Parts One andTwo of the case study. It will take at least a fewmonths for the DUIA to become a complete bill.



Answer: There are some obligations to file areport under the Foreign Exchange TransactionAct and the Foreigner’s Land Acquisition Act,which are procedural in nature. As long as aclaim arises validly and legally, there are norestrictions on the acquisition or disposal of anysecured property based on such a claim.


Answer: Laws concerning secured lending havebeen established in a considerably systematicmanner, and are substantially efficient.


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Moreover, secured lending has been used as oneof the most typical tools in financing. Anyamendment to the laws would therefore notresult in a substantial increase in secured lending.




assume further that insolvencyproceedings are commenced/opened inrespect of ABC or the parent of ABC inits place of incorporation (a foreignjurisdiction) and the foreign insolvencyrepresentative of ABC wishes to preventany enforcement or recovery action bythe secured creditors or property ownersas mentioned in Part One of the casestudy.

In your jurisdiction, how might theforeign insolvency representative seekprotection from such enforcementaction?

Answer: It is not possible under the presentlaw. The DUIA, however, permits the foreigninsolvency representative to file with a Koreancourt an application for approval of foreigninsolvency procedures, which approval will begiven or rejected by the court within a month.Until such approval is made, the court may takepreservation orders, including issuing an order ofstay of enforcement action, in order to protectthe debtor’s property and the creditors’ interest.Upon approval of the foreign insolvencyprocedures, the foreign insolvency representativemay either apply for the commencement ofdomestic insolvency procedures, or participate inthe same procedures in progress. It is alsoproposed that the DUIA will provide that theKorean court may cooperate with the foreigninsolvency representative, or a foreign courtabout other matters if necessary.


Supplementary Questions1. Question: To what regional inter-

governmental arrangements relating toeconomic corporation, facilitation oftrade, investment protection, or mutualrecognition of administrative or judicialprocess is the subject country a party?(Such arrangements might includeregional treaties, non-treatyagreements, cooperative schemes, orregular forums at the ministerial orofficial level.)

Answer: No answer provided.

2. Question: Which (if any) are the othercountries that are party to sucharrangements.

Answer: No answer provided

3. Question: Does any such arrangementrefer to and deal with insolvency, eitherspecifically or within the generality itsterms?


4. Question: Which ministry or agencyhas or would have responsibility fornegotiating and administeringarrangements on mutual recognition inthe field of insolvency?


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Philippines

Part One – Creation, Registration andEnforcement of Secured TransactionsAsia Business Corporation (‘ABC”) is a company incorporated in your country and conductsits business from there.



RETA 5975



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Issues:

1. Question: In your country would theusual nature of the ownership or title ofABC to the land be freehold, leasehold orother (e.g. land use right)?

Answer: The usual nature of ownership or titleof ABC to the land would be freehold orownership in fee simple (i.e. ownership which isfull and absolute).


Answer: The Philippines follows the TorrensSystem of land registration. Under this system,once a parcel of land has been registered, acertificate of title covering the land is issued.The original of the certificate of title remains onfile with the Office of the Register of Deedshaving jurisdiction over the land. A duplicatecopy of the title is issued to the owner. Oncethe title is issued, the title becomesincontrovertible after one year from the date theland was registered. When the owner sells theland, his certificate of title is cancelled and anew certificate is issued to the new owner.


Answer: It would be relatively easy todetermine that ABC was the owner of the landin question, so long as a copy of the title overthe property is available. A Torrens title isgenerally conclusive evidence of the ownershipof the land. A strong presumption exists thatTorrens titles are regularly issued and that theyare valid. The certificate of title serves asevidence of an indefeasible title to the property.Third parties can rely on the face of the title asto the ownership. Actual title checks andverification may also be conducted manually inthe appropriate Registry of Deeds where theproperty is located. There is, however, nocentral registry, nor is the registry computerbased. The registration must be made with theoffice of the Register of Deeds havingjurisdiction over the territory where the propertyis located.


Answer: The system of land registration extendsto registration of the proposed security that ABCwill create in favour of B Bank. Under Section 60of Presidential Decree No. 1529, otherwiseknown as the Property Registration Decree,mortgages and leases shall be registered in themanner provided in Section 54 (see Question 6).The owner of registered land may mortgage orlease it by executing the deed in a form sufficientin law. Such a deed of mortgage or lease and allinstruments which assign, extend, discharge orotherwise deal with the mortgage or lease mustbe registered, and take effect upon the title onlyfrom the time of registration.


Answer: Security over land is created by theexecution of a real estate mortgage by ABC infavour of B Bank. The real estate mortgageagreement must be signed by the personsexecuting the same, in the presence of twowitnesses, who shall sign the instrument aswitnesses to the execution. The real estatemortgage agreement shall appear in a publicdocument (i.e. a document acknowledgedbefore a notary public or other public officerauthorised by law to take acknowledgment). Inaddition, in order that a mortgage is validlyconstituted, the document in which it appearsmust be recorded in the Register of Deeds.However, while an unrecorded mortgage is notbinding on third parties who have no actualknowledge of the mortgage, it is neverthelessbinding between the parties.



(b) third parties?

Answer: Under Section 54 of the PropertyRegistration Decree, all interests in registeredland less than ownership shall be registered byfiling with the Register of Deeds the instrumentwhich creates or transfers, or claims suchinterests, and by a brief memorandum made bythe Register of Deeds upon the certificate of title


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and signed by him. A similar memorandum shallalso be made on the owner’s duplicate. Theparties are also required to pay the appropriateregistration fee(s) imposed by the Register ofDeeds prior to registration.

If the instrument is not registered or recorded,the mortgage is nevertheless binding betweenthe parties, but not to third parties who have noactual notice of the mortgage.


Answer: In the absence of any stipulation tothe contrary, a mortgage executed over a parcelof land includes all buildings, structures andother improvements on the land, even if thedeed of mortgage does not mention theinclusion of these buildings, structures or otherimprovements.


Answer: Plant and equipment which are clearlyfixed or attached in a permanent way to theland or building take on the character ofimmovable or real property. A real estatemortgage executed over the land includes suchplant and equipment attached to the land,unless there is a stipulation to the contrary.

If, however, machinery is not permanentlyaffixed to a building or to a parcel of land, thenwhether it is categorised as real or personalproperty depends on several factors, of whichthe most important is whether or not themachinery tends directly to meet the needs of anindustry or works i.e., whether the industry canfunction properly without it. If the machinerytends to meet the needs of an industry or works,then it is real, even if by nature it is movable.

Second Scenario –creation/registration of multiplesecurity interests by ABC over thesame landNext, assume that B Bank has taken security overthe land of ABC. C Bank, another

bank/financier, agrees to make a loan/financefacility available to ABC. ABC agrees to providesecurity to C Bank over the same land that BBank has taken security.

Issues:


Answer: Philippine law does not prohibit, nordoes it provide, for multiple secured interestsover land.


Answer: It is relatively easy to discover whetherB Bank has an existing security over the land,assuming the mortgage in favour of B Bank wasduly registered and recorded with the Register ofDeeds. The title over the land would contain anannotation of the prior mortgage in favour of BBank. Actual title check and verification withthe appropriate Register of Deeds where theland is located will also show a similarannotation in the original title over the land ofthe prior mortgage in favour of B Bank.

On the other hand, it may be more difficult todiscover whether B Bank has an existingmortgage over the land if the mortgage isunregistered. As mentioned, however, thisunregistered mortgage in favour of B Bank willnot bind C Bank absent actual knowledge of theexistence thereof by C Bank.


Answer: Assuming both mortgages have beenduly registered, priority will be determined basedon the date of registration. Prior registration ofthe mortgage in favour of B Bank means thatthe mortgage in favour of B Bank will besuperior over the mortgage in favour of C Bank.


Answer: If the mortgage in favour of B Bankover the land was not registered and C Bank hadno knowledge thereof, C Bank’s mortgage willbe superior to and would obtain priority overthat of B Bank’s mortgage.


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Issues:


Answer: A real estate mortgage may beforeclosed either judicially or extrajudicially. Inforeclosure proceedings, the property given byway of security is sold at public auction and theproceeds of the sale are then used to pay orsettle the obligations secured by the mortgage.It is foreclosed judicially if the mortgagee files acomplaint in court for foreclosure of themortgage pursuant to the Rules of Court. It isforeclosed extrajudicially if the mortgagee causesthe sale of the property in a public auction inaccordance with Act No. 3135, through a sheriffor notary public, pursuant to a power orauthority granted to the mortgagee in themortgage deed.


Answer: From a strict legal point of view, it isrelatively difficult to delay, obstruct or preventforeclosure. There have been instances,however, where Philippine courts have beenlenient in granting temporary restraining ordersor writs of preliminary injunctions againstforeclosures. In addition, the relative ease inobtaining stay orders in rehabilitationproceedings, which have the effect of restrainingenforcement, delay the process of enforcementof security.


Answer: It may take from 1 to 3 years toenforce a mortgage judicially. An extrajudicialforeclosure of mortgage generally takes around1-3 months to complete.


Answer: There is no law which provides for thepayment of priority claims out of the proceeds ofthe sale of the land and in priority to the securedclaims of B Bank and C Bank.


Answer: We are not aware of any possiblesecurity arising by operation of law which mayintervene upon the secured propertyentitlements of B Bank and C Bank to theproceeds of the sale of the land. The proceedsof the sale of the foreclosed property will beused to pay or settle the obligations secured bythe mortgage and related costs. If the proceedsof the sale exceed the secured obligations of BBank and related costs, the excess will be paid tothe junior encumbrancer (e.g. secured obligationof C Bank). Any excess will be paid back to themortgagor. If there is a balance due to themortgagee after applying the proceeds of thesale, the mortgagee is entitled to recover thedeficiency though an ordinary action forcollection.

We bring to your attention, however, a casedecided by the Philippine Supreme Court,Carried Lumber Co. vs. ACCFA, 63 SCRA 411(1975), wherein a “materialman’s lien”recognised under Article 2242 (4) of the CivilCode of the Philippines, i.e. claims of furnishersof materials used in the construction,reconstruction or repair of buildings, shared prorata with the claim of the mortgagee over thewarehouse the materials of which werefurnished by the former, despite the absence ofinsolvency proceedings. As explained below, themajority of the law practitioners in thePhilippines believe that Articles 2241-2242 ofthe Civil Code, which refer to concurrence andpreference of credits only apply when there areinsolvency proceedings and the debtor has beendeclared insolvent. However, the CarriedLumber Co. decision has not been overturned.


