Notes from Dean Ernesto C.

Salao’s Lecture on Personal Property Security Act

(R.A. 11057)
Author’s note: These notes are incomplete as the lecturer experienced technical difficulties in his online
lecture.

Credit Transactions: All transactions involving the purchase or loan of goods, services,
or money in the present with a promise to deliver in the future.

Security: Something given, deposited, or serving as a means to ensure the fulfillment or

enforcement of an obligation or of protecting some interest in property.

Pactum Commissorium: A stipulation empowering the creditor to appropriate the thing

given as guaranty for the fulfillment of the obligation in the event the obligor fails to live
up to his undertakings without further formality, such as foreclosure proceedings, and a
public sale.
- Expressly prohibited under Art. 2088 of the Civil Code

Elements:
a. There should be a pledge or mortgage wherein property is pledged or mortgaged
by way of security for the payment of the principal obligation;
b. There should be a stipulation for the automatic appropriation by the creditor of the
thing pledged or mortgaged in the event of non-payment of the principal obligation
within the stipulated period.
- Key term: “Automatic”
- Problem: Rosario obtained a loan of P100,000.00 from Jennifer, and pledged her
diamond ring. The contract signed by the parties stipulated that if Rosario is unable
to redeem the ring on due date, she will execute a document in favor of Jennifer
providing that the ring shall automatically be considered full payment. Is the
contract valid? (2009 Bar)
- Answer: Yes, because the agreement is not pactum commissorium as there is no
automatic appropriation of the thing pledged. Note that per the facts, Rosario is
still to execute a document conveying the ring to Jennifer. Thus, not automatic
appropriation by the latter.

Personal Property Security Act (RA 11057)

Purpose of the law: Aims to promote economic activity by increasing access to least
cost credit, particularly for micro, small, and medium enterprises (MSMEs) by:

1. Establishing a unified and modern legal framework for securing obligations with
personal property
- Rationale: Pledge and mortgage aren’t enough anymore to cover the modern
trends. Some intangible properties can now be used to secure obligations.
2. Strengthen the secured transactions’ legal framework
a. Creation
b. Perfection
c. Determination of priority
d. Establishment of a centralized notice registry
e. Enforcement of security interests in personal property

Daverick Pacumio
UST Faculty of Civil Law
Security Interest (Sec. 3[j])
A property right in collateral that:
1. Secures payment or other performance of an obligation, regardless of whether the
parties have denominated it as a security interest, and regardless of the type of
asset, the status of the grantor or secured creditor, or the nature of the se- cured
obligation;
including the rights of a:
2. Buyer of accounts receivable and
3. Lessor under an operating lease for not less than one (1) year.
- For example, it is common for certain companies to lease out their heavy
equipment.

Creation of Security Interest (Sec. 5)

A security interest shall be created by a security agreement.

A security interest may be created over all forms of tangible or intangible asset or personal
property as defined by the Civil Code, including but not limited to:

(a) Rights arising from contracts, including but not limited to:
1. Securities
2. Commodity contracts
3. Lease of goods including financial leases and operating leases for a period of not
less than 1 year

(b) Equipment
(c) Inventory
(d) Deposit accounts
(e) Negotiable instruments
(f) Negotiable documents of title
(g) Consumer goods
(h) Intellectual property
(i) Livestock
(j) Fixtures, accessions, and commingled goods, or
(k) Future property or after-acquired assets

Provided, that a security interest can only be created on the asset which the grantor has
a legal right.
- Thus, a grantor in this case cannot just offer the property of others, e.g. his
neighbor, unless the latter gives his consent as an accommodation party.

Security Agreement (Sec. 6): A security agreement must be contained in a written

contract signed by the parties. It may consist of one or more writings that, taken
together, establish the intent of the parties to create a security interest.

Extent of Security Interest (Sec. 8):

 a. The collateral: The description requirement has been relaxed, it is now sufficient if
it reasonably identifies the collateral.
o Note, under the Chattel Mortgage Law, the description requirement is more
stringent.

b. Proceeds: For example, if the grantor sells the collateral, the security interest
covers the proceeds thereof.

c. Commingled funds: For example, the collateral is sold and the proceeds have been
deposited in a deposit account, the security interest covers the commingled funds
to the extent that they remain traceable (see par. ii below).

d. Future property: But only when the grantor acquires the rights in it or the power to
encumber it.

