A guide to the Personal Property Security Act: The case of Malawi

Marek Dubovec, Cyprian Kambili

Description

This book examines the Malawian Personal Property Security Act (PPSA) of 2013 that is based on the United Nations Commission of International Trade Law’s Legislative Guide on Secured Transactions. The PPSA is the first of its kind in Africa but there are several countries, including Ghana, Kenya, Liberia, South Sudan and Zambia that are in the process of undertaking similar reforms. One of the authors is directly involved as a consultant to the International Finance Corporation of the World Bank Group in all of these countries. Secured transactions have already become an important area of law introducing new concepts for the legal profession, lenders and borrowers in Africa. The book provides commentaries on individual sections of the PPSA that include practical examples, hypotheticals, illustrations of lending practices, relevant scholarly writings, and case law from the jurisdictions that inspired this reform, including Australia, Canada, New Zealand and the United States. This book seeks to provide an easy to read guide that is accessible to lawyers, judges and creditors who will use the law on a daily basis but also to foreign policymakers considering a similar reform. The IFC is about to launch a reform initiative of this kind in South Africa.This remarkable work offers a rare, broad and comprehensive examination of the law relating to secured transactions in Malawi. It comes at the right moment as it focuses on the newly enacted Personal Property Security Act. The authors have succeeded in covering an impressive number of intricate legal questions on the subject with great ease and clarity. The book brings together topics that frequently raise problems in this area of law but which are rarely analysed together and it enriches the perspectives of the reader with a lot of cross -jurisdictional references. It is a’ must have’ for lenders, borrowers and their respective legal advisors. It is also a useful eye opener on the subject for the discerning law student.Kalekeni KaphaleAttorney General, Lilongwe, MalawiComments:Modernisation of law or law reform in the area of Personal Property Security Law has always been thought as a romantic and an abstract goal. The recent reform in Malawi in this field is a good example of how modernisation of law can be achieved. This book does an excellent job in picking out the principal issues in and challenges associated with the law reform in the area of Personal Property Security Law by an insightful and incisive analysis of the emerging policy questions in Malawian Law.Dr Orkun Akseli DurhamUniversity Law School, UK This book offers clear and concise commentary on the Malawian law of secured transactions – the Personal Property Security Act (PPSA). It explains the fundamental concepts underlying the PPSA, such as that of unitary and functional security interest, illustrates the application of its provisions in hypothetical situations, references similar laws in Australia, Canada, New Zealand and the United States and overall provides useful guidance to the users. It is unique in that it provides insights into the drafting of the PPSA itself in which both authors were actively involved. In view of the fact that the PPSA of Malawi implements to a large extent the recommendations of the UNCITRAL Legislative Guide on Secured Transactions, the authors included numerous references to the relevant recommendations of the Guide and its commentaries to direct the user to an invaluable source for further guidance and interpretation. So, this book is yet another testament of the growing influence of the UNCITRAL Legislative Guide on Secured Transactions on both the drafting of secured transactions legislation and its interpretation. This book will not only provide indispensable guidance to the users of the Malawian PPSA but could become an important tool in the implementation of similar reforms in the Sub-Saharan African countries that have already undertaken or contemplate PPSA-like reforms.Spyridon V Bazinas Senior Legal Officer International Trade Law Division, Office of Legal Affairs (UNCITRAL Secretariat)About the Editor:Marek Dubovec is Senior Research Attorney at the National Law Center for Inter-American Free Trade, Arizona, United StatesCyprian Kambili is Legal Specialist at the Ministry of Industry and Trade, Lilongwe, Malawi

Sujets

• Droit
• JUSTICE

Informations

• Publié par: PULP (Pretoria University Law Press)
• Date de parution: 01 janvier 2015
• Nombre de lectures: 6
• Langue: English
• Poids de l'ouvrage: 1 Mo

Extrait

A guide to the Personal Property Security Act: THE CASE OF MALAWI

Dr Marek Dubovec SJD, LLM Senior Research Attorney at the National Law Center for Inter-American Free Trade, Arizona, United States

and

Cyprian Kambili LLB (Hons), LLM Legal Specialist at the Ministry of Industry and Trade, Lilongwe, Malawi

with a foreword by Alejandro Alvarez de La Campa IFC Global Product Specialist, Secured Transactions and Collateral Registry Program

2015

A guide to the Personal Property Security Act: The case of Malawi

Published by: Pretoria University Law Press (PULP) The Pretoria University Law Press (PULP) is a publisher at the Faculty of Law, University of Pretoria, South Africa. PULP endeavours to publish and make available innovative, high-quality scholarly texts on law in Africa. PULP also publishes a series of collections of legal documents related to public law in Africa, as well as text books from African countries other than South Africa. This book was peer reviewed prior to publication.

