RA 11057

deposit accounts and intellectual property rights may now be used as collateral in
securing loan obligations

To boost access to credit, especially of micro, small, and medium enterprises

(“MSMEs”), farmers and fisherfolk, Republic Act No. 11057 (“R.A. 11057”), otherwise
known as the Personal Property Security Act, was signed into law last 17 August
2018. It strengthened the secured transactions legal framework in the Philippines
and provided for the creation, perfection, determination of priority, and
enforcement of security interests in personal property. R.A. 11057 also pursued the
design, establishment, and operation of a unified, centralized, online notice-based
national collateral registry that will be lodged in Land Registration Authority
(“LRA”) to reduce the risks involved in accepting movable collaterals.

Under R.A. 11057, movable collaterals now include, among others: deposit accounts,
accounts receivable, negotiable instruments, security certificate or electronic
securities, inventory, equipment, consumer goods, livestock and other agricultural
products, vehicles, and even intellectual property rights.

Before, a future property cannot be pledged or mortgaged since a party cannot

legally pledge or mortgage property he does not own. Under the present law, the
security agreement can now provide for the creation of security interest in a
future property, subject however to the creation of security interest when the
borrower acquires rights in it or the power to encumber it.

Essentially, R.A. 10157 covers all transactions of any form that secure an
obligation with movable collateral, except interests in aircrafts which will be
subject to Republic Act No. 9497, or the “Civil Aviation Authority Act of 2008”,
and interests in ships subject to Presidential Decree No. 1521, or the “Ship
Mortgage Decree of 1978”.

Prior to R.A 11057, pledge or mortgage of a movable collateral would differ in

formalities as to creation, perfection/registration, and enforcement. In pledge,
delivery of the thing pledged is necessary for its validity while in mortgage,
delivery is not necessary. In pledge, the agreement must be in a public instrument
containing the description of the thing pledged and the date thereof to bind third
persons; in mortgage, registration where the property is situated is necessary to
bind third persons. Now, rules on formalities as to creation,
perfection/registration, and enforcement have been simplified and harmonized. A
signed written contract is enough to create a security interest. Perfection of such
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. Also, a set of priority rules had been provided for to determine
the priority of interests and liens in the same collateral. More importantly,  the
long-standing distinction between a pledge and chattel mortgage on the right of the
lender to recover deficiency has been removed. Under the old law, the mortgagor is
liable to the mortgagee if the proceeds of the foreclosure sale are not enough to
satisfy the loan. Conversely, the foreclosure of the pledge completely extinguishes
the loan obligation and any stipulation allowing the pledgee to recover any
deficiency is null and void. Under the new law, the secured creditor, whether a
mortgagee or pledgee, shall account to the grantor for any surplus, and, unless
otherwise agreed, the debtor is liable for any deficiency.

In view of the foregoing, it bears stressing that the following laws, decrees, and
issuances and portions thereof which are inconsistent with the provisions of R.A.
11057, had been repealed, amended, and modified accordingly:

• Sections 1 to 6 The Chattel Mortgage Law;

 • Articles 2085-2123, 2127, 2140-2141, 2243, and 2246-2247 of the Civil
Code of the Philippines;
• Section 13 of the Financing Company Act of 1998;
• Sections 10, 114-116 of the Property Registration Decree; and
• Section 5(e) of the Land Transportation and Traffic Code.
•
Note, however, that notwithstanding the entry into force of R.A. 11057, the
implementation thereof shall be conditioned upon the Registry in the LRA being
established and operational.

The implementing rules and regulations for the effective implementation of the
statute will still be promulgated by the Department of Finance (“DOF”) in
coordination with the Department of Justice (“DOJ”) within six (6) months from its
passage. Additional articles will be written on this new law once the implementing
regulations are in place.