On the 1 October 2011, the New Civil Code (“NCC”) came into force. Some of the changes address the conditions for creating, exercising the rights derived from and enforcing the security interest in personal property.

Perfection of security interest

The language used by the NCC to designate the security interest in personal property is that of movable assets mortgage. One difference from the previous regulation is that registration with the Electronic Archive for Security Interest in Personal Property (“Electronic Archive”) is no longer deemed sufficient to have a perfected security interest which would be enforceable against third parties. A security interest is perfected when:

  • the secured obligation comes into effect;
  • the constitutor of the mortgage (“constitutor”) acquires rights over the collateral; and • public notice has been given.

The public notice requirement is fulfilled by registering the interest in the Electronic Archive, unless otherwise indicated by law.

The perfected security interest is opposable to and enforceable against the constitutor’s others creditors, the subsequent creditors secured by the same asset, and against any other third party.

Public notice of the security interest in the bank accounts

In the case of creating a security interest in the bank account of the constitutor, the public notice requirement may be alternatively met by:

  • Registering the security interest in the Electronic Archive; or
  • Acquiring control over the bank account.

The NCC introduces the concept of bank account control. The secured creditor acquires control over the bank account of the constitutor if:

  • the secured creditor is the bank itself. In such a case the bank has an important tool in avoiding further proceedings against bad debtors and may set-off the outstanding secured debt against the constitutor’s claim for the account operated by the bank;
  • the constitutor, the bank and the secured creditor enter into a written agreement. Once this agreement is convened, the bank will follow the creditor’s orders, without the prior approval of the constitutor, regarding the amounts available in the constitutor’s account; or
  • the secured creditor becomes owner of the constitutor’s bank account.

If any of the last two conditions is met, then the secured creditor has the possibility to order the bank to transfer the constitutor’s available funds for its benefit.

The constitutor may retain the right to dispose of the amounts in the account even if the secured creditor controls its bank account. In this situation they are co-owners of the bank account.

Priority ranking

The following rules help to determine priority ranking:

  • As a general rule, the priority ranking of perfected security interest is determined following the order of registration in the Electronic Archive or of perfection, unless the law provides otherwise.
  • The claim of the secured creditor who controls the bank accounts of the constitutor is preferred to the claim of the secured creditor who does not control the accounts.
  • The perfected security interest always has a higher priority ranking than the unperfected security interest.
  • The claim of the secured creditor whose interest was registered in the Electronic Archive has priority over the claim of the beneficiary of a possessory lien, even if the latter had acquired the possession of the collateral before the registration of the secured creditor’s interest in the Electronic Archive.

Please note that this article is for information purposes only and must not be construed as legal advice, nor relied upon as enforceable legislation.