For more information on PULP, see www.pulp.up.ac.za

Printed and bound by: BusinessPrint, Pretoria

To order, contact: PULP Faculty of Law University of Pretoria South Africa 0002 Tel: [phone] Fax: [phone] [e-mail] www.pulp.up.ac.za

Cover: Yolanda Booyzen, Centre for Human Rights

ISBN: 978-1-920538-35-4

© 2015

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TABLE OF CONTENTS

Foreword

Introduction

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Using the UNCITRAL Legislative Guide as a tool for a secured transactions reform in sub-Saharan Africa: The case of Malawi 1 1 Introduction 1 2 A critical review of the current laws on secured transactions in Malawi 5 2.1 The Bills of Sale Act 6 2.2 The Farmers’ Stop-Orders Act 10 2.3 The Commercial Credits Act 11 2.4 The Hire-Purchase Act 13 2.5 The Companies Act 14 3 General problems with the legal regime for secured transactions in Malawi 15 4 Comparative search for legislative solutions to secured transactions in Malawi 17 5 Final remarks 21

The key concepts, definitions, scope and interpretation 1 Security interest 2 Floating security 3 Definitions 4 Scope of the PPSA

Creation of a security interest 1 Conditions for creation of a security interest 2 Description of collateral 2.1 Description of proceeds 2.2 Description of after-acquired property 3 Giving value 4 Rights in the collateral or power to encumber

Perfection of a security interest 1 Registration 2 Possession 3 Control 4 Special provisions of the PPSA on perfection

Priority of security interests 1 General priority rules 2 Priority of purchase money security interests 3 Priority in accessions and manufactured or commingled goods 4 Transfers of collateral and priority 5 Special priority rules

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25 25 30 31 45

51 51 55 57 59 60 61

65 68 72 74 76

83 84 88

94 97 99

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Registration system 107 1 Establishment of, features and functions of the registry 108 2 Content of financing statements: Registration information 110 2.1 Identification of the debtor 112 2.2 Identification of the secured party 113 2.3 Description of the collateral 113 2.4 The maximum amount secured 115 2.5 Other data 115 3 Rejection of a financing statement 115 4 Time of effectiveness, authorisation for registration and its verification 116 5 Impact of errors on the effectiveness 119 6 Duration of registration 121 7 Amendment to and discharge of registration 122 8 Searches of the registry 124 9 Duty of the secured party to provide information 125

Default and remedies 131 1 Application of Part VIII 134 2 Secured party’s right to take possession after default 136 3 Disposal of collateral 142 4 Notice of sale 144 5 Legal effect of disposal 148 6 Proposal of secured party to retain collateral 151 7 Enforcement of security interests in accessions 153 8 Right to redeem collateral and reinstate security agreement 154 9 Statutory remedy 156

Transitional matters and applicable laws 1 Applicable laws 2 Transition 2.1 Repealed acts 2.2 Preservation of pre-PPSA security interests

Bibliography

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FOREWORD

Joyce, a Malawian woman entrepreneur who produces her own clothing designs is in the process of expanding her business. She employs four people and has two shops in Blantyre with very promising growth prospects due to the demand for her designer clothes. In order to expand, she needs additional capital. However, after a few attempts to obtain a loan from different local financial institutions, Joyce has given up on the idea and is trying to negotiate an unsecured loan with a finance company at 40% interest rate per month. A commercial bank would have charged her less than 20% interest rate, would have granted her more capital and the repayment period would have been longer. But the commercial bank also required collateral in the form of real property, something that Joyce was not able to provide.

Unfortunately, more than 70% of individual entrepreneurs in Malawi today will face similar situations. Joyce’s case is one in thousands that is commonly found within Malawi’s entrepreneurial sector whether it is in the agricultural, retail, manufacturing, services or any other key sector in the country. Access to finance is one of the most significant concerns for micro, small and medium enterprises (MSMEs) and one of the key drivers for economic development and growth in Malawi. According to the 2012 FinScope MSME Survey for Malawi, only 22% of MSMEs’ business owners have used products or services offered by a commercial bank. The World Bank’s Enterprise Surveys and Doing Business Report for Malawi, as well as the Global Competitiveness Index reach a very similar conclusion. There is a clear market failure in MSME access to finance sector in Malawi.

