One set of legal issues that must be addressed as part of any secured transactions law reform is the transition to a new law. There are four elements of transition that must be addressed by the new law. Those are:
1. Effectiveness between the parties and enforcement of interests in movables that arose under the prior law 2. Priority of interests that arose under the prior law
(prior interests) as against each other
3. Priority between a prior interest and an interest created under the new law
4. Rules governing registration of prior interests during and after transition
For the first and second elements, the team’s legal expert can begin with the analysis of prior laws that was done during the diagnostic phase. For the third and fourth elements, the legal expert must coordinate with the registry expert to determine what is possible in light of priority rules and registration practices under the prior law.
Effectiveness of prior interests: The legal expert should examine the relevant prior laws that were identified in the diagnostic phase to determine if prior law provides for non-possessory security in movable property and, if so, what types of interests are included and what rules govern
59. For example, in Bosnia and Herzegovina appeal by the debtor regarding enforcement can affect the proceedings only after the property is taken away from the debtor.
their creation and enforcement. Such interests may include non-possessory pledge, mortgage of movables, sale with retained title, etc.
The reformed law should recognize the validity of rights created under the prior law. The effectiveness and enforceability of the interest as between the parties to the agreement should continue to be governed by the prior law (see Box 26).
Priority of prior interests with respect to each other: The legal expert must determine whether the prior law provides for perfection, i.e. effectiveness against third parties, of security interests. In the rare case where there is no way to perfect under prior law, the reformed law can deal quite simply with prior interests by permitting a creditor to perfect a prior security interest under the new law on the same basis as for a new security interest. In that case, priority can be determined under the new law after it becomes effective. If the prior law does not address the issue of effect on third parties, there is no conflict if the new law permits perfection and prioritization under its terms. However, if prior law provides for perfection and prioritization of security interests, priority between competing security interests, both of which were perfected under the prior law, will not be affected by the new law; i.e. priority between prior interests will continue to be governed by the prior law.
Priority of prior interests with respect to interests created under new law: If the prior law provides for perfection and prioritization of security interests, the legal expert must consider what means to provide to secured creditors for the preservation of priority of their prior interests after the new law becomes effective. The means generally consists of a transition process whereby a prior perfected security interest may be perfected under the new law’s priority schema, while preserving its original priority date. The rules for the transition process that is used will depend on the situation in the jurisdiction.
The legal expert and the registry expert must consider several questions before developing the transition rules that will govern prior security interests. Those questions include:
What are the means of perfection of security interests •
Box 26: Example of Provision in a Secured Transactions Law for Validation of Prior Security Interests
“The effectiveness between the parties of a security interest that was created under the prior law continues after this law comes into effect, and shall continue to be governed by the prior law.”
Box 27: Different Approaches for a Transition Period for Prior Registrations
There are two approaches the reformed law can take to a transition period for prior registrations, each with its own advantages. The first is a provision to preserve the original priority date of prior security interests if a notice is registered during a transition period before commencement of registration of notices under the reformed law. The second is a provision to preserve the original priority date of prior interests if a notice is registered during a defined period after commencement of registration under the new law while allowing registration of new interests during the same period in parallel. Under either approach, if notice of a prior interest is registered after the transition period, its priority against interests created under the new law is from the registration date. The first approach precludes the risk of a new security interest registered during the transition period being subordinated to a prior security interest that is registered later in the transition period. The second approach permits commencement of registration of all types of interests as soon as the registry is ready to operate, rather than delaying it while notices of prior interests are registered, though it does leave new security interests that are registered during the transition period vulnerable to later registration during the transition period of a notice of a prior interest with an earlier priority date.
Table 9: Priority Conditions and Transition Rules of the Reformed Law
Priority Conditions under Prior Law Transition Rule of Reformed Law
No registration provided under prior law; perfection under prior law is upon the security agreement becoming effective.
If registered in transition period, priority relates back to the date/time of the agreement. If registered after transition period, priority against new interests and registered prior interests is from date/time of registration. If not registered, priority against other unregistered prior security interests is per prior law.
Priority under prior law is by registration; automated migration of data from prior registry(ies) to new database is not viable.
If registered in transition period, priority is from registration date/time of prior registration under prior law. If registered after transition period, priority is from date/time of registration. If not registered under new law, priority against other unregistered prior security interests is per prior law.
Priority under prior law is by registration; automated migration of data to the new registry database is viable and elected.
Provide for migration of prior registration data to new system. Priority of prior interests dates from date/time of registration under prior law.
under the prior law? Are security interests perfected at the time of creation of the security interest, at the time of registration, or at another time?
If perfection is by registration, is the prior registration •
system centralized or decentralized, and if decentralized, on what basis (geographically, type of debtor, type of collateral, etc.) and at what level(s) of government?
Is/are the relevant registry(ies) under the prior •
law computerized, and if decentralized, are the systems consistent with respect to data elements and organization of data?
