engaged in industry, agribusiness and/or services,
Changing Times, Changing Concepts whether
A Look at Republic Act No. 11057 or the Personal
Property Security Act
1.0 Background
The Personal Property Security Act or R.A. No.
11057 which is based on House Bill No. 6907 was
signed by President Rodrigo Roa Duterte on August
17, 2018. Section 2 provides that “[i]t is the policy of
the State to promote economic activity by increasing
access to lease cost credit, particularly for micro,
small, and medium enterprises (MSMEs), by
establishing a unified and modern legal framework for
securing obligations with personal property.” From
the wording of the statute, it is evident that such was
created to boost access to credit of micro, small and
medium enterprises.
One of the benefits of the changes introduced by
R.A. No. 11057 is that smallstore owners and farmers
who do not have immovable properties can now use
theirpersonal and/or movable property as collateral
to secure a loan obligation. Someexamples of movable
collateral it allows are the following: 1) deposit
accounts, 2)accounts receivable, 3) negotiable
instruments, 4) security certificate or
electronicsecurities, 5) consumer goods, 6) livestock
and other agricultural products, 7)vehicles and 8)
intellectual property. However, interest in aircraft and
in ships are not
included because they are governed by R.A. No. 497
and P.D. No. 1521 or the Ship Mortgage Decree of
1978, respectively.
Since accepting movable properties as collateral
increases the risk for creditors, the same also calls for
the establishment of a unified and centralized
electronic registry which will be implemented and
operated by the LRA (Land Registration Authority).
This electronic registry will allow creditors/lenders to
monitor and make sure that the collaterals of the
applicants will no longer be used for more than one
loan or credit application.
What is an MSME?
MSME, or micro, small and medium enterprises in
the Philippines is defined
under Section 3 of Republic Act No. 9501 as “any
business activity or enterprise
single proprietorship, cooperative,
partnership or corporation whose total assets,
inclusive of those arising from loans but exclusive of
the land on which the particular business entity’s
office, plant and equipment are situated, must have
value falling under the following categories:”
Micro Not more than Php 3,000,000.00
Small Php 3,000,001 - Php 15,000,000
Medium Php 15,000,001 - Php 100,000,000
MSMEs may be classified as well by employment
size. Micro enterprises employ fewer than 10 workers.
Small enterprises employ from 10 to 99 workers while
medium enterprises employ 100 - 199 workers.
Classifying businesses as micro, small, medium or
large enterprises is important as it allows the
government to
provide the needed support and properly regulate
such systems according to the type of business they
engage in.
Throughout the years, there has been an
improvement in the Philippine economy. One factor is
the growth of MSMEs as evidenced by the number of
Filipinos going into entrepreneurship, which in turn
resulted in the increase in number of working Filipinos
in the provinces or countryside. The same contributed
to an increase in tourism activity through the
promotion of products made from quality indigenous
materials, making these commodities ideal for global
export.
According to the Department of Trade and
Industry, the 2017 List of Establishments of the
Philippine Statistics Authority (PSA) recorded a total of
924,721 business enterprises operating in the
Philippines, 99.56%, or 920,677 of the 2.1 Prior to Republic Act No. 11057, future
total establishments of which are MSMEs. 89.59% property cannot be pledged
(828,436) were microenterprises, or mortgaged as ownership is required as a
9.56% (88,412) were small enterprises, and 0.41% requisite for either or both.
(3,829) were medium
enterprises. The remaining 0.44% (4,044) belongs to Under the Civil Code, a party cannot pledge or
the large enterprises. mortgage property he does not
own absolutely. Under R.A. No. 11057, the security
To further improve the growth of MSMEs, one agreement allows for the
recommendation is that existence of security interest based on a future
measures be taken to foster their development, one property although subject to
of which is to increase their
access to finance to support their business. In line
with this, the signing of Republic
Act No. 11057 will significantly benefit the MSME
sector as it broadens the range of
options for financial assistance through the
procurement of loans for sustaining
trade.