Asset-specific Rules

i. Security Interest over Future property (Sec. 3.05 IRR)

A security agreement may provide for the creation of a security interest in future property
or after-acquired assets, but the security interest in that property is created only when the
grantor acquires rights in it or the power encumber it.

ii. Security Interest over Rights to Proceeds and Commingled funds (Sec. 8)
a. A security interest in personal property shall extend to its identifiable or traceable
proceeds.
b. Where proceeds in the form of funds credited to a deposit account or money are
commingled with other funds or money:
1. The security interest shall extend to the commingled money or funds,
notwithstanding that the proceeds have ceased to be identifiable to the
extent they remain traceable;
2. The security interest in the commingled funds or money shall be limited to
the amount of the proceeds immediately before they were commingled; and
3. If at any time after the commingling, the balance credited to the deposit
account or the amount of the commingled money is less than the amount of
the proceeds immediately before they were commingled, the security
interest against the commingled funds or money shall be limited to the
lowest amount of the commingled funds or money between the time when
the proceeds were commingled and the time the security interest in the
proceeds is claimed.

iii. Security Interest over Tangible assets commingled in a mass (Sec. 3.07)
a. A security interest in a tangible asset that is commingled in a mass extends to the
mass.
b. A security interest that extends to a mass is limited to the same proportion of the
mass as the quantity of the encumbered asset bore to the quantity of the entire
mass immediately after the commingling.
iv. Security Interest over Accounts Receivables (Sec. 3.08)
a. A security interest in an account receivable shall be effective notwithstanding any
agreement between the grantor and the account debtor or any secured creditor
limiting in any way the grantor's right to create a security interest; Provided that:
Nothing in this section affects the right of a buyer to create a security interest over
the account receivable. Provided, further: that any release of information is subject
to agreements on confidentiality.
- Example: Grantor and creditor agreed that no security interest shall be constituted
over an account receivable, and thereafter, nevertheless, subjected the same to a
security interest. The grantor cannot claim that the account receivable should not
be covered by a security interest/subjected to security interest because the law
provides that a security interest in the same is effective notwithstanding any
agreement to the contrary.

b. Nothing in this section shall affect any obligation or liability of the grantor for breach
of the agreement is subsection (a)

Problem: A obtained a loan from B. the parties executed a security agreement with A’s
investment on a certain corporation. The corporation was eventually dissolved. A received
the value of his investment which was deposited to his bank account.

A now argues that B has no right over the funds since the security agreement is over his
investment and besides, the money is now commingled with his deposit account. Is A
correct?

Answer: No. The security interest in a personal property shall extend to its identifiable
proceeds. The security interest shall extend to the commingled money or funds,
notwithstanding that the proceeds have ceased to be identifiable to the extent they remain
traceable.

Continuity of Security Interest (Sec. 9)

A security interest shall continue in collateral notwithstanding sale, lease, license,
exchange, or other disposition of the collateral, except as otherwise provided in Sec. 21
of the PPSA , or agreed upon by the parties.

Perfection of Security Interest (Sec. 11)

a. Security interest shall be perfected when it has been created and the secured
creditor has taken one of the actions in Sec. 12; and
b. On perfection, a security interest becomes effective against third parties.
- So, a security agreement which is in writing is binding as between the immediate
parties (secured creditor and the grantor). However, perfection of the same is
what makes it binding as to third persons.
- Example: A and B (creditor) created security interest over a collateral without
perfecting it. C (third party) claims interest on the collateral. Who has a better right
 over the collateral? It depends if the security interest has been perfected in
accordance with law.

Means of Perfection (Sec. 12)

A security interest may be perfected by: (RPC)
a. Registration of a notice with the Registry;
b. Possession of the collateral by the secured creditor; and
o Possession means the holding of a thing or the enjoyment of a right.
o May be either by the secured creditor himself or a depositary acting for the
secured creditor
o The grantor cannot possess the collateral on behalf of the secured creditor
for purposes of perfecting and maintaining the security interest over such
collateral.
c. Control of investment property and deposit account.

