Summary
Business enterprises and organizations can hardly operate securely in the absence of registered securities. In any case, registration of security interests remain as the most vital means of managing credit risks in any business environment. Companies that operate without registering their security interests are similar to creditors who are not secured at all. The latter argument is hinged on the fact that there are instances when a debtor may be liquidated. Worse still, a debtor may be declared bankrupt. In the event of such occurrences, a company that has not registered its security interest is highly likely to be affected in the same magnitude as the debtor.
On the other hand, creditors who are secured have the least risk of losing their resources bearing in mind that their resources will be restored after the distribution of assets or when the payment process is completed. Needless to say, there are some jurisdictions that have made it legally mandatory for creditors to register their security interests so that clients who rely on them are not affected by the downfall of single or multiple debtors.
At this point, it is vital to highlight the broad meaning of a security interest. When a personal or corporate property is bought on hire purchase or other valid credit terms, a security interest is inevitably created in that particular property. This also applies when either a personal or corporate property is used as collateral to secure a credit facility. Hence, the interest obtained from the property used to acquire a credit facility is referred to as a security interest. A security interest can be created by two distinct parties. These are the secured party and the grantor.
Registration systems of security interests
As already mentioned, registration of security interests is a vital undertaking that any other company is advised to put into consideration. Nonetheless, the system of registration used is also a critical area of discussion since each system has its own merits and shortcomings. Regardless of the system used, both the pros and cons should be put into consideration. The system with the least economic burden and risks should definitely be chosen. In addition, it is also worth to mention that the processes of filing and registration may not necessarily perfect all types of security systems. In terms of registration of security interests, particulars are usually lodged while the individual security instruments are often filed.
On the overall, there are two types of systems that are used to register security interests. These are the registration systems involving a certain asset and also a registration system for a certain debtor.
Each of these systems of registrations has its own success stories and setbacks. Therefore, before settling on the best registration system to adopt for security interests created by companies, it is worth to offer a detailed and objective description of each system.
To begin with, a registration system that is geared towards the asset base of a company may not be pragmatic in all circumstances. For instance, this type of registration should have a well documented and laid out register where all security systems attached to the asset base of the company can be recorded. In other words, these assets should be of particular nature so that their feasibility is increased. There are quite a number of jurisdictions that have devised sound systems that are being used in registering various clusters of security systems. In the case of assets, various entities such as intellectual property rights, ships, aircrafts and land have their unique database where recording can take place. The main benefit of this type of a registry system is that the transaction between a debtor and credit is quite swift and as such takes a very short time to accomplish.
For example, if a debtor wants to present as particular asset as security, the given asset can be counterchecked instantly by the proposed lender. Hence, it is easy to determine if the mentioned asset is valid. While the aforementioned advantage indeed stands out, it is equally vital to underscore the fact that this system of registration may not be applicable across the board as a single stop information source. This limitation is attributed to the fact that there are countries where specialist registers are not conclusive or adequate in proving all the information needed in one instance.
On the other hand, when the debtor registration system is carried out, there are particular security interests that must be registered. These security interests should be attached to the debtor per se. as such, it is possible to determine the validity of the assets given by the debtor. Nevertheless, missing links can still be detected in this type of registration system because the registration of security interests in not a holistic requirement by all systems of registration. The occurrence of such gaps in the debtor-oriented registration systems can still create disharmony when records are being perused for purposes of lending.
In addition, it is pertinent to underscore that a thorough check cannot be provided by debtor based systems of registering security interests. Hence, it is not possible to assess the authenticate owner of the property provided since no security interests are developed against such systems of registration.
In spite of the vivid merits and disadvantages of these two systems of registrations, there are myriads of legal systems that have continued to use both terms interchangeably to mean the same thing. The general and most common assumption is that both the asset and debtor-based systems of registration can make use of the assets registered as collateral during the process of lending.
From the above discussion, it is evident that both systems of registration have their own limitations. Therefore, some modifications are necessary in either of the systems in order to come up with the most viable registration system for security interests created by companies.
A system of registration that is deemed to be most successful and well functioning should have easy access to the registry. Any collateral registry is an invaluable source of information for potential competing claims, creditors who are both potentially secured and unsecured and grantors. Therefore, any type of registry should be available to the aforementioned users.
In addition, the legal and institutional platforms of a registration system ought to allow a simplified process of registration of all valid notices. On the same note, the ease with which information is searched in the system should be user-friendly.
There is no clear evidence of whether the asset or debtor base registration systems are availed to online users. An ideal system of registration should be available online throughout the 2 hour period. It should also not demand any consent from either party when performing the registration process. Such an open and online registration system will expedite both the time taken for registration and accessing vital information. Companies that seek to advance their registry data should opt for such systems.
A remote registration by individuals who are not within the reach of a registry company is significantly hindered especially when the physical appearance of the parties concerned is made a mandatory requirement. Hence, the use of remote registration portals such as emails, fax, mail, and other forms of electronic interfaces should be highly encouraged in order to build a potential system of registering security interests. The applications of most registries have been impeded in the past due to the lack of this functional feature.
