Chattel mortgages, pledges now obsolete

Published September 16, 2020, 10:00 PM

by Atty. Jun De Zuñiga

Credit transactions secured by personal or movable properties used to be documented either through chattel mortgage or pledge instruments and these are the security documents with which the lending industry has been very familiar with, until the enactment on August 17, 2018 of Republic Act No. 110557, otherwise known as the Personal Property Security Act (PPSA).

This law was passed to boost access to credit, especially by micro, small and medium enterprises and by farmers and fisherfolk.  It was conceived to strengthen the secured transaction legal framework and provided for the creation, perfection, determination of priority and enforcement of security interests in personal property.  It also seeks to have a unified and centralized national collateral registry that will be lodged in the Land Registration Authority (LRA)j to reduce the risks involved in accepting movable collaterals.

The rules on formalities on these transactions have been simplified and harmonized in the new law, eliminating distinctions between a pledge and a mortgage, such as the ability of the mortgagee in a chattel mortgage to recover any deficiency from the debtor if the collateral does not fully satisfy the debt;  a remedy which is not allowed in a pledge since the foreclosure of the pledge completely extinguishes the debt.

What is notable is that R.A. 10157 covers all transactions in any form that secure an obligation with movable collateral, except interests in aircrafts and in ships which are governed by other special laws.  With its superimposing coverage, this law then declares as repealed the Chattel Mortgage Law and the Civil Code provisions on pledge.  As a consequence of the repeal, the chattel mortgage and pledge laws are deemed effectively abrogated from the statute books, meaning, that contracting parties would no longer have any legal basis to document their security transactions within the ambit of a pledge or chattel mortgage;  otherwise, there will be an incongruous situation in which the repealed laws will still continue to remain in force.

Questions have been raised however on the effectivity and implementation of said law since the electronic registry contemplated in said law has not yet been established as of this writing.  Related thereto, Section 67 of said law provides that “this Act shall take effect fifteen (15) days after publication in at least two (2) newspapers of general circulation.  The subsequent section, Section 68, states as follows: “Notwithstanding the entry into force of this Act under Section 67, the implementation of the Act shall be conditioned upon the Registry being established and operational under Section 26.  Similarly, the implementing Rules and Regulations of said law provides in Section 10.03 thereof as follows:  “Notwithstanding the entry into force of these Rules under Section 10.02, the implementation of the Act shall be conditioned upon the Registry being established and operational made Rule IV.”

The next question, therefore, is whether credit transactions may still utilize chattel mortgage and pledge instruments in the meantime that the electronic registry has not yet been set up in the LRA.  The issue remains unsettled at this point and the answer can be argued from both sides.  As may be noted, the law and its implementing regulations say that implementation shall be conditioned on the setting up of the electronic registry.  On the other hand, it can be argued that implementation is different from effectivity and that what is suspended is the implementation but not the effectivity of the law.  The LRA, as the principal implementing agency, may thus see it fit to provide clarification on the matter.

The above comments are the personal views of the writer. His email address is [email protected]

 
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