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Fourth Scenario –creation/registration/enforcementof a possessory security by ABCover movable propertyNext, assume that D Bank, anotherbank/financier has agreed to lend/provide afinance facility to ABC. ABC has agreed to giveD Bank security for the loan/finance facility by a‘pledge’ of certain movable property owned byABC (e.g. shares). The result is that D Bank willhave actual possession of the property.

Issues:


Answer: Book IV, Title XVI, Chapters 1 and 2(Articles 2085 to 2123) of the Civil Code of thePhilippines governs the creation of pledges. Apledge is a contract whereby the debtor deliversto the creditor or to a third person by commonagreement a movable thing for the purpose ofsecuring the fulfilment of a principal obligation.


Answer: Under Article 2093 of the Civil Code,in order to constitute the contract of pledge, thething pledged must be placed in the possessionof the creditor, or of a third person by commonagreement. Moreover, a pledge shall not takeeffect against third persons if a description ofthe thing pledged and the date of the pledge donot appear in a public instrument, i.e.acknowledged before a notary public.


Answer: The law does not require that apledge must be registered in order to be valid.However, as far as shares of stock areconcerned, where the parties have agreed togive the right to vote on such shares to thepledgee, such a right may be exercised by thepledgee and shall bind the corporation only ifthe pledge instrument stipulated is recorded inthe books of the corporation, as required bySection 55 of the Corporation Code of thePhilippines.

4. Question: If yes, what requirementsdoes the law impose upon ABC and DBank for the registration of such asecurity interest? [Please refer back toFirst Scenario, Issue 6 in advising on thisissue]

Answer: If the pledge instrument giving theright to vote on the shares of stock subject ofthe pledge is not recorded or registered in thebooks of the corporation, the corporation is notbound by such an agreement with respect to theright of the pledgee to vote on such shares.


Answer: N/A.


Answer: Under Article 2112, the creditor towhom the credit has not been satisfied in duetime, may proceed before a Notary Public for thesale of the thing pledged. This sale shall bemade at a public auction, and with notificationto the debtor and the owner of the thingpledged in a proper case, stating the amount forwhich the public sale is to be held. If at the firstauction the thing is not sold, a second one withthe same formalities shall be held; and if at thesecond auction there is no sale either, thecreditor may appropriate the thing pledged. Inthis case he or she shall be obliged to give anacquittance for his or her entire claim.

Under Article 2115, the sale of the thingpledged shall extinguish the principal obligation,whether or not the proceeds of the sale areequal to the amount of the principal obligation,interest and expenses in the proper case. If theprice of the sale is more than this amount, thedebtor shall not be entitled to the excess, unlessit is otherwise agreed. If the price of the sale isless, neither shall the creditor be entitled torecover the deficiency, notwithstanding anystipulation to the contrary.


Answer: If ABCs default is clear, it istheoretically relatively difficult to obstruct ordelay enforcement.


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Answer: Enforcement may take from 1 to 2months.


Answer: There is no law which provides for thepayment of priority claims out of the proceeds ofthe pledged property and in priority to thesecured claim of D Bank.


Answer: We are not aware of any possiblesecurity arising by operation of law which mightintervene upon the entitlement of D Bank to thepledge property. However, see our discussion inthe Third Scenario, Issue 5 with respect to theCarried Lumber Co. case.


Issues:


Answer: Yes. Act No. 1508, as amended, alsoknown as the Chattel Mortgage Law, governsthe creation of security over movable property.


Answer: Unlike real property, movable orpersonal property is not covered by certificatesof title. E Bank would have to rely on therepresentation of ABC that it owns theequipment and this cannot be independentlyverified. There is, however, a Chattel Mortgage

Register where chattel mortgages must beregistered in order to be valid against thirdparties. Actual verification on whether there isan existing chattel mortgage over the equipmentowned by ABC may be made by manuallysearching the records of the appropriate ChattelMortgage Registry. There is, however, no centralregistry, and the records are not computerised.


Answer: A chattel mortgage shall be signed bythe persons executing the same, in the presenceof two witnesses, who shall sign the mortgageas witnesses to the execution, and eachmortgagor and mortgagee, or, in the absence ofthe mortgagee, his agent or attorney, shall makeand subscribe an affidavit of good faith madesubstantially in the form required under theChattel Mortgage Law, under which an affidavitmust be signed by the parties to the mortgageas above stated. A certificate of the oath signedby the authority administering theaforementioned affidavit of good faith shall beappended to the mortgage and recordedtherewith. The agreement shall include adescription of the mortgaged property whichshall be such as to enable the parties to themortgage, or any other person, after reasonableinquiry and investigation, to identify the same.


Answer: The mortgage shall be registered orrecorded in the Office of the Register of Deeds ofthe province in which the mortgagor resides atthe time of making the mortgage, or, if he or sheresides outside the Philippines, in the province inwhich the property is situated. If the property issituated in a different province from that inwhich the mortgagor resides, the mortgage shallbe recorded in the office of the register of deedsof both the province in which the mortgagorresides, and that in which the property issituated. Payment of the appropriate registrationfees is also required prior to registration. Otherspecial laws require the registration of a chattelmortgage over specific movable property withother government agencies (e.g. a chattelmortgage over a motor vehicle must beregistered/recorded with the Land TransportationOffice, a chattel mortgage over vessels must beregistered with the Philippine Coast Guard).

A chattel mortgage agreement which is notregistered with the Chattel Mortgage Registry is


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nevertheless binding upon the parties, but voidagainst third persons, unless such third personshave actual knowledge of the mortgage.


Answer: There is no central registry and it isnot computer based. A search would have to beconducted manually and in each relevant officeof the Register of Deeds. The books can bequite voluminous, and there is no index orsummary which may be searched quickly. Theentries are instead arranged in accordance withthe date of registration.


Answer: In addition to registration in theChattel Mortgage Registry, the mortgage over amotor vehicle should also be recorded in theLand Transportation Office under the RevisedMotor Vehicles Law. The same generalrequirements apply in order to create a chattelmortgage over a motor vehicle.


Issues:


Answer: While the Chattel Mortgage Law doesnot specifically contain a provision allowing forthe creation of multiple chattel mortgages overthe same movable property, Section 13 impliedlyallows for their creation. Section 13 gives to aperson holding a subsequent mortgage the rightto redeem the mortgage by paying or delivering

to the mortgagee the amount due on themortgage, and the reasonable costs andexpenses incurred by such breach of conditionbefore the sale. Moreover, Article 319 of theRevised Penal Code penalises a mortgagor whoshall sell or “pledge personal property alreadypledged”1, or any part thereof, under the termsof the Chattel Mortgage Law, without theconsent of the mortgagee written on the backof the mortgage and noted on the record of themortgage in the office of the Register of Deedsin the province where the property is located.


Answer: As mentioned, F Bank can conduct anactual search with the appropriate ChattelMortgage Registry. However, as the registry isnot centralised nor computer based, it isrelatively cumbersome to do an actual search.Aside from having to conduct the searchmanually, there is a need to check every registrybook in each and every local registry applicablefor the relevant period.


Answer: As in the real estate mortgage, prioritywill be determined on the basis of the date ofregistration of the chattel mortgage with theChattel Mortgage Registry. The mortgage withthe prior registration will have priority over, andwill be superior to, a mortgage with a laterregistration.


Answer: If the chattel mortgage in favour of EBank over the property was not registered and FBank had no knowledge of that security, thechattel mortgage created in favour of F Bank willobtain priority over that of E Bank, assumingthat F Bank’s chattel mortgage is duly registered.


1 We believe that this provision really covers a chattel mortgage

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Seventh Scenario – [enforcementof non-possessory security overmovable property]Next, assume that ABC has defaulted in respectof the loans/finance facilities made available to itby E Bank and F Bank such that either or both ofE Bank and F Bank were able to enforce theirrespective securities over the equipment.

Issues:


Answer: A chattel mortgage may be foreclosedjudicially or extrajudicially. A chattel mortgage isforeclosed judicially if the mortgagee files acomplaint in court for foreclosure of themortgage pursuant to the Rules of Court, butsubject to the provisions of the ChattelMortgage Law on the requirements for the saleof the mortgaged property. It is foreclosedjudicially if the mortgagee causes the sale of theproperty in a public auction in accordance withSection 14 of the Chattel Mortgage Law.


Answer: If ABC’s default is clear, it istheoretically relatively difficult to delay, obstructor prevent enforcement.


Answer: Generally, it may take 1 year tocomplete the enforcement of a mortgage chattelmortgage judicially. An extrajudicial foreclosureof chattel will generally take around 1 to 2months to complete.


Answer: There is no law which provides for thepayment of priority claims out of the proceeds ofthe sale of the equipment and in priority to thesecured claims of E Bank and F Bank.


Answer: We are not aware of a possiblesecurity arising by operation of law which mightintervene upon the entitlements of E Bank and FBank to the proceeds of the sale of theequipment. However, see our discussion in theThird Scenario, Issue 5 with respect to theCarried Lumber Co. case.

Eighth Scenario – creation/registration of a non-possessorysecurity by ABC over ‘inventory’,possibly including inventoryacquired in the futureNext, assume that G Bank, anotherbank/financier, has agreed to lend/provide afinance facility to ABC. ABC has agreed to giveG Bank a non-possessory security for theloan/finance facility over its inventory of rawmaterials and finished goods, an inventory thatwill change from time to time as finished goodsare manufactured and sold and new rawmaterials are supplied.

Issues:


Answer: The Chattel Mortgage Law applies tothe creation of a security interest over chattels ingeneral. A chattel mortgage may be constitutedover present inventory.



3. Question: What requirements does thelaw impose upon ABC and G Bank forthe registration of a security overinventory? [Please refer back to FirstScenario, Issue 6 in advising on this issue]





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Answer: The description of the chattels subjectof the mortgaged must expressly include bothraw materials and finished goods. See also theanswer to Issue 6 below.


Answer: As a general rule, the Chattel MortgageLaw does not allow a chattel mortgage over futureproperty. A chattel mortgage shall be deemed tocover only the property described therein and notlike or substituted property thereafter acquired bythe mortgagor and placed in the same depository asthe property originally mortgaged, notwithstandinganything in the mortgage to the contrary. ThePhilippine Supreme Court has, however, carved outexceptions to this rule, such as in the case of drug,grocery and dry goods stores whose stocks-in-tradeare constantly sold and substituted with new stock.The Supreme Court held in one case that “[A]stipulation in the mortgage, extending its scope andeffect to after-acquired property, is valid andbinding… where the after-acquired property is inrenewal of, or in substitution for, goods on handwhen the mortgage was executed, or is purchasedwith the proceeds of the sale of such goods, etc (11C.J., p.436)”: Torres v. Limjap2

Present practice in the Philippine financialcommunity has extended the exception toinventories of raw materials, goods in process andfinished goods. Many lawyers believe thatinventories are continually being consumed andsubsequently replaced, and are of the samenature as stocks-in-trade; thus they claim thatinventories qualify for this exception. The courthas not, however, categorically ruled on this issue.