Both recurrent and one-time users should have quick access to information that has been stored online so that decisions can be made promptly. One of the best methods of increasing access to online information is by creating user accounts whereby individuals can log in with their unique passwords and usernames. In order to make the best use of this online registration system, users should be charged some subsidized fees for online user accounts. This will be one way of making sure that the system sustains itself in terms of maintaining and updating the large database. In addition, advance payments for each transaction incurred will not be necessary.
Moreover, users who do have registered accounts should also be provided with online accounts albeit with limited features. However, such users will start to have to be able to use certain approved payment systems such as debit and credit cards. This will be similar to cases whereby receipts are issued by banks to users who then log in with their unique receipt numbers. Hence, full payment of the required fees should be used as the benchmark for allowing full access to the system registry by users. Hence, there should be no other restriction for individuals who have paid fees.
The identification number of the debtor should be the best parameter to use when searching the registry’s database. Alternatively, the use of a legally permitted serial number can also be recommended especially if indexing can be allowed by the existing laws. Hence, a registration system that has an open access system should be used by companies. In any case, there are myriads of companies that are already utilizing an open access system. For instance, countries such as Vanuatu, Solomon Islands, Guatemala and Cambodia are already making use of this type of registration system. Even if a company has been utilizing a paper-based registration system, it is still possible to integrate an online system. Needless to say, there are companies that have fully transformed their registration systems into online portals that are automatically and remotely accessed.
However, it is also vital to note that the physical appearance by the concerned parties during the time of registering security interests is still a common practice among certain jurisdictions. Although such jurisdictions have largely opted to remain reserved, remote registration has been precluded by their reserved nature. Moreover, registry use has been impeded due to such geographical restrictions.
The importance of a registration system
The process of registration serves several functions both to the debtor and creditor. For instance, a registration system is largely aimed at making security interests public. In addition, such interests are also made perfect against 3rd parties.
In order to attain the above functions, there are two categories of registration that are used. These are document and notice registrations. In the case of the document registration, the agreement should be delivered and recorded. In addition, other vital forms of documentation may also accompany such deliveries. On the contrary, there is no need for registering documents in a notice registration. The only requirement needed is some kind of primary information. The latter is used by the creditor to access information related to security interests that have been expounded in the notice.
In most instances, registration of assets that are movable is carried out using the notice registration. The reason why this form of registration is preferred for registering movable assets is that it demands minimal archival and administrative expenses compared to the case of a document registry. The latter has a lot of work related to registration of large volumes of documents. Furthermore, a document registry requires a regular review process that is carried out by professionals in that field since the asset to be as security has to be investigated through detailed property valuation. Moreover, the error margin is also lowered to the minimum during the process of registration. This is possible due to the fact that the available data does not necessarily need to be transposed from the raw data sheet to the system by the registry staff.
It is interesting to note that the document registration is still being used by most jurisdictions. Therefore, this is a clear indication that a major reform agenda need to be adopted in this area of concern. Some countries in the United Kingdom still use the document registration process. Proactive governments need to embark on changing this tedious and costly process by integrating a notice registration process.
Should Notice systems make use of paper or online registrations?
The registration that is paper-based often demand data rendition in form of a notice that has associated information obtained from the registry record. This type of information is detailed enough and may not require additional analysis. This piece of accompanying information is also coded and indexed in such a way that searchers can easily access the required data. In the case of an online registry, the aforementioned procedures can only be completed after completing the registration process. Thus, the electronic systems are most preferred especially if the best international practices are needed. Paper systems are generally slow and prone to myriad sources of human error. In addition, paper-based systems are relatively cumbersome to sort, document and review. Electronic databases can be accessed immediately after the user logs into the system.
In addition, electronic registries also minimize the likelihood of entering irrelevant or incomplete data that may be accompanied by several errors. When a paper-based registration is used, there is a high likelihood of nondisclosure of certain pertinent registration information before being entered into the database. For example, the effective registration of an entity will not be found on the database between the time when the notice is admitted and the time the given records are entered in the registry.
The registrant may face risks in certain paper-based systems especially if the registration data is made effective soon after it has been transposed into the database. In such instances, all the searches will yield positive results of all the effective registrations. Thereafter, the risk level can be controlled by the registrant by avoiding any form of advances until solid confirmation feedback is obtained from the registry system. This confirmation will ascertain that the required data has been entered into the database from the paper source.
In the case of archive systems that are paper-based, there are myriads of other factors that cannot be fully established with such systems. For example, there are higher chances of spoiling information or being lost altogether. In the event that the latter happens, the creditor’s priority rights may not be determined easily. Consequently, it may cause a lot of technical hitch with the database.
Additionally, the identification of the creditor is also another contentious issue that should be put into consideration. As already discussed in the previous section of the paper, an online system has a verifiable means of identifying the user contrary to the use of a paper-based system. Hence, it is necessary for the latter to incorporate security systems that can be used to authenticate users. Unfortunately, it is technically cumbersome to implement most forms of security safeguards that are used in online registry systems.
Any form of a registration process should be fraud proof. Since it may not be easy to detect the fraudulent and fair users of the system, it is duly necessary to put in place security checks and balances. There are fraudulent users who may pose as genuine account holders but only out to spoil the reputation of some debtors and registrants.
The physical handling of all cash payments and remittances should equally be eliminated by a robust online registration system. The payment process discussed in the earlier section of this paper should be made use of when dealing with online payments in order to improve the security level of the registry. This is the only way of minimizing the accidental cash loss. It also reduces the likelihood of nay acts of corruption from taking place especially among jurisdictions where financial transparency and accountability are missing.
Results of the survey
From the above discussions, it is without doubt that the most appropriate system of registration is the electronic one. This system allows an online transmission of registration information. In addition, this form of registry permits electronic retrieval of information from the registry’s database. These two distinct features are indeed holistic for companies that seek to register and manager security interests both securely and remotely regardless of the geographical distance. Unfortunately, less than 25% of jurisdictions across the world do make use of a fully computerized online portal for registration of security interests. While the advantages of an online registry system are enormous, it is still being used minimally by companies. This implies that there are over 75% of creditors who still allow paper registration forms.
Should registration system apply to all security interests?
The question whether registration system should apply to all security interests lie with the nature or type of jurisdiction in question. However, it is evident from the above analysis that all types of security interests are very sensitive since they are used in transactions that involve significant sums of monetary resources. For example, there are higher chances of fraudulent players to engage in the activities surrounding security interests. Hence, registered security interests can be monitored and approved quite easily by registrants compared to those that are not monitored. In addition, jurisdictions across the world have adopted various types of registration systems and processes for security interests so that the activities surrounding these interests can be legally coordinated and harmonized. Needless to say, both asset and debtor-based registration systems have adopted either paperless or online registration systems so that the entire registry can be handled in the most professional manner. All these factors explain why the registration system of security interests cannot be ignored. However, there are several instances when quasi securities are accepted in transactions as described in the following section.
An overview of quasi security
Creditor’s protection can also be made possible by quasi security. There are quite a number of methods that can be used to execute quasi securities. In this case, security interests are not created at all. The main role of a guarantor is to ensure that all the obligations of a debtor are met according to the set agreement. Hence, the guarantor, the guarantor assumes the obligation of the debtor if the latter fails to honor the contract. In other words, the primary obligations among the interested parties are duly supported by the guarantee. However, the obligation of the guarantor cannot be admissible if the contract has been found to be invalid or if the debtor has been released from the prevailing obligations.
Secondly, indemnity is also an important parameter of quasi security since it works in the same way as a guarantee. Nonetheless, more protection is offered to the creditor than in the case of a guarantee. The reason why an indemnity is stronger than a guarantee is that it cannot be terminated whether the contract is void or not. On the same note, if the obligations are released from the debtor or if the contract is set aside, the primary obligation of an indemnity will still continue.
A performance bond is also another recognizable quasi security. It refers to contractual commitment by a financial firm to pay off a specified amount of money after the occurrence of a stated event. Other instruments used for quasi securities include a standby letter of credit, commercial arrangements/agreements, right of set-off and cash collaterals. It should be noted that these securities are not registered. The standby letter of credit is an accredited financial institution that can issue payment as instructed. The latter action takes place when the contract is not honored by the other participating party. Bonds also enhance the creation of primary obligation among the concerned parties.
Although quasi security contracts are preferred by some parties in settling payments accrued by debtors, it is pertinent to note that they are not the best for use especially when compared to registered security interests. In spite of the fact that creditors are protected against borrows at some point, the registered security interests are more formidable as security instruments than the quasi security contracts. For instance, quasi securities may pose several difficulties when it comes to setting priorities. These securities also have exceptions to publicity principle. Moreover, notice filing is not used with quasi securities. Transactions are used to record all registration data. In the case of single and advance filing for several transactions, quasi securities do not provide that scope. Worse still, quasi securities are not treated in the same way as security interests. This makes the former to encounter several limitations when being adopted by various parties as an option.
Centralized registry
From the above analysis, it is definite that the choice of the most appropriate registration system for security interests may largely depend on the nature of the companies that enter into contractual agreements. Nonetheless, the scope of registration still remains the protection of creditors who may fall prey to debtors. Even if quasi securities are adopted in this case, the milestone still remains on how to fully safeguard the interests of all parties taking part in an agreement.
It is also vital to reiterate that an online registration system still remains as the most formidable among the categories discussed in the paper. As such, it would be imperative to consider the relevance of a central registry. Most empirical research studies have documented that there is need to centralize all the records of a registry. Therefore, the registry should bear all the registered security interests. Hence, a registry that consolidates all the needed information in one location is the most appropriate in this rapidly growing international finance and securities system.
In addition, a single search may not be possible in the case whereby a fragmented registry has been put in place with split information. A registry that is not linked together impedes active users from accessing all the information required from a single database. This is usually common with registries that record assets. Nonetheless, separate registries can still be used to classify certain assets. For example, it is common for separate registries to be used in the registration of assets such as motor vehicles since the traffic department may be interested in securing certain information from such records.
On a final note, registries that have been centralized make it easy for lenders and buyers alike to make certain approvals without spending too much time moving from one database to another.
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