Note, however, that perfection of security interest depends on the kind of collateral
involved, thus:
Registration Possession Control
Tangible Assets ✔ ✔ ✘
Investment ✔ ✘ ✔
Deposit Account ✔ ✘ ✔

i. Means of Perfection in Tangible Assets

May be perfected by either:
a. Registration of a notice; or
b. Possession, whether actual or constructive.

Note: Unregistered security interest is valid between the parties.

ii. Means of Perfection of Intangible Assets

May be perfected by either:
a. Registration of a notice; or
b. Conclusion of a control agreement.

iii. Means of Perfection in Intermediate Securities or Deposit Accounts

May be perfected by either:
a. Registration of a notice;
b. Creation of security interest in favor of deposit-taking institution or intermediary;
or
c. Conclusion of a control agreement.

iv. Means of Perfection in Electronic Securities

May be perfected by either:
a. Registration of a notice;
b. Execution of a control agreement between the grantor and the secured creditor;
or
 c. Control, through notation of a security interest in the books maintained by the
issuer.

v. Means of Perfection in Intermediate Electronic Securities

May be perfected by either:
a. Registration of a notice;
b. Control agreement.

Perfection by Registration
Establishment of Electronic Registry (Sec. 26)
a. The Registry shall be established in and administered by the Land Registration
Authority (LRA).
b. The Registry shall provide electronic means for registration and searching of
notices.

Public Record (Sec. 27)

a. Information contained in a registered notice shall be considered as a public record.
b. Any person may search notices registered in the Registry.
c. The electronic records of the Registry shall be the official records.

Effectiveness of Notice (Sec. 30)

a. A notice shall be effective at the time it is discoverable on the records of the
Registry.
b. A notice shall be effective for the duration of the term indicated in the notice unless
a continuation notice is registered before the term lapses.
c. A notice substantially complying with the requirements of this Chapter shall be
effective unless it is seriously misleading.
d. A notice that may not be retrieved in a search of the Registry against the correct
identifier of the grantor shall be ineffective with respect to that grantor.

Perfection by Control
In a deposit account or investment property, by:
1. The creation of a security interest in favor of the deposit-taking institution or
intermediary;
o “Deposit-taking institution” refers to: (a) a bank; (b) non-stock savings or
loan association; or (c) cooperative
2. Conclusion of a control agreement; or
o “Control agreement” is an agreement in writing, between the grantor and
the secured creditor which perfects the security interests over intangible
assets. In general, the author submits that it is an agreement whereby the
intermediary agrees to follow instructions from the secured creditor
with respect to the collateral without further consent from the grantor.
o For intermediated securities and deposit accounts, the control agreement is
among the issuer or intermediary or deposit-taking institution, the grantor,
and the secured creditor, to which the issuer/intermediary agrees to follow
 instructions from the secured creditor with respect to security without
further consent from the grantor.
3. For an investment property that is an electronic security not held with an
intermediary, the notation of the security interest in the books maintained by
or on behalf of the issuer for the purpose of recording the name of the holder of
the securities.

Priority Rules (Sec. 17)

General Rule: The priority of security interests and liens in the same collateral shall be
determined according to the time of registration of a notice or perfection by other means,
without regard to the order of creation of the security interests or liens.

Priority for Perfection by Control (Sec. 18)

a. A security interest in a deposit account with respect to which the secured creditor is
the deposit-taking institution or the intermediary shall have priority over a competing
security interest perfected by any method.
- Example: A obtained a loan from ABC Bank. As security for such loan, A and ABC
Bank had a security agreement over A’s deposit account with ABC Bank.
Thereafter, A obtained a loan from C. A used the same deposit account as security
for the same, and the security interest over the same was registered by C. Who
has priority?
- Answer: It is ABC Bank, the deposit-taking institution, by express provision of Sec.
18 of PPSA.

b. A security interest in a deposit account or investment property that is perfected by a

control agreement shall have priority over a competing security interest except a
security interest of the deposit-taking institution or the intermediary.