Answer: See answer to Seventh Scenario, Issue 1.










Answer: The rule is that the mortgagor mustbe the absolute owner of the thing mortgaged,and must have the free disposal of the propertyin order for the chattel mortgage to be valid.Thus, it is believed that a retention of title infavour of JS would effectively remove the goodsfrom the lien created by the chattel mortgageover the raw materials. G Bank therefore didnot obtain any security or priority over the rawmaterials. The issue has not been ruled upon inthe Philippine courts.


2 56 Phil. 141 (1931)

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Tenth Scenario – creation/registration/enforcement of asecurity by ABC over ‘receivables’(book debts)]Next, assume that H Bank, anotherbank/financier, has agreed to lend/provide afinance facility to ABC. ABC has agreed to giveH Bank security for the loan/finance facility overreceivables (book debts) owed to ABC by itstrade debtors.

Issues:


Answer: Taking security interest over receivablesremains a controversial matter among Philippinelawyers. Many financial institutions acceptassignments of receivables as security for creditaccommodation, provided that the Deed ofAssignment is notarised on the basis of Article1625 of the Civil Code, which provides that anassignment of credit or right shall produce noeffect as against third persons unless it appears ina public instrument. Many lawyers believe thatsince the aforementioned provisions fall underTitle VI which governs “Sales”, the assignment ofcredit contemplated therein is an absoluteassignment of creditor or sale of credit, and notan assignment of credit by way of security.

Some lawyers maintain that an assignment ofreceivables by way of security must partake thenature of a chattel mortgage or pledge. In theirview, in order for an assignment as a security tobind third parties, the assignment should eitherbe registered in the Chattel Mortgage Registry(in which case, it is a chattel mortgage), or elsean evidence of the obligation assigned assecurity should be delivered to the creditor (inwhich case, it is a pledge).

Some lawyers utilise a Deed of AbsoluteAssignment in favour of the lender, which alsocreates an implied trust for the borrower, on thebasis of Article 1454 of the Civil Code whichprovides that: “If an absolute conveyance ofproperty is made in order to secure theperformance of an obligation of the grantortoward the grantee, a trust by virtue of law isestablished. If the fulfilment of the obligation isoffered by the grantor where it becomes due, hemay demand the reconveyance of the property tohim.” The assignment is documented as an

absolute assignment in favour of the lenderwhereby the borrower assigns, transfers and setsover the lender absolutely and unconditionally allof the borrower’s right, title and interest in respectof the receivables whereupon all such right, title,interest and benefit of the borrower to thereceivables shall vest upon and accrue in favour ofthe lenders immediately. The assignment containsspecific language to the effect that it is intended toensure the payment by the assignor of the loan,and the excess of the proceeds from the assetsassigned over the amount of the outstanding loan,shall be reconveyed to the borrower.


Answer: If the intention is to create a pledge, therequirements discussed for constituting a pledgewill apply. If the intention is to create a chattelmortgage, the requirements for constituting achattel mortgage will apply. If the intention is tomake an absolute assignment, then theassignment must appear in a public instrument.


Answer: Generally, there is no registrationrequirement unless it takes the form of a chattelmortgage, in which case, the requirement forregistering chattel mortgages apply.




Answer: See answer to Eight Scenario, Issue 6.


Answer: See answers to Seventh Scenario,Issue 1 or Fourth Scenario, Issue 6.


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Answer: If ABC’s default is clear, it istheoretically relatively difficult to delay, obstructor prevent enforcement.


Answer: See answers to Seventh Scenario,Issue 3 and Fourth Scenario, Issue 8.


Answer: There is no law which provides for thepayment of priority claims out of the proceeds ofthe collection of the receivables ahead of theclaim of H Bank.


Answer: We are not aware of a possiblesecurity arising by operation of law which mightintervene upon the entitlement of H Bank to theproceeds of the collection of the receivables.

Eleventh Scenario – supply ofgoods to ABC by a supplier on a‘retention of title’ contractNext, assume that JS, a supplier of goods, hasagreed to supply goods to ABC on credit and onterms that, although possession of the goods isgiven to ABC, title in the goods remains with JSuntil payment for the goods has been made infull.

Issues:


Answer: No. Since title in the goods remainswith JS, JS retains full ownership of the goods,except as to possession.


Answer: N/A.


Answer: N/A.


Answer: JS is still considered to be the ownerof the goods. Thus it is believed that ABCcannot validly constitute a chattel mortgage. Novalid non-possessory security over the inventoryremains in favour of the other person/creditor.


Answer: This arrangement is not treated as asecurity. The usual recourse available for JS is todemand for the return of the goods or paymentof the price.


Answer: The action will take the form of anordinary action for collection, which will usuallytake 2 to 4 years in the trial court.


Answer: N/A.


Answer: N/A.


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Twelth Scenario –creation/registration of a lease toABC of movable propertyNext, assume that ABC wants to acquireequipment for use in its business operations butdoes not want to purchase the equipment. KL,a lease/finance company, has agreed to purchasethe equipment and then to lease the equipmentto KL for a term of years. A provision of theagreement provides that ABC may become theowner of the equipment upon the payment ofthe full lease and other charges.

Issues:


Answer: No, a lease financing arrangement isnot treated as a security under Philippine law.


Answer: N/A.


Answer: N/A.


Answer: Ordinary civil action for the paymentof the lease or return of equipment.


Answer: The enforcement action in Issue 4 willtake approximately 2 to 4 years in the trial court.


Answer: N/A.


Answer: N/A.


Issues:


Answer: Philippine law does not seek toregulate the creation of a security over movableproperty situated in a foreign jurisdiction.Philippine law adopts the lex situs rule underArticle 16 of the Civil Code, which provides thatreal property as well as personal property issubject to the law of the country where it issituated.


Answer: No. Registration of chattel mortgageis required to be made in the place where theproperty is located.


Answer: No.


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Answer: It is relatively easy with respect to areal estate mortgage. The general rule is that aninnocent purchaser for value (which includes aninnocent lessee, mortgagee or otherencumbrancer for value), takes registeredproperty free from liens and encumbrances otherthan statutory liens and those recorded in thecertificate of title. Thus, those who have a lienover the property usually promptly have the lienannotated on the certificate of title to theproperty through the Register of Deeds havingjurisdiction over the place where the property islocated. Note however, that a statutory lien (i.e.taxes, worker’s lien, unpaid vendor’s lien, andcontractor’s lien) subsists and binds the wholeworld even without the benefit of registrationunder the Torrens system, because everyone ispresumed conclusively to know the law whichprovides for such liens. Thus, those who havestatutory liens often do not annotate the title tothe property.

A chattel mortgage is also required to beregistered in a Chattel Mortgage Register. Inmany cases, the subject of chattel mortgages arebuilding and/or equipment which aremortgaged separate from the land on whichthey may be found. In such a case, they are alsoannotated in the certificate of title covering theland.


Answer: It would be relatively easy, assumingthat the interest is annotated or registered. Theannotation usually indicates the nature of theinterest.


Answer: Relatively easy. The law clearlyprovides specific rules in the event ofconcurrence and preference of credits: Articles2236 to 2251, Civil Code. Further, the date ofannotation, which, in some cases may be crucialin determining the relative priority of claims, isalso indicated.



Answer: No. The formalities affecting thevalidity of the creation of security interests arefound in other laws, not the Insolvency Law.However, the same grounds can be raised in theinsolvency proceedings to declare invalid, void orunenforceable certain security interests.


Answer: Yes. Under Section 61 of theInsolvency Law, claims of creditors who havereceived any preference made or given by thedebtor in violation of the Insolvency Law maynot be proved. Under Section 70 of theInsolvency Law, fraudulent transfers of property,made within 30 days before the filing of thepetition for insolvency, with a view of giving



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preference to a creditor (where the creditor hasreasonable ground to believe that (i) the debtoris insolvent, (ii) the disposition is made with aview to prevent the property from coming to theassignee in insolvency or to prevent the propertyfrom being ratable distributed among thecreditors) are void, and the assignee may bringan action to recover the property or its value.Under Section 37 of the Insolvency Law, actionsmay be brought against persons who, havingnotice of the insolvency proceedings, or havingreason to believe that such proceedings areabout to be commenced, conceal, embezzle, ordispose of any property of the debtor, for therecovery of the property or for double its value.



Answer: Property subject to a mortgage orpledge does not pass to the assignee-in insolvency,unless the secured creditor surrenders his security.

A secured creditor has the following options: (a)he may waive his rights under the security orlien, prove his claim in the insolvencyproceedings, and share in the distribution of theassets of the insolvent debtor, or (b) he maymaintain his rights under his security or lien:Section 59, Insolvency Law.

If the secured creditor maintains his rights underhis security or lien, he has again two options: (a)fix the value of the property subject of themortgage, pledge, or lien, or (b) ask that theproperty be surrendered to him.

The value of the property may be fixed either byagreement between the creditor and thereceiver, or if there is no receiver, by a judge, orin a sale directed by a judge. When the value ofthe property is less than the obligation it secures,the secured creditor will be admitted in theinsolvency proceedings as a creditor for thebalance. If its value exceeds the debt secured,the assignee may convey the property to thecreditor and waive the debtor’s right ofredemption upon receiving the excess from the

creditor, or the assignee may sell the propertysubject to the claim of the creditor.

If the secured creditor asks that the property besurrendered to him, it is the duty of the assigneeto deliver to him the property encumbered, andthe creditor’s claim shall be deemed satisfied:Section 59, Insolvency Law; Union vs. CentralCapiz3; Chartered Bank vs. Imperial4


Answer: See C1.


Answer: Yes. The Insolvency Law provides thatclaims barred by the Statute of Limitations maynot be proved.



Answer: Unless the security holder opts tosurrender his security and participate in theinsolvency proceedings, he is not affected by theorder declaring the debtor insolvent. Thus, it hasbeen held that the institution of proceedings todeclare a debtor insolvent, and the subsequentdeclaration of insolvency, do not necessarily havethe effect of suspending an action for foreclosureagainst the insolvent. The mortgage creditor is notobliged to take part in the insolvency proceedingsfor the recovery of his claim against the debtorjudged insolvent. He may maintain a separate suitagainst the insolvent debtor for the recovery of hissecured credit until he obtains a final judgment, andhe may enforce this judgment against the property


3 47 Phil. 44.4 48 Phil. 931.

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mortgaged. The proceedings instituted by saidcreditor cannot be suspended whilst the insolvencyproceedings are pending, and he does not have towait for the decision in those proceedings(insolvency) or to abide by the decision, for thereason that the mortgage which the creditor holdsas security for the payment of his debt constitutes areal right on the property mortgaged.

