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21 July 2021 Written by 

Brief summary major reforms introduced by Movable Property Security Rights Proclamation, No.1147/2019

 

Introduction

Before the enactment of movable property security right proclamation, Ethiopian movable security right law is ultimately unsatisfactory because it is fragmented, and contained in four different pieces of legislation: The Civil and Commercial Codes, the Business Mortgage Proclamation, the Proclamation to Provide for a Warehouse Receipts System (Warehouse Receipts Proclamation), and the Capital Goods Leasing Business Proclamation. Under this system, security rights in many movable assets are not registered. Although some security rights are registered, this is far from uniform, as there are different registries for different types of assets, and they are all paper-based. Additionally, there is neither a generalized writing requirement, nor a registration requirement for the perfection of a pledge. It is also impossible to create a security interest in future property under Ethiopian law. Mortgages and pledges alike both require that the debtor have a present interest in the property; it would be insufficient even if the debtor eventually acquires an interest in the property. In order to avoid the above mentioned problem since the 27th of February 2020, the Movable Property Security Rights Proclamation No.1147/2019 came into full force. The day also marked the commencement of the operation of Collateral Registry under the auspices of the National Bank of Ethiopia (NBE). Proclamation No. 1147/2019 has affected not only the sources of the law on security right in movable assets in Ethiopia but also the major strands in a secured transactions system. It is the first comprehensive law of security rights (the Movable Property Security Rights Proclamation) drafted under the aegis of the International Finance Corporation (IFC). Although the official narrative is that the proclamation is based on the UNCITRAL Legislative Guide on Secured Transactions Law, the proclamation is dominantly influenced by Article 9 of the Uniform Commercial Code (UCC Article 9) the model law governing security rights (secured transactions) in the United States (US). Thus, the reform in Ethiopia is a radical departure from the French Civil Code-based Ethiopian law of security rights that has been in place since 1960.  Among other thing the following are brief summary of the major reforms introduced by Proclamation No.1147/2019:  