Lending in Malawi is heavily reliant on collateral, namely in the form of real property (immovable assets). Firms cannot utilize most of their movable assets such as equipment, inventory, accounts receivable as collateral due to a weak secured lending legal framework and the absence of a collateral registry that effectively supports property rights of lenders. Financial institutions consider lending secured with movable property “risky” because of: (i) weak and fragmented legal and regulatory framework for secured credit; (ii) very poor infrastructure to publicize security interests in movable property and to obtain information on creditors’ rights over movable property; (iii) unreliable court administration and enforcements of property rights; and (iv) the perception that borrowers are less likely to repay loans secured with movable property than those secured with immovable property (land or buildings).

It is widely acknowledged that MSMEs are significant contributors to job creation, development and economic growth. Given the crucial role of MSMEs in the Malawian national economy, it is in the common interest to optimise on this potential by putting into place strategies to mobilise and enable MSME growth and development, including better access to credit. Having recognised the market failure in the MSME access to credit sector, the Ministry of Trade and Industry of Malawi partnered with the International Financial Corporation of the World Bank Group to address these foundational issues by building the collateral regime necessary for a

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robust and sustainable financial sector marked by an increase in prudent lending to MSMEs.

One of the spillovers of this project is the writing of this excellent book. This book is a result of the efforts that a team of experts have undertaken over the past three years with local partners and stakeholders in Malawi. It reflects the excellent foundations that have started to be built in Malawi to create one of the most modern and solid secured transactions systems in the world that will help address a number of the existing access to finance challenges facing MSMEs. The authors reflect on how the new Personal Property Security Act (also known in other jurisdictions as Secured Transactions Act) will address issues related to the scope, creation, perfection, priority, publicity and enforcement of security interests in personal property and will certainly contribute to improving access to credit issues for MSMEs in Malawi.

The Malawi PPSA and this book have been crafted by two of the most recognized world scholars and practitioners in the area of personal property security and incorporates best practices not only from UNCITRAL’s products in this area but also from the personal experiences and lessons learned from similar reforms in a number of jurisdictions worldwide including New Zealand, Canada, the United States, Ghana and other countries that have managed to create very robust secured lending systems. It is a real pleasure to introduce the reader to promising changes in the legal system of a country, and, most importantly, to how such legal changes can promote commercial transactions, business and economic growth, and employment creation for Malawi.

Alejandro Alvarez de la Campa Global Product Leader, IFC Secured Transactions and Collateral Registry Program

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I NTRODUCTION

This book examines the Personal Property Security Act 8 of 2013 (PPSA) assented to on 15 July 2013 by the President of Malawi. The PPSA represents the most fundamental change to Malawian commercial law and signals a departure from the English law that Malawi inherited in 1964. Instead of looking to English law for inspiration of reform, the PPSA is based on the conceptual foundations of the United States Uniform Commercial Code Article 9 (UCC Article 9) that also underpin current secured transactions legislation in Australia and Canadian Provinces, and New Zealand, in addition to jurisdictions that have very little in common with Malawi, such as Colombia and Mexico. The drafters of the PPSA were also inspired by the United Nations Commission on International Trade Law (UNCITRAL), UNCITRAL Legislative Guide on Secured Transactions (Guide) that provides a model for the reform of secured transactions legislation and is currently being adapted into statutory text in the form of a model law. Due to the proximity of the legal systems and the complementary changes that the PPSA introduces to related legislation, the drafters chose the New Zealand Personal Property Security Act 126 of 1999 as a model for the legislative reform.

The PPSA is revolutionary not only as a stand-alone statute. It is one piece of a mosaic of Acts drafted concurrently that completely overhaul Malawian commercial law, including the Companies Act and the Insolvency Bill that as of March 2015 is pending adoption. These three major pieces of legislation have been designed and drafted to apply together to a number of important transactions, such as when a corporation that borrowed money secured against its personal property such as inventory and accounts receivable files for insolvency protection.

One of the authors of this book participated in the drafting of all three pieces of legislation and the other had a major responsibility in the drafting of the PPSA and its coordination with the relevant provisions of the Insolvency Bill undertaken by the International Finance Corporation (IFC). Due to the close involvement of both authors in the drafting of the

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PPSA, this book examines not only the individual provisions but also provides insight into some of the policy considerations behind the provisions. Although the PPSA examined in this book is unique to Malawi, a number of countries in Africa with a common legal heritage have already undertaken similar reforms. In fact, one of the authors is currently tasked with similar reform projects in Ghana, Nigeria, Sierra Leone and Zambia. Thus, this book should be equally instructive and provide guidance to the drafters of the laws in these countries and ultimately their users.