However, there are cases to the effect thatactions for secured claims already begun aresuspended until the assignee is elected. Uponelection of the assignee, the action will becontinued in the same court where it was filed5

Actions for secured claims may be commencedduring insolvency proceedings by leave of theinsolvency court. It will be granted as a matter ofform, but the action will be suspended until theelection of an assignee in insolvency. Thereafter,the action will continue in the same court whereit was filed. No separate foreclosure proceedingsmay, however, be validly instituted without theprevious consent of the court where theinsolvency proceedings are pending.6


Answer: Subject to D1 above , whilst theinsolvency proceedings are pending.


Answer: Subject to D1 above , upon the grantingof the order declaring the petitioner insolvent, allcivil proceedings against the debtor are stayed.However, there is support for the view that thesuspension does not operate automatically uponthe granting of the order declaring the petitionerinsolvent. Under Section 60 of the Insolvency Law,it would appear that an application for suspensionmust be made by the debtor, or any creditor or theassignee. It is only upon such application that allcivil proceedings against the debtor are stayed.


Answer: Subject to D1 above , no.


Answer: N/A.


Answer: N/A.



Answer: Under the Insolvency Law, creditorsholding mortgages, pledges, attachments orexecutions on the property of the debtor dulyrecorded in the Register of Deeds may opt not toparticipate in the insolvency proceedings. Insuch a case, they may proceed with theenforcement of their securities pending theinsolvency proceedings.

On the other hand, the aforementioned securedcreditors may choose to participate in theinsolvency proceedings. In this case, they waivetheir rights under the security and share in thedistribution of the assets of the debtor, or theymay have the value of the encumbered propertyappraised and then share in the distribution ofthe assets of the debtor for the balance of thecredit. Under Section 60 of the Insolvency Law,no creditor, proving his debt or claim, shall beallowed to maintain any suit against the debtor,but instead shall be deemed to have waived allright of action or suit against him or her, and allproceedings already commenced, or anyunsatisfied judgment already obtained, shall bedeemed to be discharged and surrendered.


Answer: See E1.


5 O’Brien vs. Del Rosario, 49 Phil. 657.6 Cu Unjieng vs. Mitchell, 58 Phil. 476.

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Answer: No.



Answer: Yes. The Insolvency Law follows therules on Concurrence and Preference of Creditsfound in the Civil Code (Articles 2236 – 2251),as well as the Labor Code.

2. Question: If so, what are these priorityclaims and is there any conflict betweenthem and any priority claims as mentionedin Part One of the case study (for example inscenarios 3, 4, 7, 9 & 10)?

Answer: Taxes and assessments on specificmovable and immovable property enjoy absolutepreference. Other liens attaching on specificmovable and immovable property enjoy nopriority among themselves, but must be paidconcurrently and pro rata. The pro rata rule,however, does not apply to credits annotated inthe Registry of Property by virtue of a judicialorder, attachments and executions, which arepreferred as to later credits.

Wages and other monetary claims of labourersprovide a special problem because of conflictingjurisprudence. Under Article 110 of the LaborCode, “(i)n the event of bankruptcy orliquidation of an employer’s business, his workersshall enjoy first preference as regards their wagesand other monetary claims.” There are varyinginterpretations of this provision by the SupremeCourt. The prevailing view is, it seems, that,when the creditors claims do not attach to anyspecific property, it is an ordinary preferred credit,although it is now first in the list.7 The otherview is that wages and other monetary claims ofworkers should be paid in full even before taxesand other claims of the government.8



Answer: Enforcement of secured propertyinterests is governed by other laws and rules.


Answer: No.

H. Issues relating to corporaterescue processes rehabilitation;reorganisation; restructuringAssume that ABC is under the ‘rescue’ processof the insolvency law, but has not yet reachedthe point of approval of a plan of reorganisation.

(N.B. In the Philippines, rehabilitationproceedings are governed by a different set oflaws i.e. Presidential Decree No. 902- asamended, the Rules of Procedure on CorporateRecovery issued by the Philippine Securities andExchange Commission and the Interim Rules ofProcedure on Corporate Rehabilitation issued bythe Philippine Supreme Court. Rehabilitationproceedings were originally under thejurisdiction of the Securities and ExchangeCommission pursuant to P.D. 902-A. However,Republic Act No. 8799, otherwise known as theSecurities Regulation Code transferredjurisdiction over rehabilitation proceedings to theRegional Trial Courts (“RTC”). Pursuant to theSRC, the Supreme Court of the Philippinespromulgated the Interim Rules of Procedure onCorporate Rehabilitation (the “Interim Rules”),which governs the procedure for corporaterehabilitation with the RTC. Our answers inParts H and I below relate to rehabilitationproceedings under the Interim Rules).


Answer: Yes. The Interim Rules provide that ifthe Court finds the petition for rehabilitation tobe sufficient in form and substance, it will issuea stay order which, among others, shall stay allenforcement of all claims against the debtor:Section 6, Rule 4. The word ‘claim’ coversclaims or demands of whatever nature and kindagainst the debtor or its property, includingclaims of secured creditors: Section 1, Rule 2.


Answer: The stay order shall be effective fromthe date of its issuance until the dismissal of the


7 Development Bank of the Philipines vs. National Labor Relations Commission, 183 SCRA 328 (1990); Banco Filipino vs. National

Labor Relations Commission, 188 SCRA 700 (1990); Hautea vs. National Labor Relations Commission, 230 SCRA 119 (1994).8 Philippine National Bank vs. Cruz, 180 SCRA 206 (1989).

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petition or termination of the rehabilitationproceedings. The petition shall be dismissed ifno rehabilitation plan is approved by the courtupon the lapse of 180 days from the date of theinitial hearing: Section 11, Rule 4.


Answer: The court may grant an extensionbeyond the 180-day period only if it appears byconvincing and compelling evidence that thedebtor may successfully be rehabilitated. In noinstance, however, shall the total period exceed 18months from the date of the filing of the petition.


Answer: Yes. An affected security holder mayapply to the court to terminate, modify, or setconditions for the continuance of the stay order,or relieve a claim from the coverage thereof:Section 12, Rule 4.


Answer: A stay order may be lifted uponshowing that:

● any of the allegations in the petition, or anyof the contents of any attachment, or theverification has ceased to be true;

● a creditor does not have adequate protectionover property securing its claim; or

● the debtor’s secured obligation is more thanthe fair market value of the property subjectof the stay and such property is notnecessary for the rehabilitation of the debtor.

Under this section, the creditor shall lackadequate protection if it can be shown that:

● the debtor fails or refuses to honour a pre-existing agreement with the creditor to keepthe property insured;

● the debtor fails or refuses to takecommercially reasonable steps to maintainthe property; or

● the property has depreciated to an extentthat the creditor is under-secured.

Upon showing of lack of adequate protection,the court shall order the rehabilitation receiver to:

● make arrangements to provide for theinsurance or maintenance of the property;or

● to make payments or otherwise provideadditional or replacement security such that

the obligation is fully secured. If sucharrangements are not feasible, the courtshall modify the stay order to allow thesecured creditor lacking adequate protectionto enforce its claim against the debtor,provided, however, that the court may denythe creditor the remedies in this paragraph ifsuch remedies would prevent thecontinuation of the debtor as a goingconcern, or otherwise prevent the approvaland implementation of the rehabilitationplan: Section 12, Rule 4.


Answer: The Interim Rules do not expresslyprovide that the secured property may be usedduring the period of stay. However, since thedebtor under rehabilitation continues to operateduring the proceedings, it may continue to use asecured property even during the period of stay.


Answer: No. As a matter of fact, therehabilitation receiver is empowered andmandated to prohibit and report to the courtany encumbrance, transfer, or disposition of thedebtor’s property outside of the ordinary courseof business or what is allowed by the court:Section 14 (n), Rule 4.


Answer: If a property must be sold other thanin the ordinary course of business during therehabilitation proceedings, court approval isnecessary.


Answer: Security holders do not have the rightto vote on the plan. The Interim Rules, however,give creditors the opportunity to oppose orcomment on the petition for rehabilitation:Section 6, Rule 4. Moreover, in considering therehabilitation plan, the Rehabilitation Receiver issupposed to meet with the creditors to discussthe plan with a view to clarifying or resolvingany matter connected therewith: Section 21,Rule 4. The creditors are also given the right tosubmit a revised or substitute rehabilitation planfor the final approval of the court: Section 22,


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Rule 4. However, the court may approve arehabilitation plan even over the opposition ofcreditors holding a majority of the total liabilitiesof the debtor if, in its judgment, therehabilitation of the debtor is feasible and theopposition of the creditors is manifestlyunreasonable: Section 23, Rule 4.


Answer: No. The Interim Rules follow the“equity is equality” principle under which bothsecured and unsecured creditors are treated alikepending rehabilitation proceedings.


Answer: No. Under the Interim Rules, therehabilitation plan must be approved by thecourt, not the creditors. Once the court approvesthe plan, the plan and its provisions shall bebinding upon the debtor and all persons whomay be affected by it, including the creditors,whether or not such persons have participatedin the proceedings or opposed the plan, orwhether or not their claims have beenscheduled: Section 24, Rule 4.



Answer: The Interim Rules does not expresslyprovide for the possibility of raising additionalworking capital to enable ABC to continue itsbusiness. The idea, however, is that pendingrehabilitation, the corporation is allowed tocontinue with its operations and do what isrequired or necessary for the ordinary course ofbusiness, subject to the approval of theRehabilitation Receiver and the court, ifnecessary.


Answer: There is no law or rule giving ‘superpriority’ to new money raised duringrehabilitation proceedings.


Answer: There is no law or rule specificallygoverning this matter.


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Answer: (1) Real estate mortgage, (2) chattelmortgage (security over equipment, inventory,motor vehicle) and (3) pledge, are the mostpreferred and common forms of securityarrangements for banks and other financialinstitutions, in the order given. Real propertydoes not depreciate, and cannot be concealed toavoid satisfaction of the obligation. A pledge ofequipment, inventory or motor vehicle is usuallynot practicable, since the same are often used inthe business of the borrower. However, pledgesof shares of stock are common.

2. Question: If it is possible, please provideaverage term of loan and interest ratescharged by lenders to corporateborrowers for loans secured by:

● Mortgage over land - N/A

● Pledge over movable property - N/A

● Security over inventory - N/A

● Security over receivables - N/A

● Security over equipment - N/A

● Security over motor vehicles - N/A


Answer: The indiscriminate issuance ofTemporary Restraining Orders (TRO) or writs ofinjunctions restraining foreclosures.