R.A .No. 11057 repealed, amended and/or

modified the following:

Sections 1 to 16 of Act 1508, otherwise known as the

Chattel Mortgage Law;

Articles 1484-1486, 2085-2123, 2127, 2140-2141,

2241, 2243, and 2246-2247 of
Republic Act No. 386, otherwise known as the Civil
Code of the Philippines;

Section 13 of Republic Act No. 5980, as amended by

Republic Act No. 8556,
otherwise known as the Financing Company Act of
1998;

Section 10 and Sections 114 to 116 of Presidential

Decree No. 1529, otherwise
known as the Property Registration Decree; and

Section 5 (e) of Republic Act No. 4136, otherwise

known as Land Transportation and
Traffic Code.

2.0 Specific Modifications and Changes: Highlights

In general, the differences between the old laws and

statutes prior to R.A. No. 11057
and the latter can be summed up as differences in
formalities as to creation,
perfection, registration and enforcement.
the the acquisition of the borrower of rights in such
future property or the
power to control and encumber it.
2.2 The long-standing distinction between a pledge
and chattel
mortgage based on the right of the creditor-lender to
recover deficiency
in credit (or whatever else the debtor may owe him)
has been removed.
Under the Civil Code, it is well-settled that the
mortgagor is liable to the
mortgagee if the proceeds of the sale resulting from
the foreclosure of the
mortgaged property are not sufficient to answer for
the full amount of the loan.
On the other hand, foreclosing the pledge completely
extinguishes the loan
obligation and any stipulation that allows the pledgee
to recover any
deficiency (i.e. difference between the amount of the
loan and the proceeds of
the pledge against the interest/advantage of the
pledgee) is deemed void.
Under the new law, R.A. No. 11057, the secured
creditor (whether of the
pledge or chattel mortgage) is accountable to the
grantor for any surplus, and
unless otherwise agreed, the debtor is now made
liable for ANY deficiency.
order of preference of interests and liens in the SAME
collateral. Whereas
before, as provided in the Civil Code, a pledge must be
recorded in a public
instrument containing a description of the thing
pledged and the date of
execution to make the agreement binding to third
persons. In mortgage,
likewise, registration of the mortgaged property in the
place where such is
situated is the necessary requirement to make the
mortgage binding to third
persons. R.A. No. 11057 simplifies the process by
allowing for the above
options instead (i.e. those listed under a, b, and c
above).
When a contract of pledge or mortgage is constituted
to secure the fulfilment
of a principal obligation such becomes binding only if
the latter (i.e. the
principal obligation) is valid and binding. The reverse,
however, does not
follow. An invalid pledge or mortgage can be used as
evidence of an existing

2.3. In pledge, delivery is necessary to make the

object or thing pledged
a valid object of such transaction; on the other hand,
in mortgage,
delivery is not a requisite. Under Republic Act No.
11057, a signed,
written contract is sufficient to create a security
interest, which in turn is
perfected through the act of registering such security
interest.

In contrast with the pertinent provisions of the Civil

Code, R.A. No. 11057
ensures that perfection of security interest is made
through the following: (a)
by registration of a notice with the registry; (b) by
possession of the collateral
by the secured creditor; and/or (c) by control of
investment property and
deposit account. Likewise, priority rules have been
provided to determine the
principal obligation, the validity of which operates
independently of the pledge
or the mortgage used to secure it.
A pledge or mortgage executed by one who is not the
owner of the
property pledged or mortgaged is without legal
existence and registration
cannot validate it. Furthermore, the Civil Code
requires that the pledgor or
mortgagor be the absolute owner of the property.
This means that the
property must be unencumbered. The absolute owner
of a property, therefore,
has legal and beneficial ownership.
The persons constituting the mortgage or pledge must
also have the free
disposal of the property, and in the absence thereof,
that they be legally
authorized for the purpose. Accordingly, the property
must not be subject to
any claim by a third person, and the pledgor or
mortgagor has the capacity
or authority to make a disposition of the property.
2.4 Republic Act No. 11057 simplified the registration
process for
personal assets by reconciling the law on chattel
mortgage found on the
New Civil Code with that of the Chattel Mortgage Law
of 1906.
R.A. No. 11057 created a modern centralized registry
for personal assets. It
explicitly stated that a security interest is created
through a security
agreement. It simplified the procedure for the
registration of personal assets
and changed the priority of security interests and liens
in the same collateral
from the order of creation of the security interests
and liens to determining it
according to time of registration of a notice or
perfection by other means.