  1. Scope of application: the proclamation under article 3(1) clearly stated that, it is applies to right in movable property created by agreement that secure of creditor or other performance of an obligation. This means that it does not apply to security rights in immovable properties. Security rights arising from agreements involving exchange-traded securities, mortgage of a ship, interest in an aircraft fall outside the scope of the new proclamation.
  2. Its follows functional approach: the functional approachmean that it is the way to secured transactions, all rights in movable assets that are created by agreement and that secure the payment or performance of an obligation, regardless of the type of transaction. The functional approach to security interests ensures that transactions whose economic function is to secure payment or performance of an obligation be treated as secured transactions and be subject to secured transitions law. By applying essentially similar rules to all security interests, the approach eliminates the differential treatment of different transactions and parties. This does not mean that minor differences that are designed to fit the peculiarities of different types of assets or parties are eradicated entirely. The proclamation follows this approach to security interests. Because, First, under article 2(43)  it defines security agreement as an agreement, regardless of whether take parties have denominated it as a security agreement, between a grantor and a secured creditor that provides for the creation of a security right. Second, under article 2(44) it defines security right as "a property right in movable property that is created by an agreement to secure payment or performance of an obligation, regardless of whether the parties have denominated it as a security right, and regardless of the type of movable property, the status of the grantor or secured creditor, or the nature of the secured obligation. Therefore, The above mentioned two definitional articles (article 2(43), 2(44) of the proclamation has enshrined this innovative approach to treating transactions. 
  3. Self-Help Repossession: it is a process wherein a creditor takes possession of specific property without applying to court after the debtor defaults on a contract. Before the coming in force of the proclamation under discussion In Ethiopia, self-help repossession is not allowed as a remedy to a secured creditor under general secured transactions law, whether under the Civil Code or any other statute. There are two exceptions to that, i.e., (a) the lessor's right to repossess. Recently self-help Repossession is indicated under article 81 of the proclamation. Based on these the following are Prerequisites for Self-Help Repossession: (1) default and (2) prior agreement of the debtor or absent such an agreement, lack of objection by the debtor during the repossession. If the grantor resists dispossession, the secured creditor can have the Collateral Registry Office to order the police to execute it.
  4. It is distinguishes between negotiable instruments and negotiable documents and permits the granting of security rights in both. Under article 2/29) stated that, “Negotiable instrument includes a bill of exchange, promissory note and other instruments except check issued to bearer, specified name or order.”  also, under article 2(29) stated that, Negotiable document includes documents, such as a bill of lading, way-bill, voucher or a warehouse receipt for warehoused goods that represents a right to delivery of corporeal assets and may be transferred by negotiation.  Based on this definition its clear understand that, the difference between the two categories of commercial instruments is that while negotiable instruments embody a claim for the payment of money, negotiable documents incorporate a claim to the delivery of a good.
  5. Effectiveness of security right against third party as stated under article 13 security right in movable property will be effective against third parties if, “a notice is registered with the Collateral Registry by the secured creditor, or where the secured creditor has possession of the corporeal asset that is money, negotiable instruments, negotiable documents and certificated securities or the secured creditor has acquired control over the right to payment of funds credited to a deposit account or an electronic security.” Registration is available to security right interests over any type of movable asset. However, this is fundamentally different from the type of registration prevailing before the adoption of the new Proclamation. The new Proclamation only requires registration of ‘notice’ of security right and not the contents of the security agreement. Also, single notice for security rights under multiple security agreements is sufficient; it is electronic, central and open to public access. Based on Article 13(2) and 56(1) & (2) of the proclamation there are cases where a security right can be made effective against third parties by possession. Notwithstanding the fact that the proclamation does not recognize those exceptions as creating possessory pledge, the arrangements effectively create a possessory pledge. These cases exceptions are: i. Security rights in money. ii. Security rights in negotiable documents, negotiable instruments, and certificated securities. iii. Acquisition security rights in inventories and equipment. The security rights mentioned can be made effective against third parties by possession. The other ways of Effectiveness of security right against third party is by ways of control it applies to funds in a deposit account or electronic security. And also Registration is one way of Effectiveness of security right against third party it is available to security right interests over any type of movable asset.
  6. Electronic Collateral Registration Though the proclamation does not specifically state so; all of its provisions governing collateral registry and registration foresee electronic registration, with no parallel paper-based registration system. One of the recitals of the proclamation underlines that establishing single comprehensive electronic registration regime for secured transactions in movable property to determine priority rights among competing claimants is necessary. All of its provisions under article 19-23 are dedicated to the details on how to fi1e the registration including creating a user account at the collateral registry. There is no single provision dedicated to paper-based registration in the proclamation. It can therefore be concluded that the proclamation is intended to implement exclusive electronic collateral registry.
  7. Priority right priority right of secured creditors is mentioned under articles 45-46 of the proclamation. Accordingly, the secured creditors shall have priority over other creditors. Priority among competing security right created y same grantor in the same collateral is determined according to the order of registration without regard to the order of creation of the security right. The priority of security right with respect to which a notice has been registered in the collateral registry before the conclusion of a security agreement or in the case of a security right in a future asset before the guarantor acquires right in the asset or the power to encumber it is determined according to the time of registration. Therefore, the above-mentioned article has resolved the uncertainties of the rules of ranks under Article 2860 of the Civil Code.          
  8. inapplicable laws as stated under article 93 of the proclamation provision related to movable property security right stipulated under property mortgaged or pledge with banks proclamation number 97/1998 are repealed by this proclamation. Business mortgage proclamation number 98/1998 is also repealed. New laws, regulation directives, or practice shall in so far as it is in consistency with this proclamation may be applicable with respect to matter covered under this proclamation. Therefore, it is possible to say that The Proclamation is supposed to be the single, unified source of the law governing the taking security in movable assets in Ethiopia, ample provisions in the Civil Code and the Commercial Code which are not inconsistent with the new law and these laws will continue to complement the new Proclamation.
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