Answer: The most problematic area is theintersection between secured lending andrehabilitation principally because : (a) the right ofsecured lenders to enforce their security pendingrehabilitation is stayed; (b) a secured lender is

treated on an equal footing with unsecuredcreditors; and (c) secured creditors to not have aright to vote on the rehabilitation plan.


Answer: Revision of the Insolvency Act.


Answer: Yes.


requirements of any law to registersecured property interests in a publicregister, does any law require that ABCmust maintain an internal register orbook of every security interest createdby ABC and, if so, is such register orbook available for inspection by aprospective creditor?

Answer: We are not aware of any law whichwould require ABC to maintain an internalregister or book of every security interest createdby ABC.



Answer: Yes. There is now pending in Congressa proposed Corporate Recovery Act whichprovides for an integrated and comprehensiveinsolvency and rehabilitation scheme forfinancially distressed corporations.


Part Three

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Answer: Yes. In consonance with the provisionof the Constitution prohibiting foreigners fromacquiring or owning land in the Philippines,Republic Act No. 133 (as amended by Act 4882)provides that a foreigner or his or her successor-in-interest cannot bid or take part in aforeclosure sale of real property. A foreignercannot take possession of the real propertyduring the existence of the mortgage and beforedefault, but can take possession of the realproperty after default and solely for the purposeof foreclosure. In no case is this to exceed 5years from actual possession, and suchpossession must be in accordance with theprocedure for judicial foreclosure.


Answer: Yes.






Answer: We are not aware of any law orregulation, but this may be a proper subject forconsideration in the proposed CorporateRecovery Act now pending before Congress.


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Thailand

Part One – Creation, Registration andEnforcement of Secured TransactionsAsia Business Corporation (‘ABC”) is a company incorporated in your country and conductsits business from there.



RETA 5975



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Issues:

1. Question: In your country would theusual nature of the ownership or title ofABC to the land be freehold, leaseholdor other (e.g. land use right)?

Answer: The type of ownership or title of ABCto the land would generally be freehold.Leasehold, land-use rights or other kinds ofclaim to rights are less acceptable as security toproject finance or syndicated loans.


Answer: Yes, once the land of ABC is used forsecurity, a written mortgage agreement would beofficially recorded before the competent officerof the respective land office. The borrower (ABC)should bear all costs of the registration.

3. Question: Would it be easy/difficult for BBank to determine that ABC was theowner/had title to the land in question?[Please expand by commenting on thereliability and certainty of the registrationsystem and the nature and state of theland registration system – single ormultiple registry; centralised/local registry;manual/computer based; reliability ofregistered information; difficulties ofsearching etc]

Answer: As explained above, the officialmortgage endorsement will be made on both thetitle deed of ABC, and the official deed retained atthe land office. The registration system is reliable.After completion, the lender or its authorisedlending bank shall be the party in possession ofABC’s mortgage title deeds throughout the term ofthe loan, or until the payment, if any, of thesettlement of the debt is clear. A release andcancellation of mortgage registration will then beremoved from the title deeds. The registration willbe done manually. The information is reliable andcan be easily researched, provided one can arrangefor a search at the local registry. Therefore, itwould be easy for B Bank to determine that ABCwas the owner/ had title to the land in question.


Answer: Yes, a security over land can and mustbe registered in order to be binding on theparties, and to rank in priority to other securities.

5. Question: What formal requirements

does the law impose upon ABC and BBank for the creation of a security overland?

Answer: For the creation of a security over theland, the law imposes the formal requirementupon ABC and B Bank that the said security hasto be made under written contract of mortgage.A contract of mortgage must specify theproperty mortgaged and must contain, in Thaicurrency, either a certain sum or a maximumamount for which the mortgaged property isassigned as security.



(b) third parties?

Answer:

The requirements imposed by the law upon ABCand B Bank for the registration of security overland are:

● the owner of property as mortgagor mustconsent to the registration of the mortgageagainst title to the land; and

● a contract of mortgage must be made inwriting and registered by the competentofficial.

(a) The effect of non-registration in relationto the parties is that the debt will not besecured. Although the debt under theloan will still be contractually enforceable,the debt will be treated as unsecured.

(b) The effect of non-registration in relationto the third parties is that a third partyacting in good faith and withoutknowledge of the contractualarrangements between ABC and B Bankcould enter into and, if registered,secure a mortgage over the land whichwould rank as a secured debt in priorityto that between ABC and B Bank.


Answer: Yes, a building erected upon the landis treated as part of the land on the conditionthat such building was erected upon the landbefore the date of the mortgage.


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A mortgage over land does not extend to thebuildings erected by the mortgagor upon suchland after the date of the mortgage, unless thereis a special clause in the contract to that effect.However in this case, the mortgagee can havesuch buildings sold with the land, but he canexercise his preferential right only against theprice obtained for the land.


Answer: Yes, plant and equipment is treated aspart of the land if the said plant and equipment isfixed or attached in a permanent way to the landor the buildings before the date of the mortgage,unless the registration form of the mortgage hasalready specified that the mortgage of landincludes the plant and equipment which is fixedafter the date of the mortgage. A mortgage doesnot extend to the fruits of the mortgagedproperty, except after the mortgagee has notifiedthe mortgagor or transferee of his intention toenforce the mortgage.


Issues:


Answer: Nothing in the law prevents orprohibits multiple secured interests over theland. However, it would usually be the case thatB Bank as first mortgagee would be the holderof the land title deed, so B Bank would have tobe informed and consent to registration of thesecured security to C Bank. If B Bank does notgive the land title deed to ABC, ABC could notgive the deed to C Bank as security over theland, or for registration purposes.


Answer: It is easy for C Bank to discover that BBank took security over the land by checking atthe local land registry. The process takes onlyone day at the local registry, or fifteen (15) daysat the land centralised registry.


Answer: When one and the same property ismortgaged to several mortgagees, they rankaccording to the respective dates and time ofregistration. Therefore B Bank (the firstmortgagee) ranks in priority to C Bank (as thesecond mortgagee).


Answer: A contract of mortgage must be madein writing and registered by the competentofficial. If B Bank’s mortgage was not registered,B Bank would not have the right over the land.If C Bank registers without knowledge of thecontract between ABC and B Bank, C Bank’sloan will be secured by the registered mortgage,and rank in priority to ABC’s debt to B Bank.


Issues:


Answer: B Bank and C Bank have to file thecomplaint against ABC with the court. If thecourt renders judgment in favour of B Bank andC Bank, B Bank and C Bank must request theCourt to appoint an executing officer to seizesuch land and sell it at public auction. In such acase, B Bank, as the first registered mortgageewill have priority to receive payment first.


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Answer: In practice, it is possible for ABC todelay or obstruct such process of enforcement,but difficult to prevent it. ABC’s lawyer may filetechnical motions to delay enforcement. ABCmay file an objection to the sale of the land.This can be done three times. However anexecuting officer can refuse the objection ifthere are not good reasons for the objection,and then sell the land. In such a case, ABC mayfile a petition with the Court seeking an order tooppose such sales.


Answer: In Thailand, the process ofenforcement is commenced after the courtappoints the executing officer. The mortgageecannot seize or sell the land itself. Theenforcement process is completed if and whenno objection to the auction sale is made by anyparty, and the plaintiff receives completepayment from the Legal Execution Department.In general it takes at least 6 months for B Bankor C Bank to complete the process ofenforcement if such security can be sold at thefirst public auction. The sale of the land will beeasily sold at the public auction if such land is ina good location, and the appraisal value of theland is not high. If the land is not in a goodlocation, it is very difficult to sell. In such a case,it might take over a year or more to completethe process. Delays can also be caused by thebacklog of cases at the Execution Department,and the consequent high case-load of eachindividual executing officer.


Answer: Thai law (other than insolvency law)does not provide for the payment of ‘priorityclaims’ to be paid out of the mortgagedproperty in preference to secured creditors.

5. Question: Is it possible that a securityarising by ‘operation of law’ might

intervene upon the secured propertyentitlements of B Bank and C Bank tothe proceeds of the sale of the land?

Answer: There are no securities arising byoperation of law. However it is usual for theExecution Department sale by auction terms torequire the buyer to bear all costs of the transfer,which will include any unpaid land tax, whichwill then be collected at the time of registeringthe transfer of the land to the buyer.


Issues:


Answer: Title XIII of Book Three of the Civil &Commercial Code recognises and governs thecreation of pledges.


Answer: The formal requirements which areimposed upon ABC and D Bank for the creationof this form of security are:

● The security must be made as security forperformance of an obligation.

● The moveable property is to be delivered tothe pledgee, or, if the parties to the pledgeagree, the pledged property can be kept bya third person.

● If the pledged property is a right representedby a written instrument, the pledge is voidunless such instrument is delivered to thepledgee and the debtor is notified in writingof the pledge.

● If an instrument to order is pledged, suchpledge will not be valid vis a viz thirdpersons unless the pledge’s creation isendorsed upon the instrument. Nonotification to the debtor under suchinstrument is necessary.


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● If an instrument, issued to a named personwhich is not transferable by endorsement, ispledged, the pledge must be stated on suchinstrument, and will not be valid against thedebtor under such instrument or third persons,unless notification is made to such debtor.

● If a named certificate for shares is pledged,such pledge will not be valid against thecompany or other third persons, unless thecreation of the pledge is entered in thecompany’s share register book, and in thecase of pledge to the public company, thepledge is registered at the company shareregister book, and also at the ThailandSecurities Depository Co Ltd.


Answer: Pledges of shares for privatecompanies must be registered in the shareregister book of the company as per the answerto Fourth Scenario, Issue 2. Pledges of shares inpublic listed companies must be registered at theThailand Securities Depository Co. Ltd.

4. Question: If yes, what requirements doesthe law impose upon ABC and D Bank forthe registration of such a security interest?[Please refer back to First Scenario, Issue 6in advising on this issue]

Answer: The requirement that the law imposeupon ABC and D Bank for the registration ofsuch a security interest are as set out in theanswer to Fist Scenario, Issue 6 and to thisFourth Scenario, Issues 1 and 2.


Answer: The Registration system for publiclisted shares is safe and reliable. The reliability ofthe system of registering private company sharesdepends on the diligence of the company inmaintaining its share register, but if theprocedures are followed then it is reliable.

6. Question: Assuming that ABC hasdefaulted in respect of the repayment ofthe loan/finance facility made availableto it from D Bank, what means or processof enforcement is available to D Bank?

Answer: The process of enforcement availableto D Bank is that D Bank must first notify ABCcompany in writing to perform its obligationwithin a reasonable time as fixed in the notice.If ABC company fails to comply with the notice,D Bank is entitled to sell the pledged property,but only by public auction. Prior to such sales, D

Bank is required to notify ABC company inwriting of the time and place of the auction. Ifthe notification is impracticable, D Bank may sellthe pledged property by public auction onemonth from the time the obligation came due.