The PPSA adopts a unitary concept of security interest which is different from the various forms of personal property securities endemic to English law classified, amongst other bases, on who holds title (an example being retention of title devices), whether the interest is legal or equitable, or whether the interest is fixed or floating. The PPSA has unified the pre-existing Malawian security devices, including fixed and floating charges, common law liens, possessory pledges, retentions of title under conditional sales, the security under the Bills of Sale legislation as well as farmers’ stop orders under a single umbrella. This unitary concept of security interest is subject to the scheme of creation, registration, priorities and enforcement introduced by the PPSA. All principles that previously governed various forms of security devices in personal property have been discarded. In addition to simplifying the conceptual framework of security devices, the PPSA becomes the only source of secured transactions law which greatly simplifies its application in practice. Borrowers, lenders, buyers and sellers of personal property no longer have to navigate through a patchwork of statutes to determine what their respective rights are – the PPSA provides the answers.

The book is divided into the Introduction and eight Chapters that cover the major topics and concepts on which the PPSA is based. The book was designed as a practitioner’s guide that restates all sections of the PPSA, illustrates their application on actual and hypothetical transactions and provides commentaries. This format is also suitable for teaching the PPSA as a subject at law schools.

Chapter 1 provides the background that informed the drafting of PPSA. It provides an overview of the relevant economic indicators that identify the most important sectors of the Malawian economy, the difficulties they face as well as the legal framework that governs their operations. The purpose of the Chapter is to explain to the reader the reasons for undertaking the reform of the secured transactions framework in Malawi. The primary reason was to increase access to credit, particularly for small and medium-sized businesses (SMEs) by providing a predictable, fair and easy to apply legal framework. Malawi embraced the emerging consensus that legal and regulatory frameworks relating to

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1 secured transactions laws directly impact access to finance for SMEs. However, it remained mindful of the social and public policy fabric. In that regard, policymakers and drafters were cognisant of the studies which demonstrated that the social benefits accruing from secured transactions 2 reforms likely outweigh the social costs.

The authors argue that the Guide was an efficient comparative tool for the reform of the Malawian framework of secured transactions with the 3 prospect of aiding Malawi to expanded access to credit. The Guide not only provides recommendations for the actual statutory text but ably explains the functioning of these recommendations as well as alternative approaches. The authors question the criticism and arguments that the Guide’s similarity to UCC Article 9 militates against its international 4 acceptance. On the contrary, experiences on the ground in a number of countries including Albania, Australia, Colombia, Honduras, Kosovo, Mexico, and elsewhere prove these critics of the Guide and model laws 5 wrong.

Even so, the authors warn against the copy-and-paste type of transplantation of the Guide’s recommendations and the future UNCITRAL Model Law, other secured transactions model laws or any other foreign secured transactions legislation. Instead, the authors support a methodical approach to executing a reform based on effectiveness and efficiency of the proposed transplant only after reviewing the various arguments for and against the comparative method in law reform. The methodical approach entails first analysing the present legal, credit, and socio-economic frameworks, and second, adjusting the selected model to the local environment. A critical component of this approach involves examination of local lending practices and the common types of assets used as collateral.

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Organisation for Economic Cooperation & Development. (OECD) ‘Financing innovative SMEs in a global economy: Towards a more responsible and inclusive globalisation’ Background report prepared for the 2nd OECD Ministerial Conference on SMEs, June 2004 in Istanbul, Turkey http://www.oecd.org/cfe/smes/31919 231.pdf (accessed 25 July 2014). J Armour ‘The law and economics debate about secured lending: Lessons for European lawmaking?’Centre for Business Research, University of Cambridge Working Paper No 362, March 2008 http://www.cbr.cam.ac.uk/pdf/wp362.pdf (accessed 25 July 2014). See generallyUnited Nations Commission on International Trade Law, UNCITRAL Legislative Guide on Secured Transactions, UN Sales No E.09.V.12 (2010) (Guide) http://www.uncitral.org/pdf/english/texts/security-lg/e/09-82670_Ebook-Guide_09 -04-10English.pdf (accessed 25 July 2014). See generallyG McCormack ‘American private law writ large? The UNCITRAL Secured Transactions Guide’ (2011) 60International & Comparative Law Quarterly597. B Kozolchyk ‘Implementation of the OAS Model Law in Latin America: Current status’ (2011) 28Arizona Journal of International & Comparative Law24; JH Rover ‘The EBRD’s Model Law on secured transactions and its implications for an UNCITRAL Model Law on secured transactions’ (2010) 15Uniform Law Review501.

xIntroduction

Secured transactions legislation should be flexible enough to facilitate the already-existing lending practices but also allow for the development of new credit products and transactions tailored to the needs of local businesses of all types and all sizes as well as the needs of different lenders. The law must accommodate not only the large exporters of tobacco, for instance, but also the street vendors and those who provide services generating relatively small revenue as well as consumers. On the other side of the spectrum, the law should cater not only to banks and other financial institutions that loan money but also to those who provide credit in the form of delivering goods and providing services for which they agree to be paid in the future. If these issues are not taken into account when structuring a secured transactions reform, the results can be counter- productive.