The secured creditor will account to the grantor for

the surplus amount in case
of enforcement of the security. Thus, the residue after
satisfying the obligation
and costs shall be given to the mortgagor or the
latter’s representatives. In the
absence of any evidence showing that the mortgage
also covers other
obligations of the mortgagor, the proceeds shall not
be applied to such
obligations. However, the debtor continues to be
liable for deficiencies
resulting from the difference between the amount
obtained in the sale at
public auction. The secured creditor may take
possession of the property
without need of judicial process and proceed to
dispose the collateral in a
public or private sale upon notice to debtor. Delivery
is not necessary as it is
perfected when it has been created and secured
creditor has taken one of the
actions in accordance with Section 12 of R.A. No.
11057. Therefore, there is
no more need to deliver the pledged property to the
creditor as previously
required by the Civil Code.
The priority of security interests and liens in the same
collateral is changed
from its date of creation to the date of security
interest and liens to time of
registration. It also expedites extrajudicial foreclosure
of rapidly deteriorating
assets. It enforces security interest in personal
properties and allows private
sales to maximize proceeds from personal assets.
2.5 Rules on concurrence and preference of credit on
movables have
been modified by Republic Act No. 11057 as well.
The pertinent provisions are laid out in Articles 2236
to 2251 of the New Civil
Code with regard to concurrence and preference of
credits. Concurrence of
credit exists when two or more creditors possess
equal rights or privileges
over the same property or on all of the properties of
the debtor. On the other
hand Preference of credit is a right to be paid first, out
of the debtor’s assets.
This simply creates a right to be paid first or ahead of
the others from the
proceeds of the sale of property in cases wherein
there are two or more
creditors who have separate and distinct claims
against the same debtor, who
has insufficient property.
with the equality of all credits listed under Article
2241 of the New Civil Code.
It expressly repealed Articles 2241, 2243, 2246 and
2247, all of which refer to
the preference of credits with reference to the
specific movable property of the
debtor. It must be noted that the repeal of the above
mentioned sections
changed the rules on the preference of credits in
relation only to movables.
2.6 In contrast with the pertinent provisions in R.A.
No. 8556 (amending
R.A. No. 5980 or the Financing Company Act of 1998)
and those of P.D.
No. 1529, Republic Act No. 11057 operates under a
notice-based
registry--a national, collateral registry that is
centralized and can be
accessed online.

Under Section 17 of R.A. No. 11057, the priority of

security interests and liens
in the same collateral shall be determined according
to time of registration of
a notice or perfection by other means, without regard
to the order of creation
of the security interests and liens. Sections 18 to 25
emphasizes the process
in determining the priorities in security interests
regarding movables,
particularly deposit account, investment property,
electronic securities,
security certificate, negotiable instruments, goods,
purchase money, livestock
as well as fixtures, accessions and commingled goods.
It did away with the
order of preference as provided under Article 2247,
which states that credits
are to be satisfied pro rata after payment of dues
owed to the State, as well as
 More specifically, Section 13 of R.A. No. 8556
confers authority on the
Register of Deeds, the basic functions of which are
enumerated in Section 10
of P.D. No. 1529 as follows: “It shall be the duty of
the Register of Deeds to
immediately register an instrument presented for
registration dealing with real
or personal property which complies with all the
requisites for registration. He
shall see to it that said instrument bears the
proper documentary and science
stamps and that the same are properly cancelled.
If the instrument is not
registerable, he shall forthwith deny registration
thereof and inform the
presentor of such denial in writing, stating the
ground or reason therefor, and
advising him of his right to appeal by consulta in
accordance with Section 117
of this Decree.” Sections 114 and 115 of the same
charges the Register of
Deeds with the recording of the chattel mortgage
in the province or city where
the mortgagor resides as well as where the
property was situated or ordinarily
kept, and establishes the procedural measures for
recording chattel
mortgages respectively. On the other hand, under
R.A. No. 11057, registry is
lodged with the Land Registration Authority (LRA)
to reduce potential risks
and liabilities involved in accepting movable
collaterals.