Answer: ABC can delay, obstruct or preventthat enforcement process by filing the case withthe court, and apply for an emergency injunctionorder to prohibit D Bank selling the pledgeproperty if ABC can prove to the court that thereare sufficient grounds for the court to grant suchorder against D Bank. E.g. there is no real debtbetween D Bank and ABC, and D Bank is actingin bad faith, or the pledged property does notbelong to ABC.


Answer: In general, it takes approximately 20days to one month for D Bank to complete theprocess of enforcement if the sale can be madeat the first public auction.


Answer: Other then formal insolvencyproceedings, there are no “priority claims”imposed by law that would rank in priority tothe rights of D Bank.


Answer: There are no securities by the operationof law which would intervene upon theentitlement of D Bank to the pledged property.



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Issues:


Answer: The law only permits “mortgages”over limited categories of movable property,namely:

● ships and vessels of six tons and over orlaunches and motor boats over five tons;

● floating houses;

● beasts of burden; or

● other movables for which specific laws allowregistration.

The latter includes industrial machinery ofcertain classes. Pledges of equipment can onlybe made if possession is granted to the pledgee.Any other arrangement between partieswhereby equipment is used as security would becontractually enforceable, but not “secured”,and therefore an unreliable form of security.


Answer: If the equipment is of a type that can beregistered (e.g. industrial machinery), then E Bankwould be able to check at the Central MachineryRegistry, the Department of Industrial Works, orother relevant registry to determine ownership andthe existence of any prior securities.


Answer: The security must be made in writing,and specify the amount or obligation which issecured. It must also be registered at therelevant registry.


Answer: The security must be registered. Thesame principles stated in the answer to FirstScenario, Issue 6 apply.


Answer: The registration system is relativelysafe and reliable, although it can becumbersome and time consuming to makeaccurate searches.


Answer: Although there is a register of motorvehicle ownership, the register does not recordsecurity interests, and as such there is no abilityto register such securities. The normal practice isfor the creditor to take title to the motor vehicle,and lease it back to the debtor, with acontractual obligation to return ownership uponfinal payment, i.e. a form of hire purchase.


Issues:


Answer: The law will not prevent multiple non-possessory secured interests over the sameproperty if such property is of a type that canhave securities registered against it.


Answer: It would be easy to discover that EBank had an existing non-possessory securityover the equipment by examining theregistration at the authorities relating to suchequipment, provided the equipment is of a typeagainst which securities can be registered.


Answer: Priority will be determined accordingto the date and time of registration of thesecurity. Thus if E Bank registered first, it willtake priority.


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Answer: The same principles as set out in theanswer to First Scenario, Issue 6, apply to thistype of registered security.


Issues:


Answer: E Bank and F Bank have to file acomplaint against ABC with the court. Once thecourt renders judgment for E and F Bank, theyhave to request the court to appoint anexecuting officer for the sale of the equipmentby public auction, in a similar procedure to thatwhich governs the sale of land as described inour answers to the First Scenario. E Bank, whohad registered the mortgage prior to F Bank,shall be satisfied first.


Answer: Although the law prohibits ABC fromdelaying, obstructing or preventing the processof enforcement, in practice ABC may filetechnical motions to delay enforcement.Moreover, ABC is entitled to file an objection tothe sale of the equipment. This can be donethree times, but an executing officer can refusethe objection if there is not a good reason.Delays can also arise from the backlog of casesat the Execution Department.


Answer: The period of time to complete theprocess of enforcement is hard to specify. Inpractice, the shortest period is 6 months if noobjection to such enforcement is raised by anyother party. However, longer periods, forexample one year, are common.


Answer: There are no “priority claims”imposed by law that would intervene in priorityto the claims of E Bank and F Bank.


Answer: There are no such “priority claims” orsecurities “by operation of law”.

Eight Scenario –creation/registration of a non-possessory security by ABC over‘inventory’, possibly includinginventory acquired in the futureNext, assume that G Bank, anotherbank/financier, has agreed to lend/provide afinance facility to ABC. ABC has agreed to giveG Bank a non-possessory security for theloan/finance facility over its inventory of rawmaterials and finished goods, an inventory thatwill change from time to time as finished goodsare manufactured and sold and new rawmaterials are supplied.

Issues:


Answer: The law does not provide for, butdoes not prohibit, the creation by way ofcontract of such a security over inventory. Thereis no ability to register such a security and so it isof limited value. Pledges, which are possessorysecurities, are therefore more common.


Answer: This type of security is merelycontractual, and thus the only requirement isthat it be made in writing.


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Answer: There is no official registration of suchsecurities. However, under the Accounts Law,the accountant has to record all inventories inthe Goods Control Book. Such a record must bekept at ABC Company so that the auditor of thecompany can check the stock at the end of theaccounting period.


Answer: See the answer to Eighth Scenario,Issue 3.


Answer: The parties can specify both rawmaterials and finished goods in their agreement.


Answer: The parties could specify that thesecurities apply to future property in theiragreement, but the courts would only enforcesuch contractual term over goods acquired, andwould not enter any speculation as to whetheror not goods would be acquired.



Answer: G Bank has to file the complaintagainst ABC with the court. Then, if the courtrenders a judgment in favour of G Bank, G Bankmust appoint an executing officer to enforce thejudgment.


Answer: See the answer to Seventh Scenario,Issue 2.




Answer: No, the law does not provide for thepayment of “priority claims” out of the proceedsof the sale of the inventory, and in priority to thesecured claim of G Bank.


Answer: See the answer to the SeventhScenario, Issue 5.


Answer: If title to the raw materials is retainedby JS and the raw materials have not been mixedor processed, then JS would take priority over GBank, provided JS can prove its title by expresscontractual term(s) reserving its title.


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Issues:


Answer: A “security” over receivables is in facta full assignment of the right to such receivables.As such, it is possible in law provided theformalities are followed.


Answer: The agreement of transfer of claimsmust be prepared in writing and signed by bothparties. The fact of the transfer, identity of thetransferee and payment instructions must benotified to the debtor. However, note that as amatter of practice, the transferee (in this case HBank) usually appoints the transferor (ABC) to actas its agent for all collection and notification tasks.

3. Question: What requirements does thelaw impose on ABC and H Bank for theregistration of a security overreceivables? [Please refer back to FirstScenario, Issue 6 in advising on this issue]

Answer: Registration is not available.




Answer: The parties could specify in theiragreement that the security applies to changingstock.


Answer: If the assignment of receivables hasbeen properly made and notified to the debtor,H Bank could enforce directly against the debtor.However, the procedure would be the same as ifABC were enforcing, that is filing a complaint incourt and, upon receipt of judgment, transfersto the execution officer for enforcement via theExecution Department. H Bank would have theadded requirement of proving its right astransferee of the debt, and that propernotification had been made to the debtor.




Answer: The time of filing a complaint in thecourt, to receiving judgment against the Debtorin the court of first instance could take one year,and enforcement via the Execution Departmentcould take at least another 6 months afterjudgment.


Answer: The third parties shall only havepriority to the receivables if, and when they havethe evidence to show that they have a betterclaim to the receivables, for example that title isalready transferred to them.




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Eleventh Scenario – supply ofgoods to ABC by a supplier on a‘retention of title’ contractNext, assume that JS, a supplier of goods, hasagreed to supply goods to ABC on credit and onterms that, although possession of the goods isgiven to ABC, title in the goods remains with JSuntil payment for the goods has been made in full.

Issues:


Answer: The retention of title will berecognised as a contractual right between theparties.

2. Question: If yes, what formalrequirements does the law impose on ABCand JS for the creation of such a security?

Answer: ABC and JS must have entered into anAgreement for the Sale of Goods that containsan express retention of title.




Answer: See the answer to the Ninth Scenario,Issue 6. The one who claims retention of title ingoods shall have a better right than the personwho claims a non-possessory security overinventory. However, title must be proven, andthis can be problematic when goods have beenmixed or processed.


Answer: Theoretically JS can take the goodsback because the title to the goods remains withJS. However any form of “self help” seizure isvery difficult to conduct, unless the retention oftitle clause includes an irrevocable license toenter the premises and repossess the goods.Even then there are many legal technicalitieswhich could delay or even prevent the process.

The more usual alternative would be for JS to filethe case to the court to request the remainingpayment or return of the goods.




Answer: See the answer to the Tenth Scenario,Issue 9.




Issues:


Answer: This commercial arrangement isdeemed by the law to be a Hire-Purchase . It is acontractual right, and not registrable as asecurity.


Answer: The Hire-Purchase must be created byspecifying in the contract that an owner of aproperty lets it out on hire, and promises to sellit to the hirer, or that it shall become theproperty of the hirer, conditionally on his making


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a certain number of payments. The contractmust be made in writing.


Answer: There is no requirement forregistration.

4. Question: Assuming that ABC defaults inpayment of the lease charges, whatprocess of enforcement is available to KL?

Answer: If ABC defaulted in two successivepayments, or breached any material part of thecontract, all previous payments are forfeited toKL, and KL is entitled to resume possession of itsproperty. In case of breach of contract bydefault of the last payment, KL is entitled toforfeit previous payment and resume possessionof the property only after the expiration of oneinstalment period.


Answer: KL can resume possession over theproperty after ABC defaults, as described inTwelfth Scenario, Issue 4.


Answer: The law provides that if severalpersons claim to have acquired the samemovable property under different titles, theperson who is in possession of the property ispreferred, provided that he has acquired it forvalue and has obtained possession in good faith.Therefore, if a third party bought the goods withgood faith, he will have greater priority over theentitlement than KL.


Answer: See the answer to Twelfth Scenario,Issue 6.


Issues:


Answer: There is no law which intervenes withthe creation of this arrangement. However,because the property is not in L Bank’spossession, this arrangement shall not be treatedas a pledge unless the parties agree that theproperty shall be kept by a third person in theforeign jurisdiction.


Answer: There is no requirement forregistration. The parties shall be boundaccording to the agreement which both partieshave entered into.


Answer: L Bank may file the case to the court,but whether or not the judgment of the courtwill be enforced in the foreign jurisdictiondepends on the law of a country in which theproperty is located.


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Answer: It depends on whether the property ismovable or immovable property, and whether aregister exists. For movable property, a debtorcan pledge such property to a creditor ascollateral. It is difficult to determine theproperty that is the subject of such possessorysecurity interests, and the identity of the holdersof those security interests, if such property is notrequired to be registered at any authorities.

For movable property for which a securityregister exists, and immovable property such asland, building etc., it is easy to determine,because the law requires the registration of suchsecurity.