If the registry(ies) under prior law is/are computerized •
and consistent, does the database include all data that will be required in the new registry, and if so, is the quality of data reliable and in a form that it can be automatically mapped to the new database? If migration is technically feasible, is migration of data •
or reregistration of security interests during a transition period more acceptable to the stakeholders? If registration under the prior law is centralized in a computerized registry, if the data captured include all of the elements required under the new law, if the data elements are organized and identified in a fashion that permits them to be mapped into the new database, and if the data have been accurately entered, then it may be
possible to transfer the data into the new registry database by an automated process and to continue operations with the original registration date preserved in the system. In this case, it is not necessary to have secured creditors take any action to preserve their priority against new registrations.
In the more common case where the prior law provides for perfection by registration in a decentralized system or a system that is not conducive to automated migration to the new registry’s database, the reformed law should generally provide for a transition period during which prior security interests may be registered to preserve their priority against security interests created under the new law (see Box 27).
Priority between registered security interests will be determined by the date and time when they become effective as notice to third parties. In the case of security interests created and registered under the reformed law that is the date and time of registration. In the case of prior interests, the legal expert should draft the reformed law’s transition rules in light of the priority rules of the prior law and the limitations of the registration system that was used under the prior law. Those possible conditions and possible transition rules for the reformed law are presented in Table 9:
The operation of transition rules may be illustrated by the following examples: Example 1: Prior Law Provided for Priority by Registration
Facts:
June 1, 2007, Creditor A registered pledge under prior law June 1, 2008, Creditor B registered pledge under prior law
June 1, 2009, reformed law effective, registry commences operation and transition starts June 5, 2009, Creditor B registers transition notice
June 10, 2009, Creditor C registers new notice of security interest under reformed law June 15, 2009, Creditor A registers transition notice
September 1, 2009, transition period ends
October 1, 2009, enforcement commences by A, B or C Priority ranking:
First priority to Creditor A dating from June 1, 2007 Second priority to Creditor B dating from June 1, 2008 Third priority to Creditor C dating from June 10, 2009 Example 2: Prior Law Provided for Priority by Registration Facts:
June 1, 2007, Creditor A registered pledge under prior law June 1, 2008, Creditor B registered pledge under prior law
June 1, 2009, reformed law effective, registry commences operation and transition starts June 10, 2009, Creditor C registers new notice of security interest under reformed law June 15, 2009, Creditor A registers transition notice
September 1, 2009, transition period ends
September 5, 2009, Creditor B registers transition notice October 1, 2009, enforcement commences by A, B or C Priority ranking:
First priority to Creditor A dating from June 1, 2007 Second priority to Creditor C dating from June 10, 2009 Third priority to Creditor B dating from September 5, 2009
Example 3: Prior Law Provided for Priority by Date of Agreement – No Registration Facts:
June 1, 2007, Creditor A made pledge agreement under prior law June 1, 2008, Creditor B made pledge agreement under prior law
June 1, 2009, reformed law effective, registry commences operation and transition starts June 5, 2009, Creditor B registers transition notice
June 10, 2009, Creditor C registers new notice of security interest under reformed law June 15, 2009, Creditor A registers transition notice
September 1, 2009, transition period ends
October 1, 2009, enforcement commences by A, B or C Priority ranking:
First priority to Creditor A, dating from June 1, 2007 Second priority to Creditor B, dating from June 1, 2008 Third priority to Creditor C, dating from June 10, 2009
Registration transition provisions: The reformed law should provide for transition of prior interests if the prior law provided for effectiveness against third parties (perfection). The transition rules may be included in the new law itself, or the law may defer them to implementing regulations. In any case, the rules should provide a means for identification of a transition registration and for capture of information that establishes the priority date of the registration. The first provision will be the transition process. This will include the transition period, if any, and whether it will be before or after the start-up of registration under the reformed law. It may also set out the responsibilities of the registry and the parties to prior transactions in getting registration data for prior transactions into the new system.
The second provision will set out the information on prior transactions that is required in transition registrations. If prior law provided that perfection was automatic upon creation of the security interest under the prior law, the rules may require a statement of the date and other identifying
Box 28: Matters That May Be Included in Secured Transactions Decree or Regulation
Time and location of operation of the •
registry
The manner in which the head of the registry •
discharges his duties and obligations Requirements to complete a registration, •
including amendment, cancellation, extension
Requirements to complete a search request •
Search methodology •
Format of confirmation of registrations and •
search results reports
Establishment of regular user accounts for •
access control and fee payment
Methods and processes for payment of •
fees
Fees for registry services •
information about the security agreement, and might also require a statement of the legal authority under which it was created, e.g. the pledge law. If the prior law provided for perfection by registration, the rules may require information such as the registration number, registration date and the name of the registry in which registration under the prior law was accomplished. Or, depending on the circumstances, the rules may require a book and page number of the registration if it was made in a paper-based registry. A third provision may be required to establish the date on which the registration’s effectiveness will lapse if the general rule for new registrations will not work. In the case of registration of transition notices by creditors, the provision could state that the period of effectiveness for prior registrations during the transition period will start on the first day of operation of the registry, or it could state that the period will start on the date of the transition registration. In the case of registrations that are moved by the registry from a prior database en masse, the rule might retain the effective period from the registration under the prior law, or it might provide for a set period after the start-up of the new registry. There may be other valid options, depending on the situation. The point is that the matter will need to be addressed in cases where the rule for registration of security interests under the reformed law will not work.60