The summary of the Malawian legislation in Chapter 1 reveals a number of deficiencies. First, all the Acts provided complex requirements for the creation and registration of the security devices. For some, no registration requirements have been imposed which puts a significant burden on third parties when doing their due diligence. Second, the failure to comply with unnecessary and outdated formalities resulted in the security being avoided and annulled. Accordingly, lenders needed to seek legal advice the cost of which was eventually borne by the borrower. Third, the Acts were not coordinated with one another which resulted in conflicting and uncertain priority rules. Fourth, the Acts applied depending on various criteria, such as the type of property, transaction, or debtor. For example, the Bills of Sale Act applied only where the debtor is an individual, the Commercial Credit Act applies only when the borrower is a business proprietor, the Farmers Stop-Orders Act applies only when the borrower is a farmer, and the Companies Act applies only when the borrower is registered at the Companies Registry. The multiplicity of applicable Acts also increases the monitoring cost of the lender to ensure that the borrower does not change its status, which might result in the application of a different Act.

Chapter 2 explains the fundamental concepts of the PPSA, including that of a security interest that replaces the pre-existing security devices, and analyses the meaning of the definitions. This analysis is critical for the application of many provisions of the PPSA. For instance, taking possession of an invoice that is not a negotiable instrument will not perfect the security interest. Lenders should pay close attention to the scope of a security interest to understand that some of their pre-PPSA transactions whereby they retained ownership may be characterised as security interests and their effectiveness against third parties depend on their perfection. This aspect of the reforms is perhaps one of the least understood, and in many jurisdictions lenders fail to change their practices putting their rights and priorities at a significant risk.

Introduction xi

Chapter 3 addresses the creation of a security interest. Under the PPSA, a security interest is created by a security agreement between the debtor and the secured party. The PPSA does not impose any formalities on the creation of a security interest such as registration. The minimum requirements that relate primarily to the content of the security agreement may easily be satisfied not only by large commercial banks, but also by less- sophisticated micro-finance institutions and sellers of goods. This Chapter also makes absolutely clear the creation does not ensure protection against third parties because the agreement which creates a security interest is a private matter between the parties of which strangers do not have a notice. Accordingly, the secured party will be able to enforce its security interest under the PPSA against the debtor but its enforcement rights could be subject to another security interest with a higher priority.

Chapter 4 addresses the perfection of a security interest. Both the terms creation and perfection may be new to the Malawian users of the PPSA, however conceptually they are no different from the pre-existing devices. Similarly to the creation of a security interest, there had to be some agreement establishing a floating charge. And similarly to the perfection of a security interest, the floating charge had to be registered in order to take effect against third parties and the debtor itself. Part III of the PPSA governs the perfection of security interests, and includes two sections that set forth the general methods of perfection. While creation affects the rights between the debtor and the secured party, perfection affects the rights of third parties, such as other secured parties, buyers and sellers of the collateral, judgment creditors and the insolvency trustee. Perfection requires a public notice of the security interest and only then it ensures protection for the secured party. Such public notice will most commonly be provided by registration. The PPSA also provides for alternative forms of perfection, namely possession, control, automatic and temporary.

Chapter 5 addresses priorities. The PPSA includes two Parts that set forth the priority rules: Part V includes general priority rules based on the maxim ‘first-in-time, first-in-right’ while Part VI includes special priority rules essentially listing the exceptions to the general rule which protect various third parties such as buyers in the ordinary course of business. The PPSA does not monopolise the status of a secured party, effectively preventing any other third party from buying the assets or taking it as collateral. Conflicts frequently arise not only between two secured parties, but also between a secured party whose collateral has been repaired by a mechanic who retains it until his charges are paid, or between the secured party and a buyer of equipment subject to a security interest. Priority of security interests is closely related to perfection for the reason that, typically, the date of perfection establishes priority. One of the underlying features for establishing priorities under the common law was knowledge of the competing party. To a large extent, the priority of a competing claimant depended on whether she had knowledge of the existence of a prior security interest. Under this approach, the evidentiary requirements