Answer: Further to our answer to ThirteenthScenario, Issue 1, those non-registered“security” interests are very difficult to discover.Registered securities can be relied upon as beingsecurities.

3. Question: In cases where ABC hascreated multiple security interests inrespect of the same property, would it beeasy/difficult to determine the prioritybetween the competing security holders?

Answer: It would be easy to determine thepriority of multiple security interests in respect ofthe same property by examining the date andtime of registration. The first registration ofsecurity shall have priority right over the securedproperty except for preferential mortgage. Thepreferential mortgage shall have a prior right,although the registration date occurs after othercreditors.



Answer: Yes, the Insolvency Law provides forthe possible invalidity or avoidance of any of thesecurity interests created by ABC as a result offailure to observe the formalities imposed by thelaw for the creation of a security interest orfailure to observe the requirements of the lawrelating to registration. For example, ifpossession of pledged property was nottransferred to the pledgee, or if that pledgeetransferred possession of it to a third partywithout the pledgor’s consent, the security ofthe pledge could be challenged and avoided forimperfection.


Answer: Yes. Under the rehabilitation process,Sections 90/40, 90/41, and insolvency process,Sections 113, 114, 115 of the Bankruptcy ActB.E. 2483 provides an assumption of fraudulenttransactions if the creation of such a transactionresults in a disadvantage to other creditors whilethe debtor gains an inappropriate return fromsuch a creation.



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Answer: The secured property can either betreated as the property in relation to the estateof the debtor or outside the estate of the debtor.The reason is that under Insolvency Law, asecured creditor can file its claim for repaymentof debt by waiving the security and claim for alloutstanding debt, or appraise the value of thesecured property and claim for the remainingbalance.

Under Section 95 of the Bankruptcy Act B.E.2483, the secured creditor shall have the rightover the secured property even if the applicationfor repayment of debt is not filed with theofficial receiver. If the secured creditor files theapplication with the official receiver, suchcreditor shall be treated as a secured creditoronly if it states in the application that it is thesecured creditor. If such creditor fails to identifyitself as the secured creditor in the saidapplication, such creditor shall be treated as anunsecured creditor.

In practice, a secured creditor will file theapplication for repayment of debt with theofficial receiver as an unsecured creditor onlywhen the secured property has devalued, andthe expenses of enforcement do not make itworthwhile.


Answer: Yes, the secured creditor can file aclaim for repayment of debt for the remainingbalance if such claim is filed within 2 monthsafter the announcement of the receivershiporder against the debtor is published in thegovernment gazette.


Answer: Yes. A secured creditor must identifyitself as such in its application, as set out morefully in the answer to C1.



Answer: The provision of stay/suspension uponthe enforcement right of any of the securedcreditors in Thailand is stated only in Section90/12 of the rehabilitation process under theBankruptcy Act. This becomes effective fromthe date the court accepts the application forrehabilitation. Under the Section, the securedcreditor is prohibited from enforcing the securedproperty.


Answer: The stay/suspension protection periodoperates from when the Court accepts theapplication for the business rehabilitation, untilthe rehabilitation process is accomplished, or theCourt repeals a rehabilitation order. However,the creditor who suffers from such stay may seeka court approval to enforce the security asfollows:

● Security on Land – The creditors might file amotion with the Court seeking an order toallow the creditors to enforce the security onthe grounds that the land which is thesecurity is not a substantial matter for thedebtor’s business. In this case, the securedcreditor of land also has a right to requestthe Court for enforcement if it considersthat the application for debtor’s businessrehabilitation does not give enoughprotection to the creditor’s rights.

● Non-possessory security over movableproperty – The creditor can file a motion tothe Court for approval to enforce againstthe secured property on the ground thatsuch secured property is not necessary or ofmajor concern to the debtor’s business.


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● Lease financier – If the object of the leaseagreements is not a substantial matter forrunning the debtor’s business, the creditorcan file a motion with the Court requestingapproval to enforce the security.


Answer: The stay/suspension, under section90/12 of the Bankruptcy Act. B.E.2483, operatesas an automatic stay, which is automaticallyenforced by the law from the date the courtaccepts the application for businessrehabilitation.


Answer: There are no provisions under theBankruptcy Act for an “interim” or “temporary”stay/suspension.


Answer: The stay of enforcement would notapply to the retention of title by JS and theassignment of receivables to H Bank because thetitle to the raw materials and the right to receiveand enforce the debt (respectively) have beenfully transferred to the creditors. However ifthose transactions occurred within the 3 monthspreceding the date of the application forrehabilitation, the Official Receiver would havethe power to investigate, and if necessary voidthe transactions if the Official Receiverconsidered them to be an attempt to unfairlyfavour the creditors.


Answer: Under the Bankruptcy Act. B.E.2483,the provision of stay/suspension shall be applied inany cases which might affect the debtor’s property

and its business. In the event that a securityholder has commenced or almost completed theenforcement process before the restriction period,but the period is not yet completed, such creditorshall be forced by law to cease its performance ofexecution or seizure. The security holder is able tomake a request to the Court for approval tocontinue its enforcement.



Answer: From the time the court ordersreceivership of the company, secured creditorshave three options, namely:

● To file a claim as a secured creditor, andwaive their right to enforce the security; or

● To file an appraisal of the security (with theintention to enforce it itself), and claim thebalance between the appraised security andthe total debt; or

● To ask the Official Receiver to enforce thesecurity or on behalf of the creditors’.

Under the first and third options, the staycontinues to apply, but under the second, if theappraised value is accepted by the OfficialReceiver (who has 4 months to decide), the staywill not apply to enforcement of that asset.


Answer: See the answer to E1.


Answer: Other than the three options,described in our answer to E1 regarding how thesecured creditor wishes to file its claim, the lawdoes not allow an affected security holder toapply for the stay to be lifted.



Answer: The priority claims are specified inSection 130 of the Bankruptcy Act and rank, inorder of priority, as follows:

● administration expenses of the deceaseddebtor;


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● expenses of the receiver in managing thedebtor’s assets;

● funeral expenses of the deceased debtor;

● fees in collecting assets;

● fees of petitioning creditor and counsel’sfees as the court or receiver prescribe; and

● taxes and wages.


Answer: The priority is as per our answer to F1above. These do not conflict with the scenariosin Part One because there are no such priorityclaims relevant to the scenario in Part One.



Answer: If the creditor selects the secondoption of those options listed in E1, once theappraised value is approved by the OfficialReceiver, the creditor can enforce the securityusing the procedures under ordinary law.However if the first or third options are selected,the Official Receiver will conduct enforcementaccording to Insolvency Law, but the procedures(sale by public auction) are very similar. The onlysignificant difference is that the creditors ingeneral meeting can vote to sell the assetdirectly, rather than sell by way of public auction.


Answer: The Official Receiver will be the soleperson to have the full authority to collect thedebtor’s assets under the enforcement, and sellsuch collected properties under the insolvencylaw, except where the secured creditor haselected the second option to enforce the securityitself.

H. Issues relating to corporaterescue processes [rehabilitation;reorganisation; restructuringAssume that ABC is under the ‘rescue’ processof the insolvency law, but has not yet reachedthe point of approval of a plan of reorganisation


Answer: From the day on which the courtmakes an order accepting the petition, the re-organisation clause provides that: “No action orpetition shall be brought to the court foradjudication or order to dissolve the juristicperson who is the debtor. If there has previouslybeen such action or petition brought to thecourt, the court shall suspend the trial of thesaid case”. The clause applies to theenforcement powers of secured creditors, suchthat no secured creditor can enforce payment ofdebt against the asset, which is security, unlessotherwise approved by the court with whom thepetition is filed.


Answer: From the day on which the courtmakes an order accepting the petition until theexpiration of period of time for implementationof the plan, or the date on which the plan issuccessfully accomplished, or the date on whichthe court dismisses the petition or disposes ofthe case or repeals the order for a business re-organisation, or cancels the business re-organisation, or places the debtor underabsolute receivership.


Answer: The period of time of stay is indicatedunder the re-organisation law, as answered inH2. Thus, the length of the stay cannot beextended.


Answer: Creditors and persons whose rightshave been subjected to limitations of rights maysubmit an application to the court whichaccepted the petition, for an order amending,modifying or annulling limitations on their rights.


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Answer: The conditions that must beestablished before such a stay may be lifted areas follows:

● the assets or security are not necessary forthe business re-organisation; or

● re-organisation does not sufficiently protectthe rights of secured creditors.

Upon receipt of the application pursuant toabove, the court shall proceed with itsconsideration thereof as an urgent matter. If itappears to be a case under the first point, thecourt shall issue an order as it deems appropriateto protect the benefits of the applicant, and if itappears to be a case under the second option,the court may issue an order to proceed withamendments so that the rights of securedcreditors will be sufficiently protected.


Answer: Under the re-organisation procedure,the law specifies that no secured creditor shallenforce payment of debt against the asset whichis security, unless otherwise approved by thecourt with whom the petition is filed. From suchclause it shall be deemed that the law prohibitsonly the enforcement procedure of the securedproperty by the secured creditors during the stayperiod, but does not prohibit using the securedproperty during the stay period.


Answer: As mentioned above, the law doesnot prohibit using the secured property duringsuch stay period. This use does not include saleor other disposal of the secured property, unlessit is with the Planner/Plan Administrator’sapproval.


Answer: The Creditors – No secured creditorshall enforce payment of debt against the assetwhich is security unless otherwise approved bythe court with whom the petition if filed.

The Debtor – The Debtor shall not dispose of,distribute, transfer, let, pay debt, create debt ordo any act which creates encumbrances over hisasset, except where such act is essential so thatthe debtor may carry on his business as normal,

unless otherwise ordered by the court withwhom the petition is filed.


Answer: The voting rights and powers that thesecurity holders in Part One have will depend onthe outstanding figure which the debtor owedto the creditors. The re-organisation law ofThailand prescribes that the voting rights andpowers do not depend on whether the creditorsare secured creditors or unsecured creditors, butrather it depends on the outstanding figure thatthe debtor owed such creditors.


Answer: Normally, the Plan administrator willrank the class of the creditors for voting andplan approval matters. Although there are twosecured creditors, this does not mean that bothwill be ranked into the same class. By means ofthis, the Part One creditors can be either rankedinto the same class as the secured creditors, orcan be ranked in a separate class.


Answer: Of course, if the majority vote fromthe creditors is in favour, it will also bind all thesecurity holders.



Answer: The re-organisation procedure – Ifapproval of the majority of the creditors ispassed, the debtor is able to find the newadditional working capital to enable ABC tocontinue its business.

The Bankruptcy procedure – Only the securedcreditor can raise additional working capital toenable ABC to continue its business.


