4. PROPERTY RIGHTS AND SECURED TRANSACTIONS

The ADB report noted that many of the RETA economies suffered from inadequate laws or processes relating to the extent, creation and public notification of secured transactions. In some cases this was due to an inadequate development of a property rights regime (for example, recognition of intellectual property rights, recognition of lease finance transactions) or the failure to appreciate the need for a registration or filing system. But the major problem centred upon the enforcement rights of secured creditors (or the application of laws relating to enforcement in a practical and effective sense). This created a significant imbalance between the rights and expectations of secured creditors and the debtors who had granted those securities.
In nearly all the jurisdictions in the region the 'balance' seemed to be weighted in favour of the borrower or debtor. This seemed to be principally due to the requirement that enforcement requires judicial process in most of the jurisdictions.
As mentioned in the introduction to this report, the second phase of this Project will be greatly enhanced by the work being carried out on the Secured Transaction Project. That project will provide an important and extensive review of secured transactions in a number of countries in the region. In particular it will deal with the vital issues of registration/filing, priorities between secured creditors and preferential claims in far greater depth than has been possible in this Project. It will, therefore, be necessary to take into account and blend the findings and recommendations that will emerge from that project with the more limited study of secured transactions as part of this Project.
For the purpose of the second phase of this project, the consultants in the five economies were asked to report on the more major areas of difficulty and suggested reforms. A summary of their responses follows.

4.1 Philippines
In the Philippines the basic problems are these:
-The law regarding securities (or assignments) over incorporeal rights (for example, receivables) is not clear and there are considerable risks concerning the enforceability of such securities.
-There is also a problem regarding chattel mortgages because enforcement is impossible unless the chattel is in the possession of the mortgagee or lender.
-The major impediments facing a secured creditor are inefficient registries of land and chattel mortgages and the inefficient judicial system to which recourse is almost certainly necessary for enforcement purposes. The consultant for the Philippines considers that a centralised and computerised registration system would considerably assist.
4.2 Korea
In Korea it is suggested that the idea of a 'collective' security (a security over all the assets of a corporate borrower - possibly similar to the concept of the 'fixed and floating' charge which is a characteristic of some common law countries) might be introduced. A suggestion in Korea is that a better system of disclosure, which would more accurately identify and publicise the amount(s) of loan covered by a security, would greatly assist the corporate process.
4.3 Malaysia
In Malaysia some curious contrasts regarding secured creditors and enforcement rights have become apparent as a result of the Danaharta legislation. The Malaysian consultant gives the following examples.
A major impediment to security over land is the requirement that enforcement requires a judicial sale. Thus, if a bank holds security over land in respect of a debt owed by a defaulting corporate debtor, the bank would be required to obtain court orders for a court controlled sale of that land. However if Danaharta acquires the non-performing loan along with the security over the land from the bank, Danaharta may sell the land as it sees fit without any need for a court order or court controlled sale. This is because the National Land Code was amended to enable Danaharta, in the exercise of its subrogated security enforcement rights, to sell land by private treaty.
Danaharta is, of course, a public authority, ultimately accountable to the government and may be expected to execute its powers in a proper manner. But, as the Malaysian consultant points out, other holders of securities over land might also be expected to exercise their powers in a proper manner, especially if the law provided suitable guidelines or standards to ensure that a power of sale was exercised in good faith and at market value.
The second area of contrast concerns the position of secured creditors. Under the Danaharta legislation there is more certainty and stability for secured creditors. Although a one-year moratorium on secured creditor enforcement rights takes effect upon the appointment of special managers, the affairs and management of the company are under the control of those special managers during that time. Thus, there is less prospect that the affairs of the company will be abused during that time. Further, the special administrators are required to submit a work-out proposal during that time or commit the company to liquidation.
By contrast, under the scheme of arrangement provisions, management is left in control while stay or restraining orders on secured and other creditors are in effect. There is thus no independent control of the company. Although a secured creditor can apply to lift the stay order, that will take a considerable time to be heard and determined, and they are rarely successful. An attempt has been made in Malaysia to redress this issue by providing, firstly, that the length of stay or restraining orders may not exceed 90 days and, secondly, by providing creditors with the opportunity of appointing a representative to the board of directors of the debtor company. However, very few of such appointments have been made because of a concern about possible director liability for such an appointee.
4.4 Indonesia
In Indonesia the position of secured creditors has not been improved. Some of the problems are:
-There is no registration system for security interests other than land and immovable property attached to land. Because there is no security registration system in movable assets it is not possible for a lender to determine whether a debtor has granted security over the same collateral;
-There is no central or integrated registration system for land.
-Security over land has become more problematic because of competing and conflicting claims to equipment or plant permanently attached to the land between holders of secured 'land' rights and holders of fiduciary 'equipment and plant' secured rights;
-It is a requirement that security interests in or relating to property attached to land may only be enforced through court ordered judicial sale. It is possible to delay or defeat enforcement actions because of continued difficulties in the court system. Jurisdiction in this area has not yet been given to the newly established Commercial Court.
The Indonesian consultant considers that a comprehensive (centralised, computerised and integrated) registration system is needed. In addition, if rights of enforcement continue to be exercised only by court order, improvements to the judicial and court system are required.
4.5 Thailand
In Thailand there is a problem of adequately securing property other than 'registerable property'. Intellectual property rights are an example. A clear legal framework is required to enable this and other forms of valuable collateral to be used for security purposes.
The major impediment to the enforcement of security rights continues to be the delay in the mandatory judicial process of enforcement. The courts continue to have many cases and it takes considerable time to obtain judgment. The problem is recognised but the long awaited reform to security enforcement has not yet materialised. Some improvement has been made in that it is now no longer necessary to obtain separate orders to enforce in the locality in which the property is situated.
4.6 Conclusions and proposals
It will be best to revisit this area after the combined discussion of the participants in the two projects during the October symposiums. It would be premature to make conclusions without the benefit of those discussions and debate. It seems clear, however, that some aspects of secured transactions require further attention.
-Some of the economies need to address a number of unresolved issues concerning the enforcement of securities. A weak, uncertain or long delayed enforcement system means that a debtor corporation is under no pressure or persuasion to take positive action to address its financial position. It may also drive secured creditors into bankruptcy or liquidation proceedings so that they can, ultimately, exercise their enforcement rights through one of those processes. While that may not amount to an abuse of insolvency law processes, it is certainly far from the essential purpose of those processes.
-Many of the economies need to revisit the difficult task of balancing secured property enforcement rights against the practical operation of a collective liquidation or rescue regime. There are a number of areas (such as the enforcement rights of secured creditors during a liquidation, priority rights of preferred creditors) that require more certainty.
-There is a need to develop registration systems for all forms of security. These can be a valuable aid to creditors in assessing credit risk.
-There is also a need to develop other forms of secured lending, particularly chattel or personal property secured lending and also lease financing. This development requires, however, a comprehensive legal system for the creation, registration or filing and the enforcement of such security interests.