c. The order of priority among competing security interests in a deposit account or

investment property that were perfected by the conclusion of control agreements shall
be determined on the basis of the time of conclusion of the control agreements.

d. Any rights to set-off that the deposit-taking institution may have against a grantor’s right
to payment of funds credited to a deposit account shall have priority over a security
interest in the deposit account.

e. A security interest in a security certificate perfected by the secured creditor’s

possession of the certificate shall have priority over a competing security interest
perfected by registration of a notice in the Registry.

f. A security interest in electronic securities not held with an intermediary perfected by a

notation of the security interests in the books maintained for that purpose by or on
behalf of the issuer shall have priority over a security interest in the same securities
perfected by any other method.
g. A security interest in electronic securities not held with an intermediary perfected by
the conclusion of a control agreement shall have priority over a security interest in the
same securities perfected by registration of a notice in the Registry.

h. The order of priority among competing security interests in electronic securities not
held with an intermediary perfected by the conclusion of control agreements is
determined on the basis of the time of conclusion of the control agreements.

Priority for Instruments and Negotiable Instruments (Sec. 19)

A security interest in an instrument or negotiable document that is perfected by
possession of the instrument or the negotiable document shall have priority over a
security interest in the instrument or negotiable document that is perfected by registration
of a notice in the Registry.

Priority and Plight of Retention by Operation of Law (Sec. 20)

A person who provides services or materials with respect to the goods, in the ordinary
course of business, and retains possession of the goods shall have priority over a
perfected security interest in the goods until payment thereof.

Livestock (Sec. 24)

A perfected security interest in livestock securing an obligation incurred to enable the
grantor to obtain food or medicine for the live-stock shall have priority over any other
security interest in the live-stock, except for a perfected purchase money security interest
in the livestock, if the secured creditor providing credit for food or medicine gives written
notification to the holder of the conflicting perfected security interest in the same livestock
before the grantor receives possession of the food or medicine.

Fixtures, Accessions, and Commingled Goods (Sec. 25)

A perfected security interest in a movable property which has become a fixture, or has
undergone accession or commingling shall continue provided the movable property
involved can still be reasonably traced. In determining ownership over fixtures,
accessions, and commingled goods, the provisions of Book II of Republic Act No. 386 or
the "Civil Code of the Philippines" shall apply.

Enforcement (Sec. 7.01)

The secured creditor may enforce its security interest whether through a judicial process
or through an extra-judicial process, including the sale of the secured assets through
either a public or private disposition. Any judicial enforcement of security interests,
including the disposition of collateral shall be governed by rules promulgated by the
Supreme Court.

Expedited Repossession of the Collateral (Without Judicial Process) (Sec. 7.02)

The secured creditor may take possession of the collateral without judicial process if the
security agreement so stipulates: Provided, that possession can be taken without
breach of peace.
 - Breach of peace: Includes entering the residence of the grantor without
permission, resorting to physical violence or intimidation, or being accompanied by
a law enforcement officer, when taking possession or confronting the grantor.

If the collateral is a fixture, the secured creditor, if it has priority over all owners and
mortgages, may remove the fixture from the real property to which it is affixed without
judicial process. The secured creditor shall exercise due care in removing the fixture.

Expedited Repossession of the Collateral with Judicial Process

If upon default, the secured creditor cannot take possession of collateral without breach
of peace, the secured creditor may proceed as follows:

a. The secured creditor shall be entitled to an expedited hearing upon application for
an order granting the secured creditor pos- session of the collateral. Such
application shall include a statement by the secured creditor, under oath, verifying
the existence of the security agreement attached to the application and identifying
at least one event of default by the debtor under the security agreement;
b. The secured creditor shall provide a debtor, grantor, and if the collateral is a fixture,
any real estate mortgage, a copy of the application, including all supporting
documents and evidence for the order granting the secured creditor possession of
the collateral; and
c. The secured creditor is entitled to an order granting possession of the collateral
upon the court finding that a default has occurred under the security agreement
and that the secured creditor has a right to take possession of the collateral. The
court may direct the grantor to take such action as the court deems necessary and
appropriate so that the secured creditor may take pos- session of the collateral.