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Answer: Normally, the new credit usually ranksas a super priority ahead of the security holdersmentioned in Part One of the case study.However this must be passed by the majorityvote of the creditors, as well as having an ordergiven by the court.


Answer: The new credit has to pass theconsent of the secured creditors, approval ofcreditors, and then finally it will pass theconsideration by the court.




Answer: Mortgages and pledges (as possessorysecurities) are the most popular because of therelative certainty offered by a registered securityover land (in the case of mortgages), and topossession and control of the secured asset (in thecase of pledges). Registered securities overspecial movable property (e.g. industrialmachines) are widely used, but would be ratedbelow mortgages and pledges because of thegreater practical difficulty of enforcing against amovable asset in the debtor’s possession, and theusually higher rates of depreciation of such assets.

2. Question: If it is possible, please provideaverage term of loan and interest ratescharged by lenders to corporateborrowers for loans secured by:

● Mortgage over land

● Pledge over movable property

● Security over inventory

● Security over receivables

● Security over equipment

● Security over motor vehicles

Answer: The above-mentioned order is notabsolutely fixed by the Thai banking/finance sector.Banking/finance institutions usually considerinterest rates on a case by case basis. Although theloan is secured by the security interest, the

banking/finance institution shall consider the typeof business, loan objective, business related person,and type of security interest.

In Thailand, security over immovable property ismost favoured because of the ability to register,and the certainty that it cannot bemisappropriated and it suffers no or lowerdepreciation. Because of the difficulties inenforcing, and the risks associated with lesscertain securities, e.g. security over receivables,these are less favoured and usually, but notalways, incur higher interest rates. However, thelender shall consider interest on a case by casebasis. In some cases, the movable property isthe substantial part of business or has morevalue than the immovable property. Thus thelender might accept such movable property as itssecurity interest, and charge a lower interest ratethan usual.


Answer: The main barriers/drawbacks tosecured lending in the banking/finance sectorrelate to the assessment of debtors and theproperty offered as security interest, and toenforcement of security interests.

There is no credit bureau which enables banks orother lenders to quickly check the credit rating orhistory of potential debtors. Those forms ofproperty that have security registers are dividedamongst different governmental departments,and there is inadequate centralisation of thoseregisters. The limited choice of securitiesavailable, e.g. there are no floating chargedebentures and vehicle securities are by way ofhire purchase, means that lenders are sometimesreluctant to lend on the basis of the securities

Part Three

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that are available. Possessory securities (pledges)over movable property are cumbersome toadminister for institutional lenders, and hirepurchase over vehicles means the lender has alarge number of depreciating assets in its name.It is also difficult for lenders to obtain accurateestimates of the value of potential secured assets.

The many steps to enforcement, the inability totake “self-help” and the requirement to sell bypublic auction via a government departmentmeans that enforcement is seen as slow, labour-intensive and inflexible.


Answer: The areas of the “intersection”, whichcause the most problems or are mostproblematic in the banking/finance sector, arethe property appraisal and actual purpose of thebusiness borrower.

Appraisals are only an estimated value, and thevaluation profession is not highly developed,and/or is sometimes subject to influence, givinginaccurate estimates on which banks must rely.

The actual purpose of the business borrower isalso one of the causes of the banking/financesector’s problems. Sometimes, the businessborrower applies for business loan, but in fact,the full amount of the loan is not used for thebusiness, with the balance beingmisappropriated in various ways.

In addition, traditionally in Thailand, thepersonal relationship between the businessborrower (e.g. a managing director orshareholder) and the lender has been veryimportant, and has contributed to the high levelof non-performing loans in the banking/financesector. Borrowers with “status” or strongrelationships were, and in some cases still are,provided with loans with inadequate or noproper security, on the basis of “status” or“relationship” with the bank. However thepressure of reform after the 1997 currency crisishas reduced (but not eliminated) this practice.


Answer: In Thailand, the law concerningsecurity interests and the legal proceedings toenforce such over are currently being reviewed.

Presently, the type of properties which can beused as a security interest are only tangibleproperties. It does not include intangibleproperty, such as Intellectual property, which

often has more value than tangibles. The Thaigovernment is currently considering a “FloatingCharge Law”. If and when this law is issued,the borrower will be able to use its trademarks,copyright, or patents, etc. to secure loans.

However, even though this proposed law hasnot yet been issued, the borrower might usesuch intellectual property to be secured by theloan, by making the agreement with the lender.In such agreement, it will contain the term of“default of payment”, which shall specify that incase of default, the borrower shall transfer itsintellectual property to the lender. Thusenforcement is by way of contract.

A major target of reform is to expedite legalproceedings. Since the Central BankruptcyCourt was established, it introduced continualhearings whereby whole blocks of time wereallocated for continual hearings, rather thandates spaced out over many months or one at atime. This procedure has been adopted by othercourts. However it is recognised that furtherreform will be required to more radicallyexpedite the process.


Answer: Informal procedures between groupsof creditors, as an alternative to formalprocedures are not common or favoured. Aproblem with an informal work-out process isthat if just one creditor, or another creditor notinvited to take part, commences formalbankruptcy procedures, then all the creditorsmust join those procedures, or else risk losingtheir position in the formal procedures. In sucha case any informal arrangements risk beingoverturned by the Official Receiver on theground that such arrangements unfairly favourthose creditors taking part.


requirements of any law to registersecured property interests in a publicregister, does any law require that ABCmust maintain an internal register or bookof every security interest created by ABCand, if so, is such register or book availablefor inspection by a prospective creditor?

Answer: The Civil and Commercial Code, theSecurity and Exchange Act B.E. 2535 and thePublic Company Limited Act B.E. 2545 require


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that public companies maintain an internalregister or book of every security interest createdby the company. It is available for inspection byprospective creditors. However the onlyobligation on private companies is to file anannual financial statement to the CommercialRegistration Department, Ministry of Commerceand while this gives some indication as to levelsof debt, securities are not necessarily listed.



Answer: For some time a draft law, know as theForeclosure Law, has been considered and is nowcurrently pending consideration and review bythe Council of State. As such it is still very muchsubject to change, but its content will probablyaffect the issues raised in Part One and Two.


‘foreclosure’, are there any restrictionsthat intrude upon the power of aforeign lender to take possession, sell,become the ‘owner’ of, or otherwisedispose of secured property?

Answer: Foreigners cannot own land.Otherwise there is no restriction that intrudesupon the power of a foreign lender to takepossession, sell, become the “owner” of, orotherwise dispose of secured property if suchsecured property is movable property.Immovable property, such as land can also bethe secured property which a foreign lender cantake possession of, sell, or dispose, but cannotbe registered as the owner, as that is prohibitedunder the Land Law.


Answer: Yes, it is considered thatdomestic/foreign lending might be increased byreform/ improvements to the secured lendingand/or insolvency law processes. Some issuesfrequently mentioned as areas for improvementinclude:

● shorter enforcement times;

● “self help” remedies for creditors (i.e. toreduce or eliminate the role of the ExecutionDepartment);

● allowing sales of assets other than by publicauction; and

● reducing the ability of debtors to use minortechnical issues and postponements to delayenforcement.

These would require significant legal andbureaucratic reforms to come into effect.






Answer: If the foreign insolvency representativedoes not obtain the judgment rendered by theThai Court, it would not be possible for such arepresentative to seek a stay or suspension ofsuch enforcement action. However, if the ThaiCourt ordered ABC under receivership beforethe enforcement process is completed, it wouldalso not be possible for such a representative toseek a stay or suspension of such anenforcement action, because the foreigninsolvency representative will be deemed a“foreign creditor” by Thai law.


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Mr Ron HarmerConsultant (Joint Project Leader)Blake Dawson Waldron4th Floor, 90 Basinghall StreetLondon ECV 5AYUNITED KINGDOM

Tel: Tel: +44 20 7600 3030Fax: +44 20 7600 3392E-mail: [email protected]

Mr Richard FisherPartner (Joint Project Leader)Blake Dawson WaldronLevel 37, Grosvenor Place225 George StreetSydney NSW 2000AUSTRALIA

Tel: +61 2 9258 6043Fax: +61 2 9258 6999E-mail: [email protected]

Mr Martin BrownPartner and Head of Business Recovery ServicesPricewaterhouseCoopersDarling Park Tower 2201 Sussex StreetSydney NSW 2000AUSTRALIA

Tel: +61 2 8266 4579 (direct dial)+61 2 8266 0000 (switchboard)

Fax: +61 2 8286 4579E-mail: [email protected]

Mr Geoffrey Dabb24 Brockman StreetNarrabundah ACT 2604AUSTRALIA


Mr David WhiteAssociate DirectorPricewaterhouseCoopers15th Floor, Bangkok City Tower179/74-80 South Sathorn RoadBangkok 10120THAILAND


Mr Michael SloanSenior AssociateBlake Dawson WaldronLevel 37, Grosvenor Place225 George StreetSydney NSW 2000AUSTRALIA


Persons involved in the conduct of the Technical Assistance

Asian Development BankMs Clare WeeSenior Counsel and Deputy HeadPrivate Sector Legal Unit of the Office of the General CounselAsian Development Bank6 ADB AvenueMandaluyong City0401 Metro manilaPHILIPPINES

Tel: +63 2 632 5438Fax: +632 722 2207E-mail: [email protected]

International Consultants

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Local ConsultantsMr Felix SoebagjoPartnerSoebagjo, Jatim, Djarot(ADB preferred Indonesia partner)Plaza DM, 17th FloorJl. Jenderal Sudirman kav.25, Jakarta 12920INDONESIA

Tel: +62 21 522 9765Fax: +62 21 522 9752/53E-mail: [email protected]

Mr Dong Woo SeoPartnerBae, Kim & Lee(ADB preferred Korea partner)Hankook Tire Building6th-11th Floors647-15 Yoksam-DongKangnam-Ku Seol 135-723REPUBLIC OF KOREA

Tel: 822 3404 000Fax 822 3404 0001E-mail: [email protected]

or alternatively contact Kyu Sang [email protected]

Mr Francis LimPartnerAbello Concepcion Regala & Cruz(ADB preferred Philippines partner)ACCRA Building122 Gamboa St, Legaspi VillageMakati City 0770PHILIPPINES


(Attention Mr Francis Lim)

Mr Dej-Udom Krairit Managing DirectorDej-Udom & Associates Ltd Charn Issara Tower 9th Floor, 942/142-3 RamaIV RoadBangkok 10500 THAILAND

Tel: +662 233 0055/or233 0068

Fax: +662 236 6681E-mail: [email protected]

Internet Site

An electronic version of this paper with hyperlink or pdf access to the material referred to in this paper ison the website at: http://adb.bdw.com/.

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