3.0 A Table of Contrasts

It should be noted that some of the Civil Code

provisions regarding Mortgage are still
in force. The particular provisions relating to Pledge,
however, are deemed repealed
by R.A. No. 11057. Nevertheless, these may be
distinguished as follows:

MORTGAGE R.A. No. 11057 ( Personal

Property
Security Act)

As to formalities
The parties need to observe the
need to observe the following
requisites under Article 2085 of
down in Section 12:
the New Civil Code:
The parties only paid to the mortgagor or his duly the surplus amount
authorized agent, or to the
formalities laid person entitled to it.
As to the right of creditor to recover
deficiency

1.) That they be constituted to

1.) Written security agreement
signed by the
secure the fulfillment of a
parties
principal obligation;

2.) A description of the collateral,

whether
2.) That the pledgor or
specific or general, that
reasonably identifies
mortgagor be the absolute
the same
owner of the thing pledged or
mortgaged;

.) That the persons

3 3.) Perfection of the security
interest by
constituting the pledge or registration of a notice
with the electronic
mortgage have the free disposal registry and either
possession of the object (if
of their property, and in the the collateral is
tangible property) or control of
absence thereof, that they be the account (if the
collateral is investment
legally authorized for the property or deposit
account)
purpose.

As to the right of the debtor to surpluses

Under Section 4, Rule 68 of the It uniformly

provides under Section 52 (b) that
Rules of Court, if there be any in case of
enforcement of the security, the
balance or surplus, it shall be secured creditor will
account to the grantor for
It is a settled rule that the
Section 52 (b), in case
mortgagee may recover any
debtor continues to be liable
deficiency in the mortgage
account.
As provided for under
of deficiency, the
PLEDGE R.A. No. 11057 ( Personal
for such deficiency. Property
Security Act)

As to formalities
As to the right of creditor to enforce security

In case of enforcement of In case of

enforcement of security, under
security, the remedy given to the Section 47 the
secured creditor may take
mortgagee is foreclosure of the possession of the
property without need of
subject property where the judicial process and
proceed to dispose the
mortgagor is in default in the collateral in a public
or private sale upon
payment of said obligation. notice to debtor, in
accordance with the
provisions under Section 49.

As to its binding effect against third persons

As stated under Article 2125 of Not necessary that it

appears in a public
the civil code, it is necessary instrument as it is
enough under Section 6 if it
that the instrument be recorded is contained in a
written contract and signed
in the Registry of property in by the parties.
order to bind third properties.

As to its perfection

In order that the mortgage may Delivery is not

necessary as it is perfected
be validly constituted, it is when it has been
created and secured creditor
provided for under Article 2125 has taken one of
the actions in accordance
that the document in which the with Section 12 of
R.A. No. 11057
mortgage appears be recorder
in the Registry of Property.
The parties need to observe the The parties only the sale is less, the creditor shall of deficiency, the
need to observe the debtor continues to be
requisites under Article 2085 of following not be entitled to any deficiency, liable for such
formalities laid down in Section 12: deficiency.
the New Civil Code: notwithstanding any stipulation to
the contrary.

As to the right of creditor to enforce

1.) That they be constituted to 1.) Written security
security agreement signed by
secure the fulfillment of a principal the parties
obligation;

2.) That the pledgor or 2.) A description of

the collateral, whether
mortgagor be the absolute owner specific or
general, that reasonably identifies
of the thing pledged or the same
mortgaged;

3.) That the persons constituting 3.) Perfection of

the security interest by
the pledge or mortgage have the registration of
a notice with the electronic
free disposal of their property, and registry and
either possession of the object
in the absence thereof, that they (if the collateral
is tangible property) or
be legally authorized for the control of the
account (if the collateral is
purpose. investment property or
deposit account)

As to the right of the debtor to surpluses

Article 2115 of the New Civil Code It uniformly

provides under Section 52 (b)
states that If the price if the sale is that in case of
enforcement of the security,
more than the said amount, the the secured
creditor will account to the
debtor shall not be entitled to the grantor for the
surplus amount
excess, unless it is otherwise
agreed.

As to the right of creditor to recover

deficiency

Under Article 2115, if the price of As provided for

under Section 52 (b), in case
In case of enforcement of In case of
enforcement of security, under
security, Under Article 2112 the Section 47 the
secured creditor may take
creditor may proceed before a possession of the
property without need of
Notary Public to the sale of the judicial process and
proceed to dispose the
thing pledged and the sale shall collateral in a
public or private sale upon
be made at a public auction notice to debtor, in
accordance with the
provisions under Section 49.

