Security interests are the building blocks of modern, credit-based economies, and a key component in the quest to promote economic development and sustainable growth. They provide lenders with rights in collateral entitling them to preferential satisfaction in the event of default. Legal regimes were reformed―and are still being reformed―to facilitate the use of tangible and intangible assets as collateral in order to promote the extension of new credit. Access to secured credit is important for any business and individual of virtually every economy. However, it is especially relevant for emerging economies and for micro, small- and medium-sized enterprises (MSME) that are starved for operating capital. In the pursuit of such economic benefits, this area of law has developed at an unprecedented pace over the past hundred years and gained significant momentum in the new century.
A symposium published in Law & Contemporary Problems and titled Secured Transactions Law in the Twenty-First Century investigated the adequacy and the flexibility of established legal tenets sustaining secured credit to deal with a number of future challenges. In particular, ten contributions identified and considered how ongoing and future social, political, economic, and technological developments may impact the current legal regimes pertaining to secured transactions.
Numerous common and civil law jurisdictions have reformed their national regimes. To a varying degree, the formalistic approach that had characterized secured transactions law for centuries has been either relaxed or completely abandoned. A functional regime has become the guiding principle of many legal regimes. Article 9 of the Uniform Commercial Code and the Personal Property Security Acts of various jurisdictions, such as Australia, Canada, and New Zealand, are archetypal example of this trend. In addition, ambitious initiatives have been undertaken to harmonize and modernize secured transactions law at regional and international levels, with the intent to facilitate access to credit and promote economic growth. Notable examples are the Model Law on Secured Transactions of the European Bank for Reconstruction and Development (EBRD) and the Cape Town Convention on International Interests in Mobile Equipment of the International Institute for the Unification of Private Law (UNIDROIT). In July 2016, the United Nations Commission on International Trade Law (UNCITRAL) adopted its Model Law on Secured Transactions, shortly followed by a Guide to Enactment (2017). Since then, a new project has started with the intent of producing a Practice Guide directed to the users of the UNCITRAL Model Law, including lenders, their lawyers, courts, insolvency administrators, and regulatory authorities. These instruments represent a milestone in the international harmonization of secured transactions law and establish a compelling blueprint to guide future national law reforms towards a process of modernization.
Nonetheless, as the 21st century ushers in new social, political, economic, and technological realities, novel challenges confront secured transactions law, putting to the test traditional dogmas and precepts also embedded in modern international standards. In this rapidly evolving context, it is of critical importance to consider whether the current national and international legal frameworks deliver on their promises and possess sufficient breadth and flexibility to accommodate powerful drivers for change characterising this century. Secured transaction law cannot afford to remain static. The question, addressed through different lenses by the contributors to this symposium, is whether this will require a fundamental overhaul or targeted reforms.
The Five Agents for Change
The contributors to this symposium focused on five agents for change that are bound to impact profoundly the legal framework for secured transactions in the 21st century. A brief description of their fundamental traits follows to indicate how each contribution advances this topical debate.
First, the impact of new technologies on secured lending. Professor Charles W. Mooney opened the symposium by examining the impact of FinTech on secured transactions. His contribution emphasized the role of distributed-ledger technologies (DLT) in reshaping public and private registration mechanisms. Professor Teresa Rodríguez de las Heras Ballell further expounded the disruptive impact of new technologies by illustrating how innovation, such as blockchain and the “Internet of Things,” could enhance the effectiveness of current regimes while entailing profound legal changes. In respect to the connection between technologies and industry practices, Sir Roy Goode offered an insightful contribution on the registration of international interests under the 2001 Convention on International Interests in Mobile Equipment (the Cape Town Convention) and its associated Protocols. His contribution illustrated that the design of registration systems is a complex, yet critical, endeavor and that coordination between technological experts and the lending industry is necessary to ensure the reliability and the efficiency of such systems.
Second, the interaction between financial regulation and secured transactions law. The beginning of this century was marked by a global financial crisis that highlighted the fragility of credit-based economies. Following that defining moment, regulatory considerations with respect to the over-accumulation of debt and risk cannot be separated from legislative efforts directed to stimulate the creation of new credit. Professor Steven L. Schwarcz analyzed why, and how, different types of secured transactions should take into account macroprudential concerns, in order to preserve the stability of the financial system. Dr Giuliano G. Castellano and Dr Marek Dubovec illustrated that the lack of coordination between secured transactions law and capital requirements for banks distorts the set of incentives affecting the creation of credit and possibly hinder micro and macroprudential objectives as well as access to credit policies. Professor Rodrigo Olivares-Caminal considered whether the risk of systemic turmoil justifies a change in fundamental concepts of commercial law such as the ranking and remedies of secured and unsecured creditors.
Third, the impact of secured lending on micro-businesses. Lenders have been historically reluctant to extend credit to micro-businesses, given the high level of risk and the costs of enforcement. Professors Louise Gullifer and Ignacio Tirado isolated the main issues characterizing the extension of credit to microbusinesses and suggest possible legal and institutional solutions to address them, in consideration of the fundamental tension between policies promoting access to finance, generally concerned with the enhancement of creditors’ rights, and the need to protect micro-businesses.
Fourth, the use of intellectual property rights as collateral in secured transactions. Intellectual property (IP) rights, such as copyright, trademarks, and patents, are progressively becoming the most valuable assets held by certain types of business, such as start-ups. Dr Andrea Tosato addressed this issue by focusing on taking of security in IP licenses. His contribution identified key normative issues limiting the utility of these assets as collateral across legal systems and, in consideration of the new trends of modern economies, suggests possible approaches to address them.
Fifth, the increasingly cross-border nature of secured transactions. Traditionally, lenders, borrowers, and collateral would all be in the same jurisdiction; cross-border financing operations were a prerogative of large businesses. That is changing rapidly. Businesses, including small- and medium-sized enterprises, operate (and own assets) in different jurisdictions. Professor Catherine Walsh focused on the role of party autonomy in determining the third-party effectiveness of assignments. Following the comparison among the approaches followed in Canada, the US, and in the European Union, the contribution argued for the assignor location approach, rather than a party autonomy-based choice, given the higher level of transparency offered by the former rule. Finally, Professor Neil Cohen concluded the symposium by offering a comparative analysis of the conflict of laws rules under the UNCITRAL Model Law and those under UCC Article 9. His contribution indicated how critical differences among these two systems can cause significant disruptions to transactional planning and litigation in an increasingly interconnected world.
Charles W. Mooney Jr. is the Charles A. Heimbold, Jr. Professor of Law at University of Pennsylvania Law School and a guest contributor to the Oxford Business Law Blog.
Steven L. Schwarcz is the Stanley A. Star Professor of Law & Business at Duke University School of Law School and a guest contributor to the Oxford Business Law Blog.
Giuliano G. Castellano is an Associate Professor at University of Warwick School of Law and a guest contributor to the Oxford Business Law Blog.