Review of the new Proclamation to Provide for Movable Property Security Right

Ethiopia started having a modern law on law of security agreement since half century ago. The 1960 Civil Code ,Book Four Title 17 particularly Articles 2825 to 2874 specifically address the issue of security right created in movable and intangible things. According to the Code, security right created in movables always emanate from contract (Art 2825). Accordingly, the articles provide for minimum terms and conditions of contract of pledge which must be fulfilled by contracting parties such as mandatory transfer of the pledge into the creditor/pledgee, adherence to strict procedures during foreclosure of the thing upon default etc. Mandatory provisions pertaining to such issues created difficulties to creditors in their effort to execute the security right on obligation that they are owed by their debtors.With a view to doing away with the intricacies faced by bank creditors in the course of enforcing their movable security rights, amending proclamation came into existence in 1998. The Proclamation known as Proclamation to Provide Property Mortgaged or Pledged with Banks No 97/98 was enacted to abolish the long time and procedural red tape which used to take to obtaining judgment for sale of property mortgaged or pledged by banks. Consisting of only thirteen articles, the proclamation relieved bank creditors from resorting to courts to secure authorization for sale upon on non-performance. The law entitled banks to devote in their contract a clause which authorizes them to sell the pledge/mortgage once their debtor defaults to discharge his contractual obligations. This represented the shift of judicial foreclosure prescribed in the Civil Code into power to sale Foreclosure. Non-bank creditors however were yet to pass through the cumbersome procedures taken to get into execution of security rights. The proclamation was intended to govern both movable and immovable securities encumbered by banks. However, the proclamation had two basic flaws which makes it far from being satisfactory. Firstly, it was only applicable with respect to bank creditors as a result non-bank creditors were discriminated against. Secondly, the only reform it brought was in relation to proceedings after default. It repealed only Articles 2851 and 3060 of the code which prescribe securing of authorization from court in order to foreclose on the property pledged or mortgaged in the presence of third party appointed by courts. The Civil Code requirement of delivery of pledge into the hand of creditor upon or after conclusion of contract was left intact as mandatory requirement. The requirement creates inconvenience on the part of the debtor because the property was kept away from economic use while it stays in the hand of the creditor. As a result, property owners were unable to use their movable assets as security thereby affecting their access to finance which is very important for various types of investment and means of livelihood.In order to ease these and related problems emanating from the existing laws, new proclamation is in its way for approval. The proclamation known as Proclamation to Provide for Movable Property Security Right has introduced important reforms which overhaul the movable security law by alleviating major drawbacks in the existing laws. The proclamation under Article 93 clearly declares the non-applicability of its predecessor Proclamation on Property Mortgaged or Pledged with Banks No 97.98. Furthermore, it states that no law which is inconsistent with the proclamation will be applicable with respect to matters covered under it. In addition, the law has envisaged the establishment of collateral registry office which is charged with duty of receiving, storing and making information accessible to the public in registered notices with respect to security rights and rights of non-consensual creditors. (Art 21). This seems a fundamental departure from the Civil Code regarding contract of pledge in which no organ in charge of such obligation was established. In this connection, the entry of notice of security agreement in respect of a movable property or negotiable instruments plays immense contribution for wider collateralization and stronger security for debtors and creditors respectively. One way or another, the newly introduced provisions in the proclamation are attributed to the notion of collateral registry.For the debtor, the registration enables him to continue making use of the thing, while at the same time charging it as security. According to the Civil Code, conclusion of a security/pledge contract without dispossession of the debtor is invalid (Art 2832). Accordingly, the creditor must have the pledge at hand in order to execute his right. This prohibits the debtor from utilizing the thing because it is away from his hand. The creditor cannot make use of the pledge either (Art 2840). The fact that the thing is kept out of normal exploitation entails in economic inefficiency. Apart from absence of the benefits that the thing would accrue to him, the debtor is legally obliged to cover the cost of preservation incurred while it is under the creditor’s custody. In addition, the fact that the thing is placed at the creditor’s disposal exposes the debtor to moral hazard arising from inability to monitor the way the former is handling the thing. Therefore, the introduction of digital registry system by the forthcoming proclamation avoids the duty of having to deliver the thing to creditor and the adverse effects associated with it. Abolition of duty to deliver by the proclamation creates convenience to any debtor because it enables him to simultaneously charge the property as collateral and exploiting it to derive the normal service from it.Likewise, the creditors benefit from such registration of security agreement because, they will be freed from duties associated with the taking custody of the movable security. The Civil Code imposed on creditors duties to preserve the thing, to bring possessory action in case of assault or misappropriation by third party while the thing is at his hand (Art 2842). Additionally, the creditor was duty bound not to use the thing without permission of the debtor or use is necessary for the preservation. Introduction of effective registry by the Proclamation relieves creditors from such cumbersome obligations. This is because the transfer of the pledge to creditor as validity requirement for pledge contract ceased to be mandatory element in the Proclamation because of registry. The obligation which was incumbent upon pledgee only has now been imposed on condition of who is the one in possession of the collateral in accordance with the contract (Art 66). Another important departure in the Proclamation in relation to this point is depicted under Article 68. The provision authorizes secured creditors in possession of the collateral to make use of the good reasonably which applies against the payment of secured obligation. This contrasts to Article 2840 of the Civil Code which in principle prohibits the use by pledgee of the good at his custody.Another, important concept introduced by the Proclamation beneficial to creditor is right to pursuit. In the Civil Code, the transfer of the pledge to third party terminates the security right over the thing transferred (Art 2852). This is consistent with the notion of acquisition in good faith that any person who acquired a movable thing with a lawful means is entitled to original ownership. However, the Proclamation limits this notion by making security rights effective against third party purchasers, lessees or licensees of the collateral (Art 54 and 41). According to Art 54, buyers, lessees and licensee exercise a right on the collateral free of encumbrance only upon consent of secured creditors. Effectiveness of security rights against third parties presuppose entering registration notice of the security agreement in the registry office pursuant Article 30.With regard to execution of security rights, the Proclamation adopted power to sale foreclosure. This makes it similar with its predecessor Proclamation No 97/98. Though the former proclamation has been emphatically repealed by the proclamation, the liberal mode of foreclosure it envisaged was retained. The difference lies in the duration for default notice given to the debtor/grantor before setting the execution at motion. The former proclamation under Article 4 prescribes giving of prior notice 30 days before selling. The Proclamation reduces this duration to only 20 days.ConclusionGenerally, the Proclamation is comprehensive law aimed at governing movable properties encumbered as security rights. Subject matters of the security agreement according to this law are corporeal chattels, negotiable instruments, rights/claims and receivables. The innovative reforms introduced by the proclamation are related with concept of collateral registry. Abolition of mandatory dispossession which was a norm in past movable security agreements will significantly contribute to high level of collateralization, thereby facilitating right to access to finance.However, it may present new challenges of complicating the smooth transactions by imposing another difficulty on the part of third parties entering into transactions on movable properties. They will have to check the encumbrance or otherwise of the movables by creditors before they decide to purchase or lease. The practical feasibility of having effective registry system and its negative effect on free flow of goods seems understandable.

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