As to its binding effect against third persons

As stated for under Article 2096, Not necessary that

it appears in a public
the pledge shall take effect instrument as it is
enough under Section 6 if
against third persons when the it is contained in a
written contract and
description of the thing pledged signed by the
parties.
and the date of the pledge appear
in a public instrument.

As to its perfection

Delivery of the thing pledged is Delivery is not

necessary as it is perfected
necessary for its validity. Article when it has been
created and secured
2093 provides that the thing creditor has taken
one of the actions in
pledged must be placed in the accordance with
Section 12 of R.A. No.
possession of the creditor or of 11057
the third person be common
agreement.

CHATTEL MORTGAGE - Civil code R.A. No.

11057/PPSA

As to registration
The registration of chattel mortgage is The
registration as provided for by
necessary as provided for by the law. the civil
code is not necessary. It
is sufficient that there is a
signed
written contract which will
create a
security interest. It may be
perfected through notice
with
registry, possession of
collateral
or control of the property.

Article 2140 R.A. No. 11057

By a chattel mortgage, personal property is A signed
written contract is
recorded in the Chattel Mortgage Register enough
to create a security
as a security for the performance of an interest.
Perfection of such
obligation. security interest may be
by
registration of a notice with
the
registry, possession of the
collateral by the secured
creditor
or control of investment
property
and deposit account.

As to perfection
The delivery of the thing will operate as a The A security agreement may
delivery or non-delivery of the provide
pledge and not chattel mortgage. thing or absolute owner of the thing pledged or
property is not necessary for the creation of security
or not material anymore. interest
What is mortgaged;
required is that it is in in a future property, but
compliance the
with Section 12 of the R.A. security interest in that
No. property is
11057. created only when the
grantor
If the movable, instead of being recorded, is Section acquires rights in it or the
12. Means of Perfection. - power to
delivered to the creditor or a third person, A security encumber it.
interest may be
the contract is a pledge and not a chattel perfected As to formalities
by:
mortgage.
(a) Registration of a notice
with
the Registry;

(b) Possession of the

collateral by
the secured creditor; and

(c) Control of investment

property
and deposit account.

As to ownership: as a collateral

The mortgagor must be the owner of the It is

possible to use future property
property in order to use it as a collateral as
collateral, provided that the
security interest is not
created
until and unless the
borrower
acquires rights in it or the
power to
encumber it

Section 5. Creation of
Security
Article 2085 of the New Civil Code:
Interest.

That the pledgor or mortgagor be the

The requisites of chattel mortgage is The agreed, the debtor is
formalities given by the R.A. liable for any
provided for by Article 2085. No. 11057 deficiency.
are:
As to priority of security interests and liens in the
Must be in accordance with Articles 2085 to same collateral
Section 12. Means of Perfection. -
2123, 2140 to 2141. A security
interest may be
perfected by:

(a) Registration of a
notice with
the Registry;

(b) Possession of the

collateral by
the secured creditor; and

(c) Control of investment

property
and deposit account.

As to enforcement of security

foreclosure may only be done before a the

secured creditor may take
notary public (pledge), public officer, or court
possession of the property without
(chattel mortgage), and foreclosure sales need of
judicial process (Section
were required to be done publicly. 47) and
proceed to dispose the
collateral in a public or
private
sale upon notice to the
debtor
(Section 49).

As to right of the lender to recover

deficiency

the mortgagor is liable to the mortgagee if The

secured creditor, whether a
the proceeds of the foreclosure sale are not
mortgagee or pledgee, shall
enough to satisfy the loan. account to the
grantor for any
surplus, and, unless
otherwise
It shall be in the order of creation of the shall be
determined according to
security interests and liens. The date of the time of
registration of a notice or
creation of security interest and liens are
perfection by other means. Here,
important because it will indicate what shall the
time of registration is the
be prioritized. determining factor
on which
security interest and liens
shall be
prioritized

As to the default of the debtor/mortgagor

The creditor may move to foreclose the In case

of default, borrowers and
mortgaged property and subject it to public lenders
may opt to put movable
auction, the proceeds thereof shall be collateral
for private sale.
applied to the principal obligation or the
creditor may file for an action to recover sum
of money in which case the property may be
subjected and be attached to the judgement
